OPSM 301
Operations Management
Spring 2012
Class 2
Operations Strategy
Evrim Didem Güneş
[email protected]
Announcements
• Web page available, please check for
announcements and lecture notes
• Please get copies of the course pack from
Copyland
Learning Objectives of Today
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Competitive dimensions
Order winners-order qualifiers
Efficient frontier and operational effectiveness
The concept of a trade-off
The concept of strategic fit
Operations & the Process View:
What is a Process?
Information
structure
Inputs
Process
Management
Network of
Activities and Buffers
Outputs
Goods
Services
Flow units
(customers, data,
material, cash, etc.)
Labor & Capital
Resources
What is Operations Management?
• Management of business processes
• How to structure the processes and manage
resources to develop the appropriate
capabilities to convert inputs to outputs.
– What is appropriate?
What Defines a Good Process?
Performance: Financial Measures
• Absolute measures:
– Revenues, costs, operating income, net income
T
– Net Present Value (NPV) =  Ct t
t 0 1  r 
• Relative measures:
– ROI, ROE
EBIT  Tax
– ROA = Average Total Assets
• Survival measure:
– Cash flow
Firms compete on product attributes…
This requires process capabilities
• Price (Cost) P
• Quality Q
– Customer service
– Product quality
“Order Winners”
• Time T
– Rapid, reliable delivery
– New product development
• Variety V
– Degree of customization
– Ability to cope with changes
in demand volume
– Ability to introduce a variety
of products
To deliver we need
“capabilities”
Process Performance Measures
Performance
Objective
Some typical Measures
Cost
Minimum delivery time/average delivery time, utilization of
resources, labor productivity, added value, efficiency, cost per
operation hour
Quality
Number of defects per unit, level of customer complaints,
scrap level, mean time between failures, customer
satisfaction scores
Speed
Customer query time, Order lead time, frequency of delivery,
actual versus theoretical throughput time, cycle time
Flexibility
Time needed to develop new products/services, range of
products/services, machine change-over time, average batch
size, time to increase activity rate, average
capacity/maximum capacity, time to change schedules
Effective measures are:
Linked to external measures important for the customer
Directly controllable by the process manager
Order Qualifiers and Winners
Defined
• Order qualifiers: the basic criteria that permit the
firms products to be considered as candidates for
purchase by customers
– Screening criteria
– Standard, expected performance
• Order winners: the criteria that differentiates the
products and services of one firm from another
– The more, the better
– Customer chooses based on this criteria
Competitive Benefit
Order-Winners and Qualifiers
Order
Winner
Positive
Less
Important
Neutral
Order
Qualifier
Negative
Low
Source: Slack and Lewis
High
Performance
Fit Between Strategy and Processes
• Processes must fit the operations strategy of the firm:
Competing on
• Cost (BİM,Southwest Airlines)
• Quality ( Organic Food market, e.g. Whole foods in the
US)
• Flexibility/Variety (Honda, Carrefour etc)
• Speed (Domino’s Pizza)
all require different process designs and different measures
to focus on
Corporate StrategyKey Performance Indicators
Operations StrategyProcess Design& Improvement
Cost Competition-Discount
Supermarkets
Flexibility at Honda
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Honda's Flexible Plants Provide Edge
Wall Street Journal, Sep 23, 2008
•
Honda has some of the most flexible plants in the
U.S.
Honda is able to switch from producing Civics to
CR-Vs with only 5 minutes of downtime!
– the Civic and CR-Vs were designed to be
manufactured in the same sequence of steps
– Honda did have to invest $400m several years
ago to improve its flexibility.
“Honda's manufacturing flexibility is almost as key
to its success as its product lineup. To respond to
changes in economic conditions, Honda is able to
shuffle production among different plants as well
as make different models in one plant.”
Strategic Fit:
Desired Capabilities
Processes
Match processes with desired capabilities
A Framework for Designing an Operations
Strategy and Structure
Corporate Strategy
Business Unit
Strategy
Desired
Competencies
Processes
Operations
Structure
Resources
15
15
Representation of Strategy
Current Position and Strategic Directions of Movement in the
competitive product space:
Variety
B
A
High
Low
Price
OPSM901 Operations Management
Strategy vs. Operational Effectiveness
The Operations Frontier as the minimal curve containing all
current positions in an industry
strategy
Where on the frontier should we position
ourselves? (the direction)
Responsiveness
High
A
B
C
operational effectiveness
How far are we from the
efficient frontier? How to get there?
Operations
Frontier
Low
High
Low
Price
Increasing Customer Value
Value
Increasing Value
High
Operations Frontier
A
B
C
Low
High
Low
Price
Lowering Costs
Value
Trade-off: decreasing one aspect to
increase another
High
Operations Frontier
A
B
Lowering Costs
C
Low
High
Low
Price
Focused Strategy
and Focused Processes
“ The essence of strategy is what to
do and what not to do.”
Porter, 1996
Shouldice Hospital
Video Case
Shouldice Business Model
• Medical
– Simple hernias
– Optimized process
– Check-ups and follow-up
• Social
– Club Med like experience
– Co-production at individual
and cohort level
– A network for life
Shouldice Patient Experience
COST
Low, both real and opportunity
QUALITY
Low recurrence, satisfaction with
experience
SPEED
Fast operation and recovery
X FLEXIBILITY
The process rules: only simple hernias
Comparison to General Hospital
FOCUS at Shouldice
Shouldice: prepares
for the simplest
General Hospital:
prepares for the most
complex
Hernia complexity
A product/process matrix
Wish of Marketing
High customization
Low volume
High unit margin
Flexible
Job shop
Process
Rigid line
flow
Wish of
Operations
Product
High standardization
High volume
Low unit margin
General Hospital:
Variety & flexibility
High cost
Low margins
Low Cost
High margins
(difficult to achieve)
Shouldice Hospital:
Standardization
Cost, speed, quality
Industrialization
Shouldice as a lean enterprise
Shouldice
General Hospital
Focus on low risk cases
No focus, multiple goals
Clear single value prop.
Confusion of value prop.
Predictable process
Unpredictable process
Strive for perfection
Strive for threshold perf.
Eliminate waste
Tolerate some excess
Manage patient flows
View patients as functional tasks
Pull patients into process
Push patients through process
Womack and Jones (2000) From Lean Production to Lean Enterprise, HBR March-April 1994
Focus at Shouldice: the results
• Breakthrough service
• High customer and employee satisfaction
• Industrial approach to service
Shouldice Process Life Cycle
 Birth of the Shouldice formula
 Process selection, design,
and improvement
 Innovation at the interfaces
 Process overtaken (when?)
Next Time
• Will discuss Process Selection and ProductProcess Matrix