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Operations strategy

Operations strategy is the tool that


helps to define the methods of
producing goods or a service offered to
the customer

Definition
Operations strategyis the total
pattern of decisions which shape the
long-term capabilities of any type of
operations and their contribution to
the overall strategy, through the
reconciliation of market requirements
with operations resources.
-
Slack and Lewis,

Developing Operations
Strategy
Corporate
Corporate Mission
Mission
Assessment
Assessment
of
of Global
Global
Business
Conditions

Business
Business Strategy
Strategy
Product/Service Plans

Distinctive
Distinctive
Competencies
Competencies
or
or
Weaknesses
Weaknesses

Competitive
Competitive Priorities
Priorities
Cost, Time, Quality and flexibility
Operations
Operations Strategy
Strategy
Positioning
Positioning the production
production System
System
Product/Service
Product/Service Plan
Outsourcing
Outsourcing Plan
Plan
Process
Process and Technology Plan
Strategic
Strategic Allocation
Allocation Of
Of Resources
Resources
Facility
Facility Plans:
Plans: Capacity,
Capacity, Location
Location and
and Layout
Layout

Corporate
Corporate Mission
Mission
A corporate mission is a set of longrange goals and including
statements about:
the kind of business the company wants
to be in
who its customers are
its basic beliefs about business
its goals of survival, growth, and
profitability

Business Strategy
Business strategy is a long-range
game plan of an organization and
provides a road map of how to
achieve the corporate mission.
Inputs to the business strategy are
Assessment of global business
conditions - social, economic, political,
technological, competitive
Distinctive competencies or weaknesses
- workers, sales force, R&D, technology,
management

Competitive Priorities
Low Production Costs
Definition
Unit cost (labor, material, and
overhead) of each product/service
Some Ways of Creating

Redesign of product/service
New technology
Increase in production rates
Reduction of scrap/waste
Reduction of inventory

Competitive Priorities
Delivery Performance
Definition
a) Fast deliveryb) On-time delivery
Some Ways of Creating
a) larger finished-goods inventory
a) faster production rates
a) quicker shipping methods
b) more-realistic promises
b) better control of production of orders
b) better information systems

Competitive Priorities
High-Quality Products/Services
Definition
Customers perception of degree of
excellence exhibited by
products/services
Some Ways of Creating
Improve product/services
Appearance
Performance and function
Wear, endurance ability
After-sales service

Competitive Priorities
Customer Service and Flexibility
Definition
Ability to quickly change production
to other products/services. Customer
responsiveness.
Some Ways of Creating
Change in type of processes used
Use of advanced technologies
Reduction in WIP through lean
manufacturing
Increase in capacity

Operations Strategy
Operations strategy is a long-range
game plan for the production of a
companys products/services, and
provides a road map for the
production function in helping to
achieve the business strategy.

Elements of Operations
Strategy

Positioning the production system


Product/service plans
Outsourcing plans
Process and technology plans
Strategic allocation of resources
Facility plans: capacity, location, and
layout

Positioning the Production


System
Select the type of product design
Standard
Custom

Select the type of production processing


system
Product focused
Process focused

Select the type of finished-goods inventory


policy
Produce-to-stock
Produce-to-order

Positioning the Production


System
Select the type of production
processing system
Product focused
Process focused

Select the type of finished-goods


inventory policy
Produce-to-stock
Ex McDonald:The McDonald's Corporation
is the world's largest chain of hamburger
fast food restaurants, serving around 68
million customers daily in 119 countries
Produce-to-order- Ex burger king

Product/Service Plans
As a product is designed, all the detailed
characteristics of the product are established.

Each product characteristic directly


affects how the product can be made.
How the product is made determines
the design of the production system.

Stages in a Products Life


Cycle
Introduction- Sales begin, production and
marketing are developing, profits are negative.
Growth - sales grow dramatically, marketing
efforts intensify, capacity is expanded, profits
begin.
Maturity - production focuses on high-volume,
efficiency, low costs; marketing focuses on
competitive sales promotion; profits are at
peak.
Decline - declining sales and profit; product
might be dropped or replaced.

Stages of a Products Life


Cycle
Automobile

Dot-Matrix
Fax Machine
Printer
Cell Phone
Video Recorder
Internet Radio
Color Copier CD Player

Introduction

Growth

Maturity

B&W TV

Decline

Outsourcing Plans
Outsourcing refers to hiring out or subcontracting
some of the work that a company needs to do.
This strategy is being used more and more as
companies strive to operate more efficiently.
Outsourcing
has
many
advantages
and
disadvantages.
Companies try to determine the best level of outsourcing to achieve their operations & business
goals.
More outsourcing requires a company to have less
equipment, fewer employees, and a smaller facility.

Outsourcing Plans
A company might outsource any of
the following manufacturing related
functions:
Designing the product
Purchasing the basic raw materials
Processing the subcomponents,
subassemblies, major assemblies, and
finished product
Distributing the product

Outsourcing Plans
Many companies even outsource
some service functions such as:
Payroll
Billing
Order processing
Developing/maintaining a website
Employee recruitment
Facility maintenance

Process and Technology


Plans
An essential part of operations
strategy is the determination of how
products/services will be produced.
The range of technologies available
to produce products/services is great
and is continually changing.

Strategic Allocation of
Resources
For most companies, the vast
majority of the firms resources are
used in production/operations.
Some or all of these resources are
limited.
The resources must be allocated to
products, services, projects, or profit
opportunities in ways that maximize
the achievement of the operations
objectives.

Facility Plans: Capacity , Location


and Layout
How to provide the long-range capacity to
produce the firms products/services is a
critical strategic decision.
The location of a new facility may need to
be decided.
The internal arrangement (layout) of
workers, equipment, and functional areas
within a facility affects the ability to
provide the desired volume, quality, and
cost of products/services.

OPERATION STRATEGY IN SERVICE -Characteristics


of Services
and Manufactured Products

Services
Products
Output Intangible
Tangible
Output Inventoried
No
Yes
Customer Contact Extensive
Little
Lead Time
Short
Long
Intensity
Labor
Capital
Quality
Subjective
Objective

Competitive Priorities for


Services
The competitive priorities listed
earlier for manufacturers apply to
service firms as well
Low production costs
Fast and on-time delivery
High-quality services
Customer service and flexibility

Providing all the priorities


simultaneously to customers is
seldom possible.

Positioning Strategies for


Services

Type of Service Design

Standard or custom products


Amount of customer contact
Mix of physical goods and intangible
services

Type of Production Process


Quasi manufacturing
Customer-as-participant
Customer-as-product

Positioning Strategies for


Services
Example: McDonalds
Highly standardized service design
Low amount of customer contact
Quasi-manufacturing approach to backroom production process(banking,
insurance, and postal service facilities)

FORMING
FORMING OPERATIONS
OPERATIONS STRATEGIES
STRATEGIES
Structure of operation is determined
by the positioning strategy be linked
to the product plans and competitive
priorities defined in the business
strategy.

Evolution of Positioning
Strategies
The characteristics of production systems
tend to evolve as products move through
their product life cycles.
Operations strategies must include plan for
modifying production systems to a
changing set of competitive priorities as
products mature.
The capital and production technology
required to support these changes must be
provided.

Evolution of Positioning
Strategies

Life
Stage

Intro.

Early
Growth
Slightly
Standard

Late
Growth

Product

Custom

Volume

Very
Low

Low

High

Focus

Process

Process

Product

Fin.Gds.
Batch
Size

Standard

Maturity
Highly
Standard
Very
High
Product

To-Order To-Order To-Stock To-Stock


Very
Small

Small

Large

Very
Large

Linking Operations and Marketing


Strategies
Operations Strategy

Product-focused
Make-to-stock
Standardized products
High volume

Marketing Strategy

Low production cost


Fast delivery of products
Quality

Example: TV sets

Linking Operations and Marketing


Strategies
Operations Strategy

Product-focused
Make-to-order
Standardized products
Low volume

Marketing Strategy

Low production cost


Keeping delivery promises
Quality

Example: School buses

Linking Operations and Marketing


Strategies
Operations Strategy
Process-focused
Make-to-stock
Custom products
High volume

Marketing Strategy

Flexibility
Quality
Fast delivery of products

Example: Medical instruments

Linking Operations and Marketing


Strategies
Operations Strategy
Process-focused
Make-to-order
Custom products
Low volume

Marketing Strategy

Keeping delivery promises


Quality
Flexibility

Example: Large supercomputers

No Single Best Strategy


Start-up and Small Manufacturers
Usually prefer positioning strategies with:
Custom products
Process-focused production
Produce-to-order policies
These systems are more flexible and
require less
capital.

No Single Best Strategy


Start-up and Small Services
Successfully compete with large
corporations by:
Carving out a specialty niche
Emphasizing close, personal customer
service
Developing a loyal customer base

No Single Best Strategy


Technology-Intensive Business
Production systems must be capable of
producing new products and services in
high volume soon after introduction
Such companies must have two key
strengths:
Highly capable technical people
Sufficient capital

STRATEGIC FIT
Strategic fit expresses the degree
to which an organization is matching
its resources and capabilities with
the opportunities in the external
environment.
The matching takes place through
strategy and it is therefore vital that
the company have the actual
resources and capabilities to execute
and support the strategy

Achieving Strategic Fit Achieved


The steps involved
Step 1:
and
Step 2:
chain
Step 3:

2-40

Understanding the customer


Supply chain uncertainty
Understanding the supply
capabilities
Achieve strategic fit

Step 1: Understanding the Customer


and Supply Chain Uncertainty
Identify the needs of the customer
segment being served by the
following attributes:
Quantity of product needed in each lot
Response time customers will tolerate
Variety of products needed
Service level required
Price of the product
Desired rate of innovation in the product
2-41

1. Understanding the Customer and


Supply Chain Uncertainty
Understanding customer (demand) uncertainty
Demand varies along certain attributes
Quantity in each lot, response time, variety of products
needed, service, price, innovation, etc

Implied demand uncertainty


Demand uncertainty due to the portion of demand that the
supply chain is targeting, not the entire demand

1. Understanding the Customer and


Supply Chain Uncertainty
Understanding supply uncertainty
Supply uncertainty is strongly affected by the life-cycle
position of the product. New products being introduced
have higher supply uncertainty than mature products

2. Understanding the Supply Chain


Capabilities

Supply chain capabilities

Supply chain responsiveness


Respond to wide ranges of quantity
demanded, meet short lead times, large
variety, innovative products, high service
level, etc

Supply chain efficiency (low cost)


Highly
efficient

Somewhat
efficient

Somewhat
responsive

Highly
responsive

Integrated steel
mills

Hanes apparel

Most automotive
production

Seven-Eleven
Japan

3. Achieving Strategic Fit


Strategic fit
Given a competitive strategy, what should a companys
supply chain do particularly well?

Wal-Mart
Everyday low prices (low cost retailer for a wide variety
of products)
Buys from low cost producers, owns its
infrastructure and distribution network

Coors
The coldest tasting beer in the world, brewed with
Rocky Mountain spring water
Refrigerated transport, main facility near Rocky
Mountains

Dell
Custom-made computer systems at a reasonable cost

Business strategies change over


time
In the 1990s, outsourcing was the focus of
many manufacturers.
Example: Nike Shoes
Nikes strategy: R and D on one hand and
marketing, sales, and distribution on the other.
Example 2: CISCO
CISCOs strategy: Focus on Internet sales;
increased productivity and save on business
expenses.
Example 3: Apple Computers
Apple computers: outsourced most of its mfg.
2-46

The Landscape changed


In 2001, Nike reported a profit
shortfall due to inventory buildup,
shortage for others, and late
deliveries.
In 2000, CISCO was forced to
announce 2.25 B write-down for
obsolete inventory.
In 1999, Apple had huge customer
dissatisfaction because of shortage
of G4 chip supplied by Motorola.
2-47

What went wrong?


In the examples, the difficulties reflect problems
with procurement chain strategies.
Nike, CISCO, Apple have short product life cycles.
When technologies changed, uncertainties related
to customer demand increased.
Procurement landscape changed significantly with
the introduction of independent, private, and
consortium-based e-market places.
With changes in procurement landscape, both
problems and opportunities also changed.
But, Nike, CISCO, and Apple were not able to react
to these changes and formulate a new corporate
and procurement strategy.
2-48

The need for a good


strategy
The most important requirement for sustainability
is a well-formulated corporate strategy;
A corporate strategy, in turn, requires forming sub
strategies such as product strategy, procurement
strategy, marketing strategy, and so on. And,
A firm should continually evaluate its corporate
strategy and its sub strategies and ensure that
they are appropriate for a changing environment.

2-49

Strategic Framework
The framework consists of five steps:
1. Define corporate objectives
2. Determine marketing strategies to meet these
objectives
3. Assess how different products win orders
against
competitors
4. Establish the most appropriate mode to deliver
these sets of products
5. Provide the infrastructure required to support
operations

1. Define corporate objectives


Involves establishing corporate objectives that
provide a direction for the organisation and
performance indicators that allow progress in
achieving those objectives to be measured.
The objectives will be dependent on the needs
of external and internal stakeholders and so will
include financial measures such as profit and
growth rates as well as employee practices
such as skills development and appropriate
environmental policies.

2. Market strategy
This involves identifying target
markets and how to compete in
these markets.

3. How Do Products Win Orders in


the Market Place?
This is the crucial stage in Hills
methodology where any mismatches
between the requirements of the
organisations strategy and the
operations capability are revealed
This step provides the link between
corporate marketing proposals and
the
operations
processes
and
infrastructure necessary to support
them

This is achieved by translating the


marketing strategy into a range of
competitive factors (e.g. price, quality,
delivery speed) on which the product or
service wins orders.
These external competitive factors
provide the most important indicator as
to the relative importance of the internal
operations performance objectives.

The five basic internal operations


performance objectives allow the
organisation
to
measure
its
operations performance in achieving
its strategic goals. The performance
objectives
are
Quality,
Speed,
Dependability,
Flexibility and Cost.

Step 4 Delivery System Choice


and Step 5 Infrastructure choice
service delivery systems and
capacity provision (Structural
Decision)
Operations Infrastructural decisions
describe the systems, policies and
practices that determine how the
structural elements covered in step 4
are managed