Chapter Two
Operations and Supply
Chain Strategy
Chapter outline
2.1
Operations Strategy Model
2.2
Emphasis on Operations Objectives
2.3
Linking Strategies
2.4
Operations Competence
2.5
Global Scope of Operations
2.6
Supply Chain Strategy
2.7
Key Points
Student Internet Exercises
Discussion Questions
Selected Bibliography
There is an increasing awareness that operations should contribute to the global
competitive stance of the business and not merely be a place to make the firm’s
products or services. This can be done by contributing distinctive capability
(or competence) to the business and continually improving the products
an processes of the business. The Operations Leader box discusses how Corning Inc. competes through a strategy of cycle-time reduction and quality
improvement.
Skinner (1969) notes that operations is seldom neutral: “It is either a competitive weapon or a corporate millstone.” In his now-classic article, Skinner argues
that operations should be fully connected to the business strategy. Operations
strategies and decisions should fulfill the needs of the business and should add
competitive advantage to the firm.
In the previous chapter, we indicated that the operations function is a key
wealth creator for the firm. Wealth can be created only by operations that are
more productive than competitors’ in relation to a known market with the
required financing and human resources. In other words, all of the functions of
the firm must be well coordinated for wealth to be created and competitive
advantage to occur. The cross-functional coordination of decision making is facilitated by an operations strategy that is developed by a team of managers from
across the entire business.
18
Chapter 2
OPERATIONS
LEADER
Corning Inc.
Competes
through Cycle
Time and
Quality
Operations and Supply Chain Strategy
19
At Corning’s Telecommunications Products Division (TPD), the corporate performance goals
and measures are selected by a cross-functional Goal Sharing Team that consists of 8 to
10 people from all levels of the company. The process includes brainstorming measures;
researching them; inviting internal and external experts to consult with the team; setting
goals, measures, and weights; and testing the measures for three to six months.
The data and information Corning TPD uses to monitor and drive improved business
performance are linked to its business strategy, values, and performance analysis. It collects
and uses data to support the development of the division strategy, deployment of its strategic initiatives, investment in the company’s values, and improvement of results.
Corning TPD also believes that cycle time and quality are much better indicators of business excellence and relative performance than financial indicators. Gerald J. McQuaid, division vice president of Corning TPD said, “We are
unique in that we are willing to put our money on improvement of nonfinancial measures, knowing this improvement will link to financial measures.
Most companies tell their employees, ‘Meet your financials, and then we will
pay you for customer service.’ We don’t do that. We don’t have any thresholds in our system; we pay for customer service if our employees hit it,
whether or not they meet their financials. That says we believe in the link.”
Source: Laura Struebing, “Measuring for Excellence,” Quality Progress, December
1996, pp.25–30; and www.corning.com website, 2005.
The following definition of operations strategy is a starting point for our discussion:
Operations strategy is a strategy for the operations function that is linked to the
business strategy and other functional strategies, leading to a competitive advantage
for the firm.
This definition will be expanded in the next section as a basis for guiding all
decisions that occur in operations and connecting those decisions to other functions. At the end of the chapter we will extend operations strategy to a global
context and to the entire supply chain.
2.1 OPERATIONS STRATEGY MODEL
As depicted in Figure 2.1, operations strategy is a functional strategy that
should be guided by the business strategy and should result in a consistent pattern in decisions [Hayes and Wheelwright (1984)]. The four elements inside the
dashed box—mission, distinctive competence, objectives, and policies—are the
heart of operations strategy. The other elements in the figure are inputs or outputs from the process of developing operations strategy. The outcomes of the
process are operations decisions in the four parts of operations (process, quality, capacity, and inventory), which are well connected with the other functions
in the business.
Corporate and
Business
Strategy
Corporate strategy and business strategy are at the top of Figure 2.1. The
corporate strategy defines what business the company is pursuing. For example,
Walt Disney Productions considers itself in the business of “making people
happy.” The Disney Corporation includes not only the theme parks but production of cartoons, movie production, merchandizing, and a variety of entertainmentrelated businesses around the world.
20
Part One
Introduction
THE MAGIC
KINGDOM. Walt
Disney is in the
business of “making
people happy.” This
business strategy is
implemented
throughout the
company. © Mark
Peterson/CORBIS SABA
Business strategy follows from the
corporate strategy and defines how a
particular business will compete. Most
large corporations have several different businesses, each competing in different market segments. Each business
must find its own basis for competing
in its particular markets. For example,
Treacy and Wierserma (1997) define
three generic types of business strategies, which can be selected by any particular business: customer intimacy,
product leadership, and operational
excellence.1 The operations strategy
should then be connected to the particular business strategy selected.
Operations Mission
Every operation should have a mission
that is connected to the business strategy and in agreement with the other
functional strategies. For example, if the
business strategy is product leadership,
the operations mission should emphasize new-product introduction and flexibility
to adapt products to changing market needs. Other business strategies would lead
to other operations missions, such as low cost or fast delivery, as will be illustrated
below. The operations mission is thus derived from the particular business strategy selected by the business unit. How mission-driven companies can create shareholder value is explained by William George, an operations leader at Medtronic.
Distinctive
Competence
All operations should have a distinctive competence (or operations capability)
that differentiates it from the competitors. The distinctive competence is something that operations does better than anyone else. It may be based on unique
resources (human or capital) that are difficult to imitate. Distinctive competence
can also be based on proprietary or patented technology or any innovation in
operations that cannot be easily copied.
The distinctive competence should match the mission of operations. For example, it does no good to have a distinctive competence of superior inventory
management systems when the operations mission is to excel at new-product
introduction. Likewise, the distinctive competence must be something that is
coordinated with marketing, finance, and the other functions so that it is supported across the entire business as a basis for competitive advantage.
Distinctive competence may be used to define a particular business strategy
in an ongoing business. The business strategy does not always emanate from
the market; it may be built instead on matching operations’ distinctive competence (current or projected) with a market. Both a viable market segment and a
unique capability to deliver the product or service offered must be present for
the firm to compete. In an insightful article, Clark (1996) argues that distinctive
competence is an essential ingredient for a successful business strategy.
1
They define customer intimacy as catering closely to every customer need, product leadership as having
the latest new products, and operational excellence as being the lowest-cost producer.
Chapter 2
Operations and Supply Chain Strategy
21
FIGURE 2.1
Corporate
strategy
Operations strategy
model.
Business strategy
Internal
analysis
Operations strategy
Functional strategies in
Mission
marketing, finance,
engineering,
External
analysis
Distinctive
competence
human resources, and
information systems
Objectives
(cost, quality, flexibility,
and delivery)
Policies
(process, quality capacity,
and inventory)
Consistent pattern
of decisions
Results
Wal-Mart has a mission to be the low-cost retailer. To achieve this mission they
have developed a distinctive competence in cross-docking aimed at lowering
costs of shipping. Using cross-docking, goods from suppliers’ trucks are transferred across the loading dock to waiting Wal-Mart trucks and delivered to the
stores without entering the warehouse. Wal-Mart also has a more sophisticated
inventory control system than its competitors and therefore can hold inventories
to a minimum. These distinctive competencies help Wal-Mart compete at low cost.
Operations
Objectives
Operations objectives are the third element of operations strategy. The four
common objectives of operations are cost, quality, delivery, and flexibility.2
These objectives should be derived from the mission, and they constitute a
2
In some cases, innovation has been added as a fifth operations objective.
22
Part One
Introduction
Wal-Mart has distinctive competencies to support its low cost strategy.
restatement of the mission in quantitative and measurable terms. The objectives
should be long-range oriented (5 to 10 years) to be strategic in nature.
Table 2.1 shows some common measures of objectives that can be used to
quantify long-range operations performance. The objectives for 5 years into the
future are compared to the current year and also to a current world-class
competitor. The comparison to a world-class competitor is for benchmarking
purposes and may serve to indicate that operations is behind or ahead of the
competition. But the objectives should be suited to the particular business, which
will not necessarily exceed the competition in every category.
Operations
Policies
Operations policies constitute the fourth element of operations strategy. Policies
should indicate how the operations objectives will be achieved. Operations policies should be developed for each of the major decision categories (process, quality, capacity, and inventory). These policies should, of course, be well integrated
with other functional decisions and policies. This is one of the most difficult
things to actually achieve in business and is one of the reasons a truly integrated
operations strategy is needed.
Table 2.2 indicates some important policies for operations. Note, these policies may require trade-offs or choices in each case. For example, in the capacity area there is a choice between one large facility or several smaller ones.
While the large facility may require less total investment due to economies of
scale, the smaller facilities can be located in their markets and provide better
customer service. So the choice of policies depends on what objectives are
Chapter 2
OPERATIONS
LEADER
How MissionDriven
Companies
Create LongTerm Shareholder
Value:
Medtronic’s
Former CEO Bill
George
Operations and Supply Chain Strategy
23
. . . I have developed a deep conviction that the widely accepted philosophy, that the primary
mission of a for-profit corporation is to maximize shareholder value, is flawed at its core. While
that philosophy may result in short-term increases in shareholder value, it is simply not sustainable over the long term. Over time, shareholder value will stagnate and eventually decline
for companies that drive their strategy simply from financial considerations. . . .
The best path to long-term growth in shareholder value comes from having a wellarticulated mission that employees are willing to commit to, a consistently practiced set
of values, and a clear business strategy that is adaptable to changing business conditions.
Companies that pursue their mission in a consistent and unrelenting manner in the end
will create shareholder value far beyond what anyone believes is possible. . . .
The real flaw in the sole mission of maximizing shareholder value is the inability to motivate a large group of employees to exceptional performance. Tying financial incentives of
the management team—be they bonuses, incentive compensation, stock grants, or stock
options—to immediate results that increase shareholder value will indeed motivate the top
people in the organization, at least in the short term. This is well established and documented. Unfortunately, the top people represent only a small fraction of
the people doing the work of the organization. . . .
There is a better way to increase long-term shareholder value, but this
cannot be the primary objective. It is my belief that corporations are created for a purpose beyond making money. Sustained growth in shareholder
value may be the end result, but it cannot be the sole purpose.
The purpose of a company boils down to one thing: serving the customers. This is true
across all industries and all types of businesses: stock brokers, banks, aerospace companies, consumer goods, retailing, etc. . . . If it is superior (in serving its customers) to everyone else in the field, and can sustain this advantage over the long term, that company will
create ultimate shareholder value. . . .
In the end, motivating employees with a mission and a clear sense of purpose is the
only way I know of to deliver innovative products, superior service and unsurpassed quality
to customers over an extended period of time. Over time, an innovative idea for a product or a service will be copied by your competitors. Creating an organization of highly motivated people is extremely hard to duplicate.
Source: William George, “Address Given to the Academy of Management,” Academy of
Management Executive 15, no. 4 (November 2001), pp. 39–47.
TABLE 2.1
Typical Operations
Objectives
Current
Year
Objective:
5 Years
in the Future
Current:
World-Class
Competitor
55%
4.1
52%
5.2
50%
5.0
85%
3%
1%
99%
1%
0.5%
95%
1%
1%
90%
3 wk
95%
1 wk
95%
3 wk
10 mo
3 mo
6 mo
3 mo
8 mo
3 mo
Cost
Manufacturing cost as a percentage of sales
Inventory turnover
Quality
Customer satisfaction (percentage satisfied
with products)
Percentage of scrap and rework
Warranty cost as a percentage of sales
Delivery
Percentage of orders filled from stock
Lead time to fill stock
Flexibility
Number of months to introduce new products
Number of months to change capacity by ⫾20%
24
Part One
Introduction
TABLE 2.2
Examples of
Important Policies
in Operations
Policy Type
Policy Area
Strategic Choice
Process
Span of process
Automation
Process flow
Job specialization
Supervision
Make or buy
Handmade or machine-made
Flexible or hard automation
Project, batch, line, or continuous
High or low specialization
Highly decentralized or centralized
Quality
Approach
Training
Suppliers
Prevention or inspection
Technical or managerial training
Selected on quality or cost
Capacity
Facility size
Location
Investment
One large or several small facilities
Near markets, low cost, or foreign
Permanent or temporary
Inventory
Amount
Distribution
Control systems
High levels or low levels of inventory
Centralized or decentralized warehouse
Control in great detail or less detail
being pursued in operations, availability of capital, marketing objectives, and
so forth.
2.2 EMPHASIS ON OPERATIONS OBJECTIVES
It is possible to use the four operations objectives, discussed above, to describe
different ways to compete through operations. Suppose we start with the idea
of competing through quality. For the moment we can think of quality as
satisfying customer requirements. This assumes that marketing has identified a
particular type of customer for the business or a particular market segment of
customers. If we are competing through quality as the first priority, there are
many things that we would do in product design and operations. For example,
we would work with the selected customers to define their specific requirements;
we would also want to be sure that the process that we have is capable of meeting those customers’ needs and is under control. We would ensure that workers
are trained to provide the product or service needed and so on. The point is that
a quality objective leads to certain actions and policies in operations to provide
a product or service that the customer wants.
Now, suppose that we had decided to pursue a low-cost objective instead of
quality. Actually, low cost is compatible with the quality objective in the way
that we have defined quality, satisfying a particular set of customers.3 Perhaps
the best way to achieve lower cost is to focus on customer requirements (quality) in both product design and operations, as a way of eliminating rework,
scrap, inspection, and other forms of non-value-added steps in operations. It has
been found always to be cheaper to prevent errors and mistakes than to correct
them after they occur. The cost savings of this approach can be dramatic. But a
low-cost objective may require more than just an emphasis on quality. Heavy
investment in automation and information systems may also be needed to reduce
costs. In this case, some actions required for low cost are the same as those for
quality and some are unique.
3
Later, we will broaden the definition of quality to include superior product attributes or features that
may indeed cost more in the short run.
Chapter 2
Operations and Supply Chain Strategy
25
Had we selected delivery time as the key objective, we would also want to
use quality improvement as a way of reducing wasted time in operations. When
rework, scrap, inspection, and other non-value-added steps are eliminated from
operations, the time to order, produce, and deliver the product is also reduced.
But focusing on time is different than focusing on quality, although these two
are related. Typical products spend most of their time in operations waiting and
sitting in line for the next step. The waiting time may be as much as 80 or 90
percent of the total time of production. The best way to reduce time, beyond
quality improvement efforts, is to attack time directly. This is done by reducing
machine changeover time, by moving processes closer together, by smoothing out
flows, by simplifying complex operations, and by redesigning the product or service for fast production. These actions would be taken in addition to those of a
quality improvement objective.
Finally, we could choose to emphasize flexibility in operations. By reducing
time, flexibility will automatically improve. For example, suppose that it originally took 16 weeks to make a product and we have now reduced the production time to 2 weeks. This will make it possible to change the schedule within a
2-week time frame rather than a 16-week time frame, thereby making operations
more flexible to changes in customer requirements. On the other hand, flexibility can be attacked directly by adding capacity, by buying more flexible equipment, or by redesigning the product for high variety.
What we see from these examples is that operations objectives are connected.
If we stress quality improvement, we also get cost reduction, time improvement,
and more flexibility. It seems that quality is the place to start, along with time
reduction. Then other objectives may be attacked directly by taking unique
actions for that objective, as needed. A series of such actions will then result in
continuous improvement of all four operations objectives at the same time.4
Zara, a giant fashion retailer in Europe, is able to achieve fast replenishment
of hot-selling items in its stores within a few weeks rather than the months taken
by competitors. By stressing quality processes and supply chain management
practices, Zara achieves fast restocking of its stores and lower costs.
2.3 LINKING STRATEGIES
Not only should objectives be linked, but the entire operations strategy should
be linked to business strategy and to marketing and financial strategies as well.
Table 2.3 illustrates this linkage by showing two diametrically opposite business
strategies that can be selected and the resulting functional strategies. First, there
is the product imitator (or operational excellence) business strategy, which
would be typical of a mature, price-sensitive market with a standardized product. In this case, the operations mission would emphasize cost as the dominant
objective, and operations should strive to reduce costs through such policies as
superior process technology, low personnel costs, low inventory levels, a high
degree of vertical integration, and quality assurance aimed at saving cost. Marketing and finance would also pursue and support the product imitator business
strategy as shown in Table 2.3.
The second business strategy shown in the table is one of product innovation
and new-product introduction (or product leadership). This strategy would typically be used in an emerging and possibly growing market where advantage
4
For more details, see the famous “sand-cone model” by Ferdows and De Meyer (1990).
26
Part One
Introduction
TABLE 2.3
Strategic
Alternatives
Business Strategy
Strategy A
Strategy B
Product Imitator
Product Innovator
Market conditions
Price-sensitive
Mature market
High volume
Standardization
Product-features-sensitive
Emerging market
Low volume
Customized products
Operations mission
Emphasize low cost for mature
products
Emphasize flexibility to introduce
new products
Distinctive competence
operations
Low cost through superior process
technology and vertical
integration
Fast and reliable new-product
introduction through product
teams and flexible automation
Operations policies
Superior processes
Dedicated automation
Slow reaction to changes
Economies of scale
Workforce involvement
Superior products
Flexible automation
Fast reaction to changes
Economies of scope
Use product development teams
Marketing strategies
Mass distribution
Repeat sales
Maximizing of sales opportunities
National sales force
Selective distribution
New-market development
Product design
Sales made through agents
Finance strategies
Low risk
Low profit margins
Higher risks
Higher profit margins
can be gained by bringing out superior-quality products in a short amount of
time. Price would not be the dominant form of competition, and higher prices
could be charged, thereby putting lower emphasis on costs. In this case, operations would emphasize flexibility to rapidly and effectively introduce superior new
products as its mission. Operations policies could include the use of new-product
introduction teams, flexible automation that could be adapted to new products, a
workforce with flexible skills, and possibly purchase of some of the key services
and materials from outside to retain flexibility. Costs would not be emphasized to
the same degree as in the first strategy. Once again, finance and marketing also
need to support the business strategy to achieve an integrated whole.
What Table 2.3 indicates is that drastically different types of operations are
needed to support different business strategies. It also illustrates that flexibility
and superior-quality products might cost more for the product innovator strategy. There is no such thing as an all-purpose operation that is best for all
circumstances. Thus, when asked to evaluate operations, one must immediately
consider the business strategy as well as the mission and objectives of operations.
Table 2.3 also suggests that all functions must support the business strategy
for the strategy to be effective. For example, in the product imitator strategy marketing should focus on mass distribution, repeat sales, competitive pricing, and
maximization of sales opportunities. On the other hand, in the product innovator strategy marketing should focus on selective distribution, new-market development, product design, and perhaps sales through agents. It is not enough for
just operations to be integrated with the business strategy; all functions must
support the business strategy and each other.
Hill (1994) is an advocate of the above approach that integrates marketing and
operations and clearly selects a particular mission for operations. He makes the
distinction between order winners and order qualifiers. An order winner is an
Chapter 2
Operations and Supply Chain Strategy
27
objective that will win orders from the customers in a particular segment that
marketing has selected as the target market. In the product imitator strategy, the
order winner is price for the customer; this implies the need for low cost in operations, marketing, and finance. Other objectives in this case (flexibility, quality, and
delivery) can be considered order qualifiers in that the company must have
acceptable levels of these three objectives to qualify to get the order. Insufficient
levels of performance on order qualifiers can lose the order, but higher performance on order qualifiers cannot by themselves win the order. Only price/
cost will win the order in this case.
In the product innovator strategy, the order winner is flexibility to rapidly and
effectively introduce superior products; order qualifiers are cost, delivery, and quality. Note how the order winner depends on the particular strategy selected and that
all functions must pursue superior levels relative to competition on the order winner, while achieving acceptable levels to the customer on order qualifiers.
What is the order winner at Wal-Mart? It’s low cost and everything is geared
to keeping costs down. The same cannot be said about Nordstrom’s, which competes on upscale merchandise and superior customer service. Since the order
winners in these stores are different, so are the operations strategies.
2.4 OPERATIONS COMPETENCE
A recent trend in operations strategy is to stress distinctive competence as the
primary basis for a business strategy. The distinctive competence must, of course,
have a market and customer. The reverse is also true: a market without a distinctive competence does not provide the basis for a competitive strategy, and at
best the operations strategy can be defensive or neutral.
Distinctive competence, as we have defined it above, refers to resources or
capabilities that are unique relative to competitors. For the distinctive competence to be sustainable it must be difficult to imitate or copy. Resources or capabilities that are difficult to imitate include the following examples:
• Skills of employees and managers, particularly those that can’t be easily
learned.
• Proprietary equipment or processes that are patented or otherwise protected.
• An ability to continuously learn and improve operations at a rapid pace.
• Partnerships with customers or with suppliers that are developed and nurtured over the long run.
• An advantageous location for facilities gained by being the first mover (e.g.,
access to rare natural resources or an attractive retail location).
• Organizational knowledge that has been built up internally over time.
• Proprietary or unique information and control systems.
As can be seen from these examples a sustainable distinctive competence is not
something that can be purchased on the open market. Rather, it is often built up
by the organization over time. If it could be purchased from the market, then
competitors could easily duplicate it. Competitors cannot easily duplicate internal resources that are developed over time. A sustainable distinctive competence
in operations is consistent with the “resource-based view” of the firm that advocates building strategy on resources that are rare, valuable, inimitable, and nonsubstitutable (Schroeder, et al., 2002).
28
Part One
Introduction
The Dell Computer Corporation has a sustainable distinctive competence in
both marketing and production. Dell developed its famous direct marketing
approach for the sale of computers by Internet and phone orders. This not only
leads to a unique marketing channel in the computer business, but also is based
on a distinctive competence in operations. When orders for computers are
accepted online or by telephone, the customer immediately pays for the computer, usually by credit card. The computer is then assembled directly from the
order and shipped to the customer within five days. To accomplish this Dell has
developed proprietary software that allows it to quickly enter orders into its system and to track the order to completion. They have also developed partnerships
with suppliers that can immediately supply the assembly lines of the Dell factories with the required parts and components. Dell factory employees have flexible skills so they can assemble a large number of different computers that are
built in lot sizes of one. The fast assembly of computers limits Dell’s need for
inventory, thus providing for rapid turnover of inventory and low costs. Since
the product is shipped within five days, the customer payment is received in
advance, and suppliers are paid later, Dell has a positive cash-to-cash cycle and
can therefore hold working capital to a minimum.
This example gives only one way of building a distinctive competence that is
difficult for competitors to copy or find a substitute and also is rare and valuable.
While the methods Dell uses are well known to competitors they have not duplicated Dell’s efficient and responsive system of production and marketing. Distinctive competencies are sometime “sticky” and not easily duplicated, even
though they could be. This is because the competitors would have to retool their
entire production system, write new software, develop long-term supplier relationships, and retrain employees to copy the Dell system.
Distinctive competence provides an advantage for operations and can be the
basis for competing. While market positioning is important, it is more powerful
when coupled with a distinctive competence in operations. Competitively neutral operations, without a distinctive competence cannot be expected to provide
an advantage in cost, quality, delivery, or flexibility. A sustainable distinctive
competence or capability is needed to provide a performance advantage.
2.5 GLOBAL SCOPE OF OPERATIONS
Every day in the popular press we read that markets are becoming global in
nature. Due to expanding worldwide communications systems and global travel,
consumer demand is more homogenized on an international basis. Many products and services are global in nature, including soft drinks, VCRs, TVs, banking, travel, automobiles, motorcycles, farm equipment, machine tools, and a wide
variety of other products. To be sure, there are still market niches that are
national in character, but the trend is toward more global markets and products.
As a result of these changes, business and operations are becoming more
global. Traditional businesses are operated on a multicountry basis rather than
a global basis. In a traditional company, decisions are handled differently in each
country around the world. The business sees itself as selling to local markets,
there is mostly local competition, and there is limited export and import. Also,
each country has its own quality, process technology, and cost structure. Sources
of supply are handled locally, or regionally, and export is subject to currency fluctuations. A traditional company is organized with a separate division or subsidiary for each country in which the company operates.
Chapter 2
Operations and Supply Chain Strategy
29
When operating in global markets, a traditional company is at a competitive
disadvantage. The scale of operations is wrong, products may be inadequate, and
the company is organized the wrong way to produce and market its products. As
a result, the global corporation has emerged with the following characteristics.
Facilities and plants are located on a worldwide basis, not country by country. Products and services can be shifted back and forth between countries. This
is being done in the automobile industry, electronics, and many other industries
today. Components, parts, and services are sourced on a global basis. The best
worldwide source of supply is found, regardless of its national origin.
Global product design and process technology are used. A basic product or service is designed, whenever possible, to fit global tastes. When a local variation is
needed, it is handled as an option rather than as a separate product. Process technology is also standardized globally. For example, Black and Decker has recently
designed worldwide hand tools. Even fast food is becoming a global product.
Demand for products is considered on a worldwide, not a local, basis. Therefore, the economies of scale are greatly magnified, and costs can be lower. The
VCR came out as a worldwide product and was never marketed locally. Its
demand and cost were scaled for a global market right from the start. Local competitors were kept out of the market.
Logistics and inventory control systems are global in nature. This makes it possible to coordinate shipments of products and components on a worldwide basis.
For services operations, facilities are interconnected through a worldwide communications system. For example, consulting firms, fast food, banks, and travel services are globally interconnected.
A global corporation is organized into divisions that have global responsibility for the marketing, R&D, and operations functions. These functions are not
fragmented into several domestic and international divisions.
Some services have also taken on a global scope of operations. For example,
consulting firms, telecommunications, air travel, entertainment, financial services, and software programming have global operations. All parts of the world
receive these services, and global consolidation has taken the place of these once
fragmented service industries. Certainly, not all service is global. There still
remain services that are delivered on a local basis to serve local markets, but the
trend toward globalization is undeniable.
The implications for operations management of this change toward global
business are profound. Operations strategy must be conceived of as global in
nature. A global distinctive competence should be developed for operations,
We have a great
new marketing
strategy
Marketing
But, does it fit
with our distinctive
competence in operations?
OM Veep
This company needs
to be market directed
Marketing
Really?
OM Veep
30
Part One
Introduction
along with a global mission, objectives, and policies. Product design, process
design, facility location, workforce policies, and virtually all decisions in operations are affected. To achieve an international perspective, we will provide a
global orientation to decisions throughout this text.
2.6 SUPPLY CHAIN STRATEGY
In the same way that operations can be expanded to a global context, operations
strategy can also be expanded to supply chain strategy. Today, some firms no
longer compete with each other, but entire supply chains compete.
In Chapter 10, we define a supply chain as a sequence of business processes
and information that provides a product or service from suppliers through manufacturing and distribution to the ultimate customer. Supply chain strategy thus
takes into account not only the business and corporate strategy of the firm but
also the strategies of the suppliers and customers in the firm’s supply chain.
Supply chain strategy should be aimed at achieving a sustainable competitive
advantage for the entire supply chain. This advantage can be achieved by
expanding many of the concepts already covered in this chapter. For example, a
supply chain should have a distinctive competence that is valuable and difficult
to imitate or replace by competitors. This distinctive competence should be based
on what the firm does along with actions of its supply chain partners. In a similar way, the supply chain partners and the firm should be working toward the
same mission and objectives in order to have a consistent supply chain strategy.
Since no single firm controls the entire supply chain, a coherent supply strategy
can be difficult to achieve. Nevertheless, it is important to realize that supply chain partners that are working at cross purposes will not be competitive
with other supply chains that have achieved a high degree of cooperation and
consistency.
In this chapter we have contrasted the product innovator and product imitator strategies. By the same token, an entire supply chain can implement
these two types of strategies. As a result, not all supply chains have the same
strategies but they are configured according to their fundamental purpose and
therefore exhibit different missions, objectives, distinctive competencies and
policies.
For example, earlier in this chapter we discussed Wal-Mart’s mission to be a
low cost retailer. Because of its enormous size and clear mission, Wal-Mart can
impose a low cost strategy on the entire supply chain. If supply chain partners
do not support the low cost strategy, they will no longer participate in Wal-Mart’s
supply chain. It is clear from this example how a supply chain strategy can exist
beyond the boundaries of a single firm. It will, of course, be more difficult to
define and implement such a strategy in smaller and more diffuse supply chains.
In every operations decision it is important to consider the proper context
whether it be global or the supply chain of which the firm is only a part. Global
operations and the supply chain help to set the context, not only for operations
strategy, but also for decision making in all parts of operations.
2.7 KEY POINTS
This chapter has emphasized the idea of achieving a competitive advantage
through operations by developing an operations strategy that the market and the
customers of the business value. The key points are as follows:
Chapter 2
Operations and Supply Chain Strategy
31
• The strategy for the operations function must be linked to the business strategy and other functional strategies, leading to a consistent pattern of decisions, unique capability, and competitive advantage for the firm.
• Operations strategy consists of mission, distinctive competence, objectives,
and policies. These four elements must be tightly integrated with each other
and with other functions.
• The operations mission should be aligned with the business strategy. Possible
missions for operations include low cost, fast new product introduction, fast
delivery, or best quality.
• The distinctive competence of operations should support the mission and differentiate operations from its competitors. Possible distinctive competencies
include proprietary technology, superior human resource practices, best location of facilities, unique organization culture, and ability for rapid change.
• The objectives of operations are cost, quality, delivery, and flexibility. These
objectives can work in concert if non-value-adding activities are removed from
operations. One of the four objectives should be selected as an order winner;
the others are order qualifiers.
• Operations policies indicate how operations objectives will be achieved. Operations policies should be developed for each of the major decision areas (process,
quality, capacity, and inventory). Policies require trade-off choices in operations.
• There is no one best strategy for all operations. The mission, distinctive competence, objectives, and policies of operations depend on whether a product
imitator, product innovator, or other strategy is being pursued by the business.
• The business strategy can be built on a sustainable distinctive competence that
is difficult for competitors to copy or imitate.
• The scope of operations strategy is now expanding to a global basis, particularly for those businesses pursuing a global business strategy.
• In some situations the basis of competition is not the firm, but the entire supply chain. Supply chain strategy is an extension of operations strategy that
considers not only the firm but also the strategies of its supply chain partners.
STUDENT
INTERNET
EXERCISES
1. Medtronic
http:/www.medtronic.com
Check the Medtronic website for evidence of a mission or vision statement.
How can the mission be related to operations strategy and operations decisions?
2. Wal-Mart Company
http://www.walmartstores.com
Go to “About Wal-Mart” and read about culture and international operations.
Come to class prepared to discuss what sets Wal-Mart apart from its competition and how Wal-Mart is approaching global operations.
3. Perpetual Company
http://www.perpetual.com.au/
What is the Perpetual company mission statement and how is it related to operations?
32
Part One
Introduction
Discussion Questions
1. What are the reasons for formulating and
implementing an operations strategy?
2. Describe a possible mission for operations and
some associated strategies that fit the following
business situations:
a. Ambulance service
b. Production of standard automobile batteries
c. Production of electronics products that have a
short product life cycle
3. An operations manager was heard complaining,
“The boss never listens to me—all the boss
wants from me is to avoid making waves. I
rarely get any capital to improve operations.”
a. Does the business have an operations strategy?
b. What should be done about the situation?
4. Define the following terms in your own words:
mission of operations, order winner, order
qualifier, and distinctive competence.
5. How would you determine whether a company
has an operations strategy or not? What specific
questions would you ask, and what information
would you gather?
6. Evaluate your local hospital in terms of its
emphasis on the four objectives of operations:
cost, quality, delivery, and flexibility. Are all
departments focused on the same objectives?
What are the order winners and what are the
order qualifiers?
7. Define some of the strategic decisions that might
be required in grocery store operations
depending on whether the mission (order
winner) was emphasizing cost or quality.
8. What kinds of external factors might affect the
following types of operations?
a. Airline
b. Bank
c. Semiconductor manufacturing
9. Using newspapers, magazines, or the Internet,
find examples of operations strategies. Write a
few paragraphs describing the situation and the
strategies being pursued.
10. Find an example of an operation in your local
community that has been successful in
simultaneously improving quality, reducing
throughput time, improving on-time deliveries,
and reducing costs. How has this operation been
able to achieve these seemingly conflicting results?
11. Think of an operation where higher quality will
cost more money. What is your definition of
quality in this case? Why does higher quality
cost more? If you use a different definition of
quality, will higher quality cost less?
12. What do you consider to be the distinctive
competence of the following companies? If you
don’t know the distinctive competence, see if
you can determine it from their Internet site or
articles on the company.
a. Starbucks Coffee Company
b. Hewlett Packard
c. Citibank
13. Explain how a distinctive competence in
operations can be the basis for competition in the
company.
14. Give two examples of a distinctive competence
that can be sustained and not easily duplicated.
Explain why it is hard to copy these distinctive
competencies.
15. Give examples of a global business that you are
familiar with. How has globalization of this
business affected operations?
16. What are the practical consequences of a lack of
strategic linkage between the business and the
operations function?
17. Give three examples of supply chains that
compete with each other. In each case determine
the basis of competition between the supply
chains (e.g. quality, low cost, fast delivery,
flexibility, etc.)
18. Define the distinctive competence for two
different supply chains of your choice. Explain
why the distinctive competence is valuable,
difficult to imitate, and hard to find a substitute
by competitors.
Selected Bibliography
Ahmad, Sohel, and Roger G. Schroeder. “Dimensions
of Competitive Priorities: Are They Clear,
Communicated and Consistent?” Journal of
Applied Business Research 18, no. 1 (2002),
pp. 77–86.
Alegre-Vidal, Joaquín, Rafael Lapiedra-Alcamí, and
Ricardo Chiva-Gómez. “Linking Operations
Strategy and Product Innovation: An Empirical
Study of Spanish Ceramic Tile Producers.” Research
Policy 33, no. 5 (July 2004), pp. 829–40.
Chapter 2
Barnes, David, Matthew Hinton, and Suzanne
Mieczkowska. “The Strategic Management of
Operations in e-Business.” Production Planning &
Control 15, no. 5 (July 2004), pp. 484–95.
Boyer, Kenneth K. “Strategic Consensus in Operations
Strategy.” Journal of Operations Management 17, no. 3
(March 1999), pp. 289–305.
Clark, Kim B. “Competing through Manufacturing
and the New Manufacturing Paradigm: Is
Manufacturing Strategy Passé?” Production and
Operations Management 5, no. 1 (Spring 1996).
Collin, James, and Jerry Porras. Built to Last: Successful
Habits of Visionary Companies. New York:
HarperCollins, 1997.
Dyer, Davis, and Daniel Gross. The Generations of
Corning: The Life and Times of a Global Corporation.
Oxford: Oxford University Press, 2001.
Edwards, Tim, Giuliana Battisti, and Andy Neely.
“Value Creation and the UK Economy: A Review of
Strategic Options.” International Journal of
Management Reviews 5/6, no. 3/4 (September 2004),
pp. 191–214.
Frohlich, Markham T. “A Taxonomy of Manufacturing
Strategies Revisited.” Journal of Operations
Management 19, no. 5 (October 2001), p. 541.
Gunasekaran, A., L. Forker, and B. Kobu. “Improving
Operations Performance in a Small Company: A
Case Study.” International Journal of Operations &
Production Management 20, no. 3 (2000), p. 316.
Hayes, Robert H., and David M. Upton. Strategic
Operations: Competing through Capabilities.
New York: Free Press, 1996.
Hayes, Robert H., and Kim B. Clark. Dynamic
Manufacturing: Creating the Learning Organization.
New York: Free Press, 1988.
Hayes, Robert H., and Steven C. Wheelwright.
Restoring Our Competitive Edge: Competing through
Manufacturing. New York: Wiley, 1984.
Hill, Terry. Manufacturing Strategy: Text and Cases,
3rd ed. New York: McGraw Hill, 2000.
Ketokivi, Mikko, and Roger G. Schroeder.
“Manufacturing Practices, Strategic Fit and
Performance: A Routine-Based View.” International
Journal of Operations & Production Management 24,
no. 2 (2004), pp. 171–190.
Operations and Supply Chain Strategy
33
McDougall, Paul, and Darrell Dunn. “Fixing HP with
Strong Operations Strategy.” Information Week 1026
(February 14, 2005), pp. 24–26.
Pagell, Mark. “Do Trade-offs Exist in Operations
Strategy? Insights from the Stamping Die Industry.”
Business Horizons 43, no. 3 (May–June 2000), p. 59.
Porter, Michael E. Competitive Strategy: Techniques for
Analyzing Industries and Competitors. New York:
Free Press, 1980.
Safizadeh, Hossein M. “Revisiting Alternative
Theoretical Paradigms in Manufacturing Strategy.”
Production and Operations Management 9, no. 2
(Summer 2000), pp. 111–27.
Schroeder, Roger G., John C. Anderson, and Gary
Cleveland. “The Content of Manufacturing
Strategy: An Empirical Study.” Journal of Operations
Management 6, no. 4 (August 1986), pp. 405–16.
Schroeder, Roger G., Kimberly A. Bates, and Mikko A.
Junttila. “A Resource-Based View of Manufacturing
Strategy and the Relationship to Manufacturing
Performance.” Strategic Management Journal 23, no. 2
(2002), pp. 105–17.
Skinner, Wickham. “Manufacturing—Missing Link in
Corporate Strategy.” Harvard Business Review,
May–June 1969, pp. 136–45.
———. “Manufacturing Strategy on the ‘S’ Curve.”
Production and Operations Management 5, no. 1
(Spring 1996).
Smith, Thomas M. “The Relationship of Strategy, Fit,
Productivity, and Business Performance in a
Services Setting.” Journal of Operations Management
17, no. 2 (1999), pp. 145–61.
Treacy, Michael, and Fred Wiersema. The Discipline of
Market Leaders: Choose Your Customers, Narrow Your
Focus, Dominate Your Market. New York: Perseus
Press, 1997.
Ulrich, Dave, and Norm Smallwood. “Capitalizing on
Capabilities.” Harvard Business Review, June 2004,
pp. 119–27.