Slide 1 Operations Strategy

Lecture I

Operations Strategy

Professor Kihoon Kim

BUSS211 OM

Slide 2 Operations Strategy

CEOs of S&P 500 companies

42%

31%

24%

17%

0%

10%

20%

30%

40%

50%

Operations Finance Marketing Sales

31%

21%

12%

6%

0%

10%

20%

30%

40%

50%

Operations Finance Marketing GeneralManagement

42% had Operations experience at some point in their career

31% were in Operations immediately before becoming CEO

Source: Spencer Stuart Route to the top Survey, 2008

Slide 3 Operations Strategy

Replacing the irreplaceable

Source: Adam Lashinsky The genius behind Steve Fortune, 2008

Slide 4 Operations Strategy

Agenda

Introduction & Administrative

What is Operations? Process view of Ops

What is good Operations Manaqgement? A Strategic Framework for Operations

Ops: competencies and Processes

Aligning strategy and operations: Focus

Relationship between process choice and strategy

Slide 5 Operations Strategy

Operations Strategy

Slide 6 Operations Strategy

The Strategic Role of Ops

A companys operations function is

either a competitive weapon

or

a corporate millstone.

It is seldom neutral. [Skinner 69]

Slide 7 Operations Strategy

Consistency between Ops and Strategic decisions

Most operational decisions have strategic impact, and vice

versa.

Truck dispatching

Compensation Scheme for truck dispatcher

IT at Walmart

Inventory tracking Buyers sensitivity to changes in prices pricing decision

Low price low inventory cost vendor-managed inventory

Just-in-time vs. Material Requirements Planning

Major Airlines vs. Low-cost carriers

vs.

Slide 8 Operations Strategy

What do you mean by Operations?

Slide 9 Operations Strategy

Operations in non-manufacturing sectors?

Trying to organize globally, KPMG plans to

consolidate most operations

Microsoft splits into five groups in reorganization

Microsoft announced a long-awaited reorganization, dividing

the company to five major groups and naming two veteran

executives to head its online operations.

Slide 10 Operations Strategy

What is Operations?

The process of bringing

goods and services

to customers/markets

Slide 11 Operations Strategy

Information structure

A process is a transformation of inputs into outputs through a network of activities and buffers, utilizing resources, IT and mgt

Outputs

Goods Services

Inputs

Flow units/Entities (customers, data,

material, cash, etc.)

Labor & Capital

Resources

Process Management

Network of Activities and Buffers

Slide 12 Operations Strategy

What is Good Operations Management?

Good Management of business processes

How to structure processes and manage resources to develop the

appropriate capabilities to convert inputs to outputs.

What is an appropriate capability?

What is a good process?

Slide 13 Operations Strategy

What defines a good process?

Performance: Financial Measures

Absolute measures:

revenues, costs, operating income, net income

Net Present Value

Relative measures:

Return on assets (ROA), ROI, ROE

Survival measure:

cash flow

Problems with financial measures:

Infrequent

Aggregate

Lagging

Need operational or process measures

Slide 14 Operations Strategy

Bringing goods and services to customers:

Value maximization and supply chain surplus

Value is created through a chain of activities, including

customer exchanges

Good and Service providers try to maximize supply chain

surplus

How to classify values to customers?

Ideas Design Produce Market

& Sell Ship Service

Finance, Information Systems, Human Resources, Accounting

Total supply chain cost Willingness to pay

Slide 15 Operations Strategy

What defines a good process? Ultimately, all

organizations compete on delivered value

Delivered value of process =

benefit to process customers total process cost

Benefit driven by customer value

Variety V

(flexibility)

Quality Q:

of product or outcome

of service

Time T:

Rapid, reliable delivery

New product development

Price p

(Cost)

Slide 16 Operations Strategy

A Strategic Framework for Process Design and Improvement:

Three questions

1. What is our strategic position: how do we compete & provide value in the market?

What is the value proposition to our customers?

Rank (p, T, Q, V)

2. Given our strategic position, what must operations do particularly well?

Which competencies must ops develop?

Rank (c, T, Q, Flex)

3. Given needed competencies, how should operations processes be structured to develop competencies that support strategy?

Process choice (structure) and management

competitive strategy

Process structure & mgt

operations strategy

Slide 17 Operations Strategy

What defines a good Operations?

A good Operations

structures the processes and resources to

align and adapt

the operational competencies

with the needs of the customers

and market conditions.

Slide 18 Operations Strategy

The Fundamentals: Competitive Strategy

1. Defines your sand box

Your market

Your core activities in the value chain

2. Prioritizes your value proposition

Cost, Quality, Variety, Time

What are your priorities?

Cost efficiency

Time

Speed

Slide 19 Operations Strategy

Operations

Strategy

The Fundamentals:

Operations Strategy a framework

A plan for developing resources and configuring processes such that the

resulting competencies maximizes NPV/value

Align with and adapt to competitive strategy

Competitive

Strategy

Competencies

Resources Processes

Cost Time

Quality Variety

Slide 20 Operations Strategy

Representation of Strategy: Current Position and Strategic Directions of Movement in the competitive product space

Price

Responsiveness

B

A

High Low

Slide 21 Operations Strategy

Strategy vs. Operational Effectiveness: The Operations Frontier as the minimal curve containing all current positions in an industry

Responsiveness

operations frontier

A

B

C

Price High Low

Slide 22 Operations Strategy

Wal-Mart

Corporate Strategy

(Gain competitive advantage by) providing customers access to quality goods, when and where needed, at competitive prices

Operations Strategy Short flow times

Low inventory levels

Operations Structure Cross docking

EDI

Fast transportation system

Focused locations

Communication between retail stores

Slide 23 Operations Strategy

Classification of Processes:

by Process Types

Project One-of-a-kind products Examples:

Job Shop Small volume of highly customized products Examples:

Batch Groups of items (lots or batches) that are essentially identical Examples:

Line Flow Repetitive, discrete process Examples:

Continuous Flow Repetitive, continuous process Examples:

Job Shop

Flow Shop

Slide 24 Operations Strategy

Characteristics of Processes: Comparison of Process Types

Type of

Process

Product

Volume

Product

Variety

Machine

Setup

Frequency

Labor

Skills

Variable

Cost

Job Shop

Flow Shop

Slide 25 Operations Strategy

Process Flexibility

Jumbled Flow. Process segments loosely linked.

Disconnected Line Flow/Jumbled Flow but a dominant flow exists.

JOB SHOP

(Commercial Printer, Architecture firm)

BATCH

(Heavy Equipment, Auto Repari)

LINE FLOWS

(Auto Assembly, Car lubrication shop)

CONTINUOUS FLOW

(Oil Refinery)

Product Variety

Low Low Standardization

One of a kind Low Volume

Many Products Few Major Products

High volume

High Standardization Commodity Products

Connected Line Flow (assembly line)

Continuous, automated, rigid line flow. Process segments tightly linked.

High

Low

High

Matching Process Choice with Strategy: Product-Process Matrix

Slide 26 Operations Strategy

What is a good process?

Summary

A good process maximizes delivered value, which is the difference between the benefit delivered to the customer minus total process cost

Value improves when process competencies are aligned with targeted customer value proposition. A simple framework asks three questions:

1. What is the value proposition to our customers? Rank (p, T, Q, V)

2. Given this proposition, which competencies must the process have? Rank (c, T, Q, Flex)

3. Given needed competencies, which process design is best? design process

How to design the process?

Focused processes are easiest to get to the frontier; one integrated may be needed because of financial investments

Its all about tradeoffs!

Pick the right process type (job shop vs. flow shop) using service-process matrix

Slide 27 Operations Strategy

Designing processes aligned to specific value

proposition: the advantages of focused processes

Basic facts:

1. there are many other dimensions of value besides low cost,

2. a process cannot perform well on every yardstick,

3. simplicity and repetition breeds competence

Focused processes therefore are hard to beat

Focused companies are more successful

Profits vs. Variety (fewer variety implies more profit margins)

But what do you do if you want to serve different customer types with different needs (values)? The choice:

Different focused processes, each focused on one type

One integrated process

Slide 28 Operations Strategy

Operations Strategy Key Takeaways

An operation as a transformation process

Good Operations?

Link between business strategy, operations strategy, and operations

structure

Strategy vs. Operational Effectiveness

Process Classification and Relationship with strategy (product-process matrix)

Focus as operations strategy