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Operations Strategy

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Chapter 2 of Gaither Edited by Sheri Nemeth 12/19/95. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Linking Operations ... – PowerPoint PPT presentation

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Title: Operations Strategy


1
(No Transcript)
2
Chapter 2
  • Operations Strategies
  • in a Global Economy

3
Overview
  • Introduction
  • Todays Global Business Conditions
  • Operations Strategy
  • Forming Operations Strategies
  • Wrap-Up What World-Class Producers Do

4
Introduction
  • Operational effectiveness is the ability to
    perform similar operations activities better than
    competitors.
  • It is very difficult for a company to compete
    successfully in the long run based just on
    operational effectiveness.
  • A firm must also determine how operational
    effectiveness can be used to achieve a
    sustainable competitive advantage.
  • An effective competitive strategy is critical.

5
Factors Affecting Todays Global Business
Conditions
  • Reality of global competition
  • Quality, customer service, and cost challenges
  • Rapid expansion of advanced technologies
  • Continued growth of the service sector
  • Scarcity of operations resources
  • Social responsibility issues

6
Reality of Global Competition
  • Changing nature of world business
  • International companies
  • Strategic alliances and production sharing
  • Fluctuation of international financial conditions

7
Changing Nature of World Business
  • The US gross domestic product (GDP) is, at 10
    trillion, the largest in the world.
  • Companies all over the globe are aggressively
    exporting their products/services to the US
  • Many US companies are targeting foreign markets
    to shore up profits.
  • The global economy that interconnects the
    economies of all nations has been termed the
    global village.
  • One of the most important new markets is China.

8
International Companies
  • International companies are those whose scope of
    operations spans the globe as they buy, produce,
    and sell.
  • International firms search out opportunities for
    profits relatively unencumbered by national
    boundaries.
  • Operations managers must coordinate
    geopraphically dispersed operations.

9
International Companies
  • Worlds Largest Corporations
  • 1. General Motors US
  • 2. Wal-Mart Stores US
  • 3. Exxon Mobil US
  • 4. Ford Motor US
  • 5. DaimlerChrysler Germany
  • 6. Mitsui Japan
  • 7. Mitsubishi Japan
  • 8. Toyota Japan
  • 9. General Electric US
  • 10. Itochu Japan

10
Strategic Alliances
  • Strategic alliances are joint ventures among
    international companies to exploit global
    business opportunities.
  • Alliances are often motivated by
  • Product or production technology
  • Market access
  • Production capability
  • Pooling of capital

11
Strategic Alliances
Kia might help sell and market GM cars in South
Korea
General Motors (US) Kia Motor Corp. (S.K.)
Manufacture 100,000 vehicles annually near Moscow
Renault (France) City of Moscow
Forming Texas-based Sino Swearingen Aircraft Co.
Sino Aerospace Invest- ment Corp. (Taiwan)
Swearingen Aircraft (US)
12
Strategic Alliances
  • Japanese companies have long practiced keiretsu,
    the linking of companies into industrial groups.
  • A financial keiretsu links companies together
    with cross-holding of shares, sales and purchases
    within the group, and consultation.
  • A production keiretsu is a web of interlocking
    relationships between a big manufacturer (Toyota)
    and its suppliers.

13
Production Sharing
  • Production sharing was coined by Peter Drucker
  • It means that a product might be designed and
    financed in one country, its materials produced
    in other countries, assembled in another country,
    and sold in yet other countries.
  • The country that is the highest-quality,
    lowest-cost producer for a particular activity
    would perform that portion of the production of
    the product.

14
Pros and Cons of Globalization
  • Pros (Pluses)
  • Productivity grows more quickly (living standards
    can go up faster)
  • Global competition and cheap imports keep a lid
    on prices (inflation less likely to derail
    economic growth)
  • Open economy spurs innovation (with fresh ideas
    from abroad)
  • Export jobs often pay more than other jobs
  • US has more access to foreign investment (keeps
    interest rates low)

15
Pros and Cons of Globalization
  • Cons (Minuses)
  • Millions of Americans have lost jobs due to
    imports or production shifts abroad
  • Most displaced workers find new jobs that pay
    less
  • Workers face pay-cuts demands from employers
  • Service and white-collar jobs are increasingly
    vulnerable
  • US employees lose their comparative advantage
    when companies build advanced factories abroad

16
International Financial Conditions
  • International financial conditions are complex
    due to
  • inflation
  • fluctuating currency exchange rates
  • turbulent interest rates
  • volatility of international stock markets
  • huge national debts of some countries
  • enormous trade imbalances between countries

17
International Financial Conditions
  • The Dollar Versus the Yen and the Mark
  • Year Yen per Dollar Mark per
    Dollar
  • 1975 305 2.7
  • 1980 215 2.0
  • 1985 210 2.4
  • 1990 135 1.6
  • 1995 85 1.4
  • 2000 108 2.2

18
International Financial Conditions
  • Example of Currency Exchange Rate Changes
  • A product produced and sold in the US for 1
    would have sold in Japan for 135 yen in 1990 and
    85 yen in 1995, a price decrease of 37.
  • A product produced and sold in Japan for 135 yen
    in 1990 and sold for 1 in the US would have sold
    in the US for 1.57 in 1995, a 57 price increase.

19
International Financial Conditions
  • Due, in part, to the fall in the value of the
    dollar between 1975 and 1995, the following
    occurred
  • Prices of US products/services abroad fell and
    demand increased
  • Japan and other countries built factories in US
  • Japanese manufacturers moved upscale toward
    higher priced products

20
International Financial Conditions
  • Companies must be ready to move quickly to shift
    strategies as world financial conditions change.
  • Opportunities are usually available to reduce
    risk
  • Building smaller, more flexible factories
  • Using foreign suppliers for materials, parts, or
    products
  • Carefully planning and forecasting so that
    changing conditions can be anticipated

21
Quality, Service, and Cost Challenges
  • Quality
  • The goal of adequate quality must be replaced
    with the objective of perfect product and service
    quality.
  • The entire corporate culture must be redirected
    and committed to the ideal of perfect quality.
  • All employees must be empowered to act.
  • A commitment to continuous improvement has to be
    organization-wide.

22
Quality, Service, and Cost Challenges
  • Customer Service
  • Companies must quickly develop innovative
    products and respond quickly to customers needs.
  • Organizational structures must be made more
    horizontal to quickly accommodate change.
  • Multidisciplined teams must have decision-making
    authority, responding better to the marketplace.
  • Large, unwieldy companies are spinning off whole
    business units making them autonomous businesses
    that can compete with small, aggressive
    competitors.

23
Quality, Service, and Cost Challenges
  • Cost
  • There is continuing pressure to reduce direct
    costs (of producing and selling) and overhead
    costs.
  • It cost the US automakers 1,500 more per auto
    for labor in 1980 than it cost the Japanese
    auto-makers. By the 1990s the difference was
    almost zero.
  • Giant retailers (like Wal-Mart) squeezed weaker
    competitors out of the market, giving the
    retailers the leverage to force their suppliers
    to streamline operations and reduce costs/prices.

24
Quality, Service, and Cost Challenges
  • Cost
  • Cost-cutting measures being used include
  • Moving production to low-labor-cost countries
  • Negotiating lower labor rates with unions and
    workers
  • Automating processes to reduce the amount of
    labor needed, particularly processes that are
    labor intensive.

25
Advanced Technologies
  • The use of automation is one of the most
    far-reaching developments to affect manufacturing
    and services in the past century.
  • The initial cost of these assets is high.
  • The benefits go far beyond a reduction in labor
    costs.
  • Increased product/service quality
  • Reduced scrap and material costs
  • Faster responses to customer needs
  • Faster introduction of new products and services

26
Advanced Technologies
  • US companies cannot use automated production
    technology as a long-term competitive advantage.
  • Automation systems are available to any company
    in the world today, although the price is
    prohibitive for some companies.
  • Not investing, or delaying investing in this
    technology could be disastrous for a company.

27
Continued Growth of Service Sector
  • A robust service sector helps support the
    manufac-turing sector.
  • There is much opportunity for quality improvement
    in US service firms.
  • Many operations managers are being employed in
    services.
  • Planning, analyzing, and controlling approaches
    from manufacturing are being adapted to service
    systems.
  • The US service sector, like the manufacturing
    sector, must streamline and improve operations if
    it is to survive.

28
Scarcity of Operations Resources
  • Raw materials like titanium, nickel, coal,
    natural gas, water, and petroleum products are
    periodically unavailable or in short supply.
  • A shortage of any necessary input to a conversion
    subsystem, including skilled personnel, can be a
    challenge for an operations manager.
  • An important issue in the formation of business
    strategy is how to allocate scarce resources
    among business opportunities.

29
Social-Responsibility Issues
  • Corporate attitudes are evolving from doing what
    companies have a legal right to do, to doing what
    is right.
  • Factors influencing this evolution include
  • Consumer attitude -- Consumers are expressing
    their likes/dislikes by such means as
    stockholder meetings, liability suits, and buying
    preferences.
  • Regulation The EPA, OSHA, Clean Air Act, and
    Family Leave Act place constraints on businesses.
  • Self-interests -- Companies realize that profits
    will be greater if they act responsibly.

30
Social-Responsibility Issues
  • Environmental Impact
  • Product-Safety Impact
  • Employee Impact

31
Social-Responsibility Issues
  • Environmental Impact
  • Concerns about the global environment include
  • Landfill waste reduction
  • Recycling
  • Energy conservation
  • Chemical spills
  • Acid rain
  • Radioactive waste disposal
  • and more

32
Social-Responsibility Issues
  • Environmental Impact
  • There is a need for standardizing government
    regulations of the environment.
  • Otherwise, companies will gravitate to the
    less-regulated countries.
  • The International Organization for
    Standardization has developed a set of
    environmental guidelines called ISO 14000.

33
Social-Responsibility Issues
  • Product-Safety Impact
  • Harm to people or animals that results from poor
    product design can
  • Damage a companys reputation
  • Require a large expense to remedy
  • Cause governments to impose more regulations

34
Social-Responsibility Issues
  • Employee Impact
  • Employee benefits and policies include
  • Safety and health programs
  • Fair hiring and promotion practices
  • Day-care
  • Family leave
  • Health care
  • Retirement benefits
  • Educational assistance
  • and more

35
Social-Responsibility Issues
  • Employee Impact
  • Employee benefits and policies impact long-term
    profitability due to their effect on
  • Employee morale and productivity
  • Recruitment and retention of employees
  • Demand for a companys products
  • Cost of defending against lawsuits and boycotts

36
Developing Operations Strategy
Corporate Mission
Assessment of Global Business Conditions
Distinctive Competencies or Weaknesses
Business Strategy
Product/Service Plans
Competitive Priorities
Operations Strategy
37
Corporate Mission
  • A corporate mission is a set of long-range 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

38
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, RD, technology, management

39
SWOT Strategic Planning Tool

Opportunity
Treat
Strength
Weakness
40
Competitive Priorities
41
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

42
Competitive Priorities
  • Delivery Performance
  • Definition
  • a) Fast delivery b) 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

43
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

44
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

45
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.

46
Elements of Operations Strategy
  • Positioning the production system
  • Product/service plans (Chapter 4)
  • Outsourcing plans (Chapter 11)
  • Process and technology plans (Chapters 4 6)
  • Strategic allocation of resources (Chapter 8)
  • Facility plans capacity, location, and layout
    (Chapter 5)

47
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

48
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.
49
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.

50
Stages of a Products Life Cycle
51
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
    out-sourcing to achieve their operations
    business goals.
  • More outsourcing requires a company to have less
    equipment, fewer employees, and a smaller
    facility.

52
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

53
Outsourcing Plans
  • Many companies even outsource some service
    functions such as
  • Payroll
  • Billing
  • Order processing
  • Developing/maintaining a website
  • Employee recruitment
  • Facility maintenance

54
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.

55
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.

56
Facility Plans
  • 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.

57
Characteristics of Servicesand 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

58
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 products/services
  • Customer service and flexibility
  • Providing all the priorities simultaneously to
    customers is seldom possible.

59
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

60
Positioning Strategies for Services
  • Example McDonalds
  • Highly standardized service design
  • Low amount of customer contact
  • Physical goods dominating intangible services
  • Quasi-manufacturing approach to back-room
    production process

61
Forming Operations Strategies
  • Support the product plans and competitive
    priorities defined in the business strategy.
  • Adjust to the evolving positioning strategies.
  • Link to the marketing strategies.
  • Look at alternative operations strategies.

62
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.

63
Evolution of Positioning Strategies
Life Stage
Intro.
Early Growth
Late Growth
Maturity
Product
Custom
Slightly Standard
Standard
Highly Standard
Volume
Very Low
Low
High
Very High
Prod mode
Process
Process
Product
Product
Inventory.
To-Order
To-Order
To-Stock
To-Stock
Batch Size
Very Small
Small
Large
Very Large
64
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

65
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

66
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

67
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

68
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.

69
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

70
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

71
Wrap-Up World-Class Practice
  • Put customers first
  • Get new products/services to market faster
  • Are high quality producers
  • Have high labor productivity low production
    costs
  • Carry little excess inventory
  • . . . more

72
Wrap-Up World-Class Practice
  • Think more globally in purchasing and selling
  • Quickly adopt and develop new technologies
  • Trim organizations to be lean and flexible
  • Are less resistant to strategic alliances/joint
    ventures
  • Consider relevant social issues when setting
    strategies
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