BUSS211
OM
Lecture I
Operations Strategy
Professor Kihoon Kim
Operations Strategy
Slide 1
CEOs of S&P 500 companies
50%
42%
40%
31%
30%
24%
42% had Operations
experience at some
point in their career
17%
20%
10%
0%
Operations
Finance
Marketing
Sales
50%
40%
31%
30%
31% were in Operations
immediately before
becoming CEO
21%
20%
12%
10%
6%
0%
Operations
Source: Spencer Stuart Route to the top Survey, 2008
Operations Strategy
Slide 2
Finance
Marketing
General
Management
Replacing the irreplaceable
Source: Adam Lashinsky The genius behind Steve Fortune, 2008
Operations Strategy
Slide 3
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
Operations Strategy
Slide 4
Operations Strategy
Operations Strategy
Slide 5
The Strategic Role of Ops
A companys operations function is
either a competitive weapon
or
a corporate millstone.
It is seldom neutral. [Skinner 69]
Operations Strategy
Slide 6
Consistency between Ops and Strategic decisions
Most operational decisions have strategic impact, and vice
versa.
Truck dispatching
vs.
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
Operations Strategy
Slide 7
What do you mean by Operations?
Operations Strategy
Slide 8
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.
Operations Strategy
Slide 9
What is Operations?
The process of bringing
goods and services
to customers/markets
Operations Strategy
Slide 10
A process is a transformation of inputs into outputs through a
network of activities and buffers, utilizing resources, IT and mgt
Process
Management
Inputs
Network of
Activities and Buffers
Outputs
Goods
Services
Flow units/Entities
(customers, data,
material, cash, etc.)
Resources
Labor & Capital
Operations Strategy
Information
structure
Slide 11
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?
Operations Strategy
Slide 12
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
Operations Strategy
Need operational or process measures
Slide 13
Bringing goods and services to customers:
Value maximization and supply chain surplus
Value is created through a chain of activities, including
customer exchanges
Ideas
Design
Produce
Market
& Sell
Ship
Service
Finance, Information Systems, Human Resources, Accounting
Total supply chain cost
Willingness to pay
Good and Service providers try to maximize supply chain
surplus
How to classify values to customers?
Operations Strategy
Slide 14
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)
Price p
(Cost)
Quality Q:
of product or outcome
of service
Operations Strategy
Time T:
Rapid, reliable delivery
New product development
Slide 15
A Strategic Framework for Process Design and Improvement:
Three questions
1.
competitive
strategy
2.
operations
strategy
Operations Strategy
What is the value proposition to our customers?
Rank (p, T, Q, V)
Given our strategic position, what must operations
do particularly well?
3.
Process
structure & mgt
What is our strategic position: how do we compete
& provide value in the market?
Which competencies must ops develop?
Rank (c, T, Q, Flex)
Given needed competencies, how should
operations processes be structured to develop
competencies that support strategy?
Process choice (structure) and management
Slide 16
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.
Operations Strategy
Slide 17
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
Time
Speed
Cost efficiency
What are your priorities?
Operations Strategy
Slide 18
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
Cost
Time
Quality
Variety
Competencies
Resources
Operations Strategy
Operations
Strategy
Slide 19
Processes
Representation of Strategy:
Current Position and Strategic Directions of Movement in the competitive product space
Responsiveness
A
High
Low
Price
Operations Strategy
Slide 20
Strategy vs. Operational Effectiveness:
The Operations Frontier as the minimal curve containing all current positions in an industry
Responsiveness
A
B
operations
frontier
High
Low
Price
Operations Strategy
Slide 21
Wal-Mart
Corporate Strategy
(Gain competitive advantage by) providing customers access to quality goods,
when and where needed, at competitive prices
Operations Structure
Cross docking
EDI
Fast transportation
system
Focused locations
Communication between
retail stores
Operations Strategy
Short flow times
Low inventory levels
Operations Strategy
Slide 22
Classification of Processes:
by Process Types
Project
Groups of items (lots or batches) that are essentially identical
Examples:
Line Flow
Small volume of highly customized products
Examples:
Batch
Job Shop
Job Shop
One-of-a-kind products
Examples:
Repetitive, discrete process
Examples:
Continuous Flow
Operations Strategy
Flow Shop
Repetitive, continuous process
Examples:
Slide 23
Characteristics of Processes:
Comparison of Process Types
Type of
Process
Product
Volume
Product
Variety
Machine
Setup
Frequency
Job Shop
Flow Shop
Operations Strategy
Slide 24
Labor
Skills
Variable
Cost
Matching Process Choice with Strategy:
Product-Process Matrix
Process
Flexibility
High
JOB SHOP
Jumbled Flow.
Process segments
loosely linked.
(Commercial Printer,
Architecture firm)
BATCH
Disconnected Line
Flow/Jumbled Flow
but a dominant flow
exists.
(Heavy Equipment,
Auto Repari)
LINE FLOWS
Connected Line
Flow (assembly line)
Continuous, automated,
rigid line flow.
Process segments tightly
linked.
Low
(Auto Assembly,
Car lubrication shop)
CONTINUOUS
FLOW
(Oil Refinery)
Low
High Standardization
Commodity Products
High volume
Operations Strategy
High
Few Major Products
Slide 25
Many Products
Low Standardization
One of a kind
Low Volume
Product
Variety
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
Operations Strategy
Its all about tradeoffs!
Pick the right process type (job shop vs. flow shop) using service-process matrix
Slide 26
Designing processes aligned to specific value
proposition: the advantages of focused processes
Basic facts:
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
1.
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:
Operations Strategy
Different focused processes, each focused on one type
One integrated process
Slide 27
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
Operations Strategy
Slide 28
