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