operations strategies in a global economy. countryminimum wage (per day) approx. value in us$...
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Country Minimum Wage (per day)Approx. Value in US$
Vietnam US$ 2.40
India US$ 2.24
Luxembourg US$ 14.24 (with 20% premium for skilled workers)
Mexico US$ 4.88
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.
FACTORS AFFECTING TODAY’S 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
REALITY OF GLOBAL COMPETITION Changing nature of world business International companies Strategic alliances and production
sharing Fluctuation of international financial
conditions
CHANGING NATURE OF WORLD BUSINESS
The US gross domestic product (GDP) is, at around $15 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.
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 geographically dispersed operations.
INTERNATIONAL COMPANIES World’s Largest Corporations (2013 data)
1. Royal Dutch Shell2. Wal-Mart 3. Exxon Mobil4. China Petrochemical (Sinopec)5. China National Petroleum6. BP7. State Grid Corporation of China8. Toyota 9. Volkswagen10. Total
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
SUCCESSFUL STRATEGIC ALLIANCES Starbucks partnered with Barnes and Nobles
bookstores in 1993 to provide in-house coffee shops, benefiting both retailers.
In 1996, Starbucks partnered with PepsiCo to bottle, distribute and sell the popular coffee-based drink, Frappucino.
A Starbucks-United Airlines alliance has resulted in their coffee being offered on flights with the Starbucks logo on the cups
A partnership with Kraft foods has resulted in Starbucks coffee being marketed in grocery stores.
In 2006, Starbucks formed an alliance with the NAACP, the sole purpose of which was to advance the company's and the NAACP's goals of social and economic justice.
PRODUCTION SHARING An agreement to share the production or
extraction costs between two governments, a government and a corporation, or a corporation and an individual. This can be accomplished when two countries agree to allow certain raw materials to be shipped tariff free from the first country to the second country where the materials are manufactured into a finished product. That product is then shipped back, tariff free, to the original country. In oil or mineral extraction, the company doing the extraction is paid in oil or minerals as compensation for business costs as well as a share of the profit.
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.
The “Bang” mug has been redesigned many times to realize shipping cost savings. Originally, 864 mugs would fit into a pallet. After redesign a pallet held 1,280 mugs, and with a further redesign 2,024 mugs could be squeezed into a pallet, reducing shipping costs by 60%.
Even better, the cost of production at Ikea's Romanian factory has also fallen because the more compact mugs require less space in the kiln.
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.
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.
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.
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
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.
CONTINUED GROWTH OF SERVICE SECTOR A robust service sector helps support the
manufacturing 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.
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.
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 Clean Air Act, etc. Self-interests -- Companies realize that profits will be
greater if they act responsibly.
SOCIAL-RESPONSIBILITY ISSUES
Environmental ImpactConcerns about the global environment include: Landfill waste reduction Recycling Energy conservation Chemical spills Acid rain Radioactive waste disposal … and more
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.
SOCIAL-RESPONSIBILITY ISSUES
Product-Safety ImpactHarm to people or animals that results from poor product design can: Damage a company’s reputation Require a large expense to remedy Cause governments to impose more
regulations
SOCIAL-RESPONSIBILITY ISSUES
Employee ImpactEmployee 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
SOCIAL-RESPONSIBILITY ISSUES
Employee ImpactEmployee benefits and policies impact long-term profitability due to their effect on: Employee morale and productivity Recruitment and retention of employees Demand for a company’s products Cost of defending against lawsuits and boycotts
DEVELOPING OPERATIONS STRATEGY
Corporate MissionCorporate MissionCorporate MissionCorporate Mission
Business StrategyBusiness StrategyBusiness StrategyBusiness Strategy
Product/Service PlansProduct/Service PlansProduct/Service PlansProduct/Service Plans
Competitive PrioritiesCompetitive PrioritiesCompetitive PrioritiesCompetitive Priorities
Operations StrategyOperations StrategyOperations StrategyOperations Strategy
AssessmentAssessmentof Globalof GlobalBusinessBusiness
ConditionsConditions
AssessmentAssessmentof Globalof GlobalBusinessBusiness
ConditionsConditions
DistinctiveDistinctiveCompetenciesCompetencies
ororWeaknessesWeaknesses
DistinctiveDistinctiveCompetenciesCompetencies
ororWeaknessesWeaknesses
CORPORATE MISSIONCORPORATE 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
COCA-COLA COMPANY
MissionEverything we do is inspired by our enduring mission:
To Refresh the World... in body, mind, and spirit.
To Inspire Moments of Optimism... through our brands and our actions.
To Create Value and Make a Difference... everywhere we engage.
COCA-COLA COMPANY
VisionTo achieve sustainable growth, we have established a vision with clear goals.
Profit: Maximizing return to shareowners while being mindful of our overall responsibilities.
People: Being a great place to work where people are inspired to be the best they can be.
Portfolio: Bringing to the world a portfolio of beverage brands that anticipate and satisfy peoples’ desires and needs.
Partners: Nurturing a winning network of partners and building mutual loyalty.
Planet: Being a responsible global citizen that makes a difference.
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
FOUR STEPS FOR STRATEGY FORMULATION
Defining a primary task What is the firm in the business of doing?
Assessing core competencies What does the firm do better than anyone else?
Determining order winners and order qualifiers What wins the order? What qualifies an item to be considered for
purchase? Positioning the firm
How will the firm compete?
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: COST
Lincoln Electric
reduced costs by $10 million a year for 10 yearsskilled machine operators save the company millions that would have been spent on automated equipment
Southwest Airlines
one type of airplane facilitates crew changes, record-keeping, maintenance, and inventory costsdirect flights mean no baggage transfers$30 million annual savings in travel agent commissions by requiring customers to contact the airline directly
COMPETITIVE PRIORITIES
Delivery Performance Definition
a) Fast delivery b) On-time delivery Some Ways of Creating
a) larger finished-goods inventorya) faster production ratesa) quicker shipping methodsb) more-realistic promisesb) better control of production of ordersb) better information systems
COMPETITIVE PRIORITIES: SPEEDCiticorp
advertises a 15-minute mortgage approval
L.L. Bean ships orders the day they are received
Wal-Mart replenishes its stock twice a week
Hewlett-Packard produces electronic testing equipment in five days
Citicorp advertises a 15-minute mortgage approval
L.L. Bean ships orders the day they are received
Wal-Mart replenishes its stock twice a week
Hewlett-Packard produces electronic testing equipment in five days
General Electric reduces time to manufacture circuit-breaker boxes into three days and dishwashers into 18 hours
Dellships custom-built computers in two days
Motorola needs less than 30 minutes to build to order pagers
General Electric reduces time to manufacture circuit-breaker boxes into three days and dishwashers into 18 hours
Dellships custom-built computers in two days
Motorola needs less than 30 minutes to build to order pagers
COMPETITIVE PRIORITIES High-Quality Products/Services
Definition
Customers’ perception of degree of excellence exhibited by products/services
Some Ways of CreatingImprove product/service’s Appearance Performance and function Wear, endurance ability After-sales service
COMPETITIVE PRIORITIES: QUALITY
Ritz-Carlton - one customer at a time Every employee is empowered to satisfy a
guest’s wish Teams at all levels set objectives and devise
quality action plans Each hotel has a quality leader Quality reports tracks
guest room preventive maintenance cycles percentage of check-ins with no waiting time spent to achieve industry-best clean
room appearance Guest Preference Reports are recorded in a
database
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
COMPETITIVE PRIORITIES: FLEXIBILITY Andersen Windows
number of products offered grew from 28,000 to 86,000
number of errors are down to 1 per 200 truckloads Custom Foot Shoe Store:
customer’s feet are scanned electronically to capture measurements
custom shoes are mailed to the customer’s home in weeks
prices are comparable to off-the-shelf shoes National Bicycle Industrial Company
offers 11,231,862 variations delivers within two weeks at costs only 10% above
standard models
OPERATIONS STRATEGY
Operations strategy is a long-range game plan for the production of a company’s 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
PRODUCT/SERVICE PLANS
As a product is designed, all the detailedAs a product is designed, all the detailedcharacteristics of the product are established.characteristics of the product are established.
Each product characteristic directlyEach product characteristic directly affects how the product can be made.affects how the product can be made.
How the product is made determinesHow the product is made determines
the design of the production system.the design of the production system.
STAGES IN A PRODUCT’S 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 PRODUCT’S LIFE CYCLE
Introduction Growth Maturity DeclineIntroduction Growth Maturity Decline
B&W TVB&W TV
AutomobileAutomobile
Video RecorderVideo Recorder
CD PlayerCD PlayerColor CopierColor Copier
Cell PhoneCell Phone
Internet RadioInternet Radio
Fax MachineFax MachineDot-MatrixDot-Matrix PrinterPrinter
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.
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 firm’s 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
How to provide the long-range capacity to produce the firm’s 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.
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.
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: McDonald’s Highly standardized service design Low amount of customer contact Physical goods dominating intangible
services Quasi-manufacturing approach to back-room
production process
FORMING OPERATIONS STRATEGIESFORMING 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.
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
VolumeVolumeVeryVeryLowLow
LowLow HighHighVeryVeryHighHigh
FocusFocus ProcessProcess ProcessProcess ProductProduct ProductProduct
Fin.Gds.Fin.Gds. To-OrderTo-Order To-OrderTo-Order To-StockTo-Stock To-StockTo-Stock
BatchBatchSizeSize
VeryVerySmallSmall
SmallSmall LargeLargeVeryVeryLargeLarge
ProductProduct CustomCustomSlightlySlightlyStandardStandard
StandardStandardHighlyHighly
StandardStandard
LifeLifeStageStage
Intro.Intro.EarlyEarly
GrowthGrowthLateLate
GrowthGrowthMaturityMaturity
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 ManufacturersUsually prefer positioning strategies with: Custom products Process-focused production Produce-to-order policiesThese systems are more flexible and require
lesscapital.
NO SINGLE BEST STRATEGY
Start-up and Small ServicesSuccessfully compete with large corporations
by: Carving out a specialty niche Emphasizing close, personal customer
service Developing a loyal customer base