2-1 Competitiveness, Strategy, and Productivity

Operations Management

William J. Stevenson

8th edition

2-2 Competitiveness, Strategy, and Productivity

CHAPTER

Competitiveness, Strategy, and Productivity

McGraw-Hill/Irwin

Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

2-3 Competitiveness, Strategy, and Productivity

Competitiveness:
How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services

2-4 Competitiveness, Strategy, and Productivity

Businesses Compete Using Marketing

Identifying consumer wants and needsachieving a perfect match between those wants and needs and the organizations goods and/or services. Pricing- understand the trade-off decision consumers make between price and other aspects of a product/service such as quality Advertising and promotion- inform potential customers about features of their products/services and attract buyers

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Businesses Compete Using Operations

Product and service design- special characteristics or features of a product or service can be a key factor in consumer buying decisions Cost- a key variable that affects pricing decisions and profits. Productivity is an important determinant of cost. High productivity rates translate to competitive cost advantage

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Businesses Compete Using Operations

Location- important in terms of cost and convenience to customers Quality- consumers judge quality in terms of how well they think a product or service will satisfy its intended purpose. Willingness to pay more for a high quality product/service. Quick response- quick in bringing the new product/service to the market / quick in delivery of an order / quick in handling customer complaints

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Businesses Compete Using Operations

Flexibility- ability to respond to changes like alterations in design features or changes in the volume demanded by customers Inventory management- can be a competitive advantage by effectively matching supplies of goods with demand Supply chain management- coordinating internal and external operations (buyers and suppliers) to achieve timely and cost-effective delivery of goods throughout the system.

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Businesses Compete Using Operations

Service- might involve after-sale activities customers perceive as value-added such as delivery, setup, warranty work, and technical support Managers and workers people at the heart and soul of an organization, can provide a distinct competitive edge by their skills and the ideas they create. One often overlooked skill is answering the telephone.

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Why Some Organizations Fail

Too much emphasis on short-term financial performance at the expense of research and development. Failing to take advantage of strengths and opportunities Failing to recognize competitive threats Neglecting operations strategy

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Why Some Organizations Fail

Too much emphasis in product and service design and not enough on process design and improvement Neglecting investments in capital and human resources Failing to establish good internal communications and cooperation among different functional areas Failing to consider customer wants and needs

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Mission/Strategy/Tactics

Mission

Strategy

Tactics

How does mission, strategies and tactics relate to decision making and distinctive competencies?

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Strategy

Strategies

Plans for achieving organizational goals reason for existence for an organization

Mission
The

Mission Statement
Answers

the question What business are we in?

Goals
Provide

detail and scope of mission

Tactics
The

methods and actions taken to accomplish strategies

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Planning and Decision Making

Mission Goals

Figure 2.1. Hierarchical relationship that exist from the mission down to actual operations

Organizational Strategies
Functional Goals Finance Strategies Marketing Strategies Operations Strategies

Tactics Operating procedures

Tactics Operating procedures

Tactics Operating procedures

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Strategy Example

Example 1

Rita is a high school student. She would like to have a career in business, have a good job, and earn enough income to live comfortably

Mission: Goal: Strategy: Tactics: Operations:

Live a good life

Successful career, good income
Obtain a college education Select a college and a major

Register, buy books, take courses, study, graduate, get job

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Examples of Strategies an organization might choose from

Low cost- outsource operations to third-world countries that have low labor costs Scale-based strategies- use capital-intensive methods to achieve high output volume and low unit costs Specialization- focus on narrow product lines or limited service to achieve higher quality Flexible operations- focus on quick response and/or customization

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Examples of Strategies an organization might choose from

High quality- focus on achieving higher quality than competitors Service- focus on various aspects of service (e.g., helpful, courteous, reliable, etc.) Sometimes organizations will combine two or more of these or other approaches into their strategy to compete and assess its own strengths and weaknesses in order to take advantage of its distinctive competencies

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Strategy and Tactics

Distinctive Competencies
The special attributes or abilities that give an organization a competitive edge. Price Quality Time Flexibility Service Location

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Distinctive Competencies

Organizations develop distinctive competencies based on customer needs as well as on what the competition is doing Marketing and operations work closely to match customer needs with operations capabilities Competitor competencies- if competitor is able to supply high-quality products, make that high quality as a baseline which means not only matching the competitor but exceeding its quality level or gain an edge by excelling in other dimensions such as rapid delivery

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Examples of Operations Strategies

Low Cost U.S. first-class postage, Wall-Mart Motel-6, Red Roof Inns High-performance design Sony TV or high quality Consistent Lexus, Cadillac quality Pepsi, Kodak, Motorola Rapid delivery On-time delivery Variety Volume Superior customer service Convenience Express Mail, Fedex, One-hour photo, UPS Burger King Supermarkets Disneyland Nordstroms Banks, ATMs

Table 2.2

Price Quality Time Flexibility Service Location

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Operations Strategy

Operations strategy The approach, consistent with organization strategy, that is used to guide the operations function It is narrower in scope, dealing primarily with the operation aspect of the organization It relates to products, processes, methods, operating resources, quality, costs, lead times, and scheduling.

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Strategy Formulation

Distinctive competencies Environmental scanning- the considering of events and trends that present threats or opportunities for a company SWOT

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Strategy Formulation

Order qualifiers

Characteristics that customers perceive as minimum standards of acceptability to be considered as a potential purchase Characteristics of an organizations goods or services that cause it to be perceived as better than the competition

Order winners

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Key External Factors in Strategy Formulation

Economic conditions- the general health and direction of the economy, inflation and deflation, interest rates, tax laws and tariffs Political conditions- include favorable or unfavorable attitudes toward business, political stability or instability, and wars

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Key External Factors in Strategy Formulation

Legal environment- include antitrust laws, government regulations, trade restrictions, minimum wage laws, product liability laws, labor laws and patents Technology- includes the rate at which product innovation are occurring, current and future process technology (equipment, materials handling), and design technology.

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Key External Factors. . .

Competition- includes the number and strength of competitors, the basis of competition (price, quality, etc.) and the ease of market entry Markets- includes size, location, brand loyalties, ease of entry, potential for growth, long term stability, and demographics

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Key Internal Factors in Strategy formulation

Human Resources- include the skills and abilities of managers and workers, special talents, loyalty to org., expertise, dedication, and experience Facilities and equipment- capacities, location, age, and cost to maintain or replace can have significant impact on operations Financial resources-cash flows, access to additional funding, existing debt burden, and cost of capital

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Key Internal Factors . . .

Customers- loyalty, existing relationships, and understanding wants and needs Products and services- include existing product and services, and the potential for new products and services Technology- includes existing technology, the ability to integrate new technology, and the probable impact of technology on current and future operations Suppliers- relationships, dependability of suppliers, quality, flexibility, and service

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Quality and Time Strategies

Quality-based strategies

Focuses on maintaining or improving the quality of an organizations products or services Quality at the source

Time-based strategies

Focuses on reduction of time needed to accomplish tasks

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Time-based Strategies
FEB MAR APR MAY JUN

JAN
Planning

Designing Processing Changeover Delivery On time!

Organization have achieved time reduction in some of the following: Planning time- the time needed to react to a competitive threat, develop strategies and select tactics, adopt new technologies and so on Product/service design time- the time needed to develop and market new or redesigned products or services Processing time- the time needed to produce goods or provide services Changeover time- the time needed to change from producing one type of product to another
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Organization have achieved time reduction in some of the following: Delivery time- the time needed to fill orders Response time for complaints- customer complaints about quality, timing of deliveries, and incorrect shipments
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Productivity

Productivity

A measure of the effective use of resources, usually expressed as the ratio of output to input

Productivity ratios are used for

Planning workforce requirements Scheduling equipment Financial analysis

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Productivity

Partial measures

output/(single input) output/(multiple inputs) output/(total inputs)

Multi-factor measures

Total measure

Outputs Productivity = Inputs

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Productivity Growth

Productivity Growth =
Current Period Productivity Previous Period Productivity Previous Period Productivity

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Measures of Productivity

Table 2.4

Partial measures
Multifactor measures Total measure

Output Labor

Output Output Machine Capital

Output Energy

Output Labor + Machine

Output Labor + Capital + Energy

Goods or Services Produced All inputs used to produce them

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Examples of Partial Productivity Measures

Table 2.5

Labor Productivity
Machine Productivity Capital Productivity

Units of output per labor hour Units of output per shift Value-added per labor hour
Units of output per machine hour machine hour Units of output per dollar input Dollar value of output per dollar input

Energy Productivity

Units of output per kilowatt-hour Dollar value of output per kilowatt-hour

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Example 3

7040 Units Produced Sold for $1.10/unit Cost of labor of $1,000 What is the multifactor productivity? Ans. 2.20

Cost of materials: $520

Cost of overhead: $2000

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Example 3 Solution
Output Labor + Materials + Overhead

MFP =

MFP =

(7040 units)*($1.10) $1000 + $520 + $2000 2.20

MFP =

2-39 Competitiveness, Strategy, and Productivity

Factors Affecting Productivity

Capital

Quality

Technology

Management

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Other Factors Affecting Productivity

Standardization- reducing variability can have significant benefit for productivity Quality differences- when comparisons are made over time like comparing the productivity of a factory now with one 30 years ago. Use of Internet- can lower costs of a wide range of transactions

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Other factors. . .

Computer viruses- can have an immense negative impact on productivity Searching for lost or misplaced items waste timecan negatively affect productivity Scrap rates- have adverse effect on productivity signaling inefficient use of resources New workers- tend to have lower productivity than seasoned workers

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Other Factors Affecting Productivity

Safety- accidents can take a toll on productivity Shortage of IT workers- hampers the ability of companies to update computing resources Layoffs- effect on productivity could be positive or negative Labor turnover- have negative effect on productivity Design of the workspace Incentive plans that reward productivity

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Bottleneck Operation
10/hr

Figure 2.3

Machine #1 Machine #2

10/hr

Bottleneck Operation
10/hr 10/hr

30/hr

Machine #3

Machine #4

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Improving Productivity

Develop productivity measures Determine critical (bottleneck) operations Develop methods for productivity improvements Establish reasonable goals Get management support Measure and publicize improvements Dont confuse productivity with efficiency