Download Operational strategies

Introduction
Operations Strategy and Productivity
MD707 Operations Management
Professor Joy Field
Operations and Operations Management Defined
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Operations
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Operations Management
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The production of goods and services; the transformation process
that converts inputs to outputs
The management of systems or processes that transform inputs
into finished goods and services
The purpose of the operations function is to add value during
the transformation process. Value-added is the difference
between the cost of inputs and the value or price of outputs.
Operations can add value by decreasing the cost of inputs or
increasing the value of outputs or both.
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Transformation Process
Value-Added
Inputs
Transformation/
Conversion
Process
•Land
•Labor
•Capital
•Information
Outputs
•Goods
•Services
Feedback
Feedback
Control
Feedback
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Louis Vuitton Then
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Operations design prior to 2007 …
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It took 20 to 30 craftsmen eight days to put together each
“Reade” tote bag.
Separate workers would do each individual step in the assembly
process.
Inflexible production process and extensive rework (up to 50% of
certain products).
When new designs caught on, they often sold out, creating large
backlogs and unhappy customers.
Fresh collections of products were shipped to its boutiques every
12 weeks.
Salespeople advising customers would also retrieve items from
the stockroom if they weren’t available on the shop floor.
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Louis Vuitton Now
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Current operations …
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Clusters of 6 to 12 workers can assemble a LV-logo bag in a
single day.
Workers are cross-trained to enable them to do several different
assembly tasks.
Production cells increase operational flexibility and allow flaws to
be recognized earlier and fixed more easily.
While scarcity of high-end fashion items can create an aura of
desirability, Louis Vuitton has taken steps to better understand
what customers want and avoid unintended product shortages.
Fresh collections of products are shipped to its boutiques every 6
weeks.
Separate stockroom employees send items from the stockroom,
increasing the productivity of salespeople and customer
satisfaction.
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Key Operations Principles
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Aggregation Principle
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Uncertainty Principle
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The higher the level of aggregation of resources and information,
the more predictable operations becomes (e.g. forecasts of total
product volume tend to be more accurate than forecasts of
individual products). This is a manifestation of the Central Limit
Theorem.
The more uncertainty in operations, the greater the need to
employ extra resources to cope with this uncertainty.
Alternatively, the greater the stability and predictability, the leaner
operations can function.
Efficiency Principle
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All else being equal, operations should function as efficiently as
possible.
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Productivity
Productivity =
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Output
Input
Measures of productivity
Labor productivity 
Units produced
Quantity at selling price
or
Employee hours
Employee hours
Multifactor productivity =
Quantity at selling price
Labor cost + Materials cost + Overhead cost
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Productivity Problem
A news service matches relevant news stories (often before the news
story is even published) to client interests based on criteria provided by
the client. If the client is, in fact, interested in the news story, it is
electronically sent to the client, and the client is charged $7 per story. A
department of the news service operates 24/7, with a total of 30
employees, each of whom works 40 hours per week at an average pay
rate of $25 per hour. Each employee identifies an average of 3000 news
story/client matches week, of which only 45% are actually purchased by
the client. Material costs are $10,000 per week, and overhead costs are
$95,000 per week.
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Calculate the multifactor productivity for the news clipping service
department.
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Definitions of Operations Strategy
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An operations strategy is a set of goals, policies, and selfimposed restrictions that together describe how the
organization proposes to direct and develop all the resources
invested in operations so as to best fulfill its mission.
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Other definitions of operations strategy:
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An operations strategy consists of a pattern of decisions that,
over time, enables a business unit to achieve a desired
operations structure, infrastructure, and set of specific capabilities
in support of competitive priorities.
An operations strategy is a set of policies in both process choice
and infrastructure design that are consistent with the existing
ways products win orders, while being able to reflect future
developments in line with changing business needs.
The successful implementation of an operations strategy
creates value for the customer.
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Order Qualifiers and Order Winners
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Order-qualifiers are those criteria that a company must
meet for a customer to even consider it as a possible
supplier. Companies need only be as good as
competitors.
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Order-winners are those criteria that win the order.
Companies need to be better than their competitors.
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Levels of Strategy
Fin
HR
Corporate
What business are we in?
Divisional
(business)
How do we compete?
Mkt
Prod
Devpt
Ops
Role of each function?
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Components of an Operations Strategy
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Structural decision
categories
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Capacity
Facilities
Vertical integration
(sourcing)
Information/process
technology
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Capabilities
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Competitive priorities
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Infrastructural decision
categories
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Workforce
Organization
Control/quality systems
Cost
Quality
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Unique to each firm
Time
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Rapid delivery
On-time delivery
Flexibility
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High performance design
Consistent quality
Customization
Volume flexibility
Service
Location
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Criteria for Evaluating an Operations Strategy
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Consistency (internal and external)
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Between the operations strategy and the overall business strategy
Among the decision categories that make up the operations
strategy
Between the operations strategy and the other functions’ strategies
Between the operations strategy and the business environment
(resources available, competitive behavior, governmental restraints,
etc.)
Contribution (to competitive advantage)
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Making trade-offs explicit, enabling operations to set priorities that
enhance the competitive advantage
Directing attention to opportunities that complement the business
strategy
Promoting clarity regarding the operations strategy throughout the
firm
Providing the operational capabilities that will be required by the
business now and in the future
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Operations Strategy Formulation
Content
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Mission
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Objectives
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Structural and infrastructural decisions are stated in strategic terms. They must be
formulated to support the operations mission and objectives and should be
consistent with each other and with what is intended to be accomplished by
operations.
Policies
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Operations objectives should be defined in concise, measurable terms, as part of
the operations strategy. They should be specific statements of expected results –
a refinement of the mission.
Operational strategies
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The operations mission specifies what operations must accomplish for the
business to succeed. It states the purpose of the operations function and
competitive priorities as they relate to the customer and competition.
Structural and infrastructural decisions are stated in tactical terms in support of
the operational strategies.
Distinctive competence
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The competitive priorities provide a framework for developing a distinctive
competence, which is realized through the implementation of the operations
strategy and the use of the firm’s resources. It is what sets operations apart from
the competition and, thus, can be defined in terms of uniqueness.
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McDonald’s Example
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McDonald’s operations mission
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McDonald’s operational strategies (structural)
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Capacity
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Facilities
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Distributed facilities, each facility being very similar to the next, all focused
around a similar menu with some local variations (especially by country)
Vertical integration (sourcing)
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Growth as needed through additional stores - but capacity added carefully
Well-utilized - franchisee's well-being depends on heavily utilization
Partnership arrangement
Long-term relationship with suppliers to promote innovation and quality
improvement
Information/process technology
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High degree of process understanding, emphasis on "fool-proof" processes
A leader in the technology of fast-food delivery
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McDonald’s Example
(cont.)
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McDonald’s operational strategies (infrastructural)
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Workforce
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Organization
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Franchisees: well-trained, carefully selected, entrepreneurs
Operators: high-turnover, lower-paid
Guidelines provided by corporation, but franchisees push to locally
optimize
Control/quality systems
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Centralized buying
Bulk contracts
"Push" system for basic supplies, "pull" system day-to-day in the
restaurants
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