Operations Strategy
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What is it?
Generic Strategies
Order winners verses qualifiers
Generic Processes
Order processing
Service
Design
Operations Strategy 1
Linkages for Strategy
• Key notion of strategy is that all functions must be pursuing functional
strategies that support the business strategy.
– Classic misalignment - usually driven by measures and rewards
• marketing strategy based on differentiation and customization
• operations strategy low cost
• As a money person you need to understand how a company wins
orders
– an investment in quality might not increase profits but it might
retain customers who would otherwise be lost (note marketing link
as well) – Nissan article
• As a money person you need to understand how work flows and the
costs of changes
• All managers should understand the tradeoffs inherent in some of the
process choices they make (all managers manage processes)
Operations Strategy 2
Strategy - how do we accomplish our mission?
• If our mission is our company’s purpose, what is
our strategy ?
• For this class- strategy is Why a customer chooses
us as opposed to another provider
• Why do we need a strategy ?
• What are generic strategies / priorities?
– differentiation - better / unique
• quality / flexibility (customization)
– cost leadership- cheaper
• price / cost
– quick response- faster
• delivery speed / delivery reliability / new product introductions
Operations Strategy 3
Generic strategies: Differentiation- we do
something unique / better
• The customer defines better (keep this in mind
when we discuss quality)
• Examples:
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Rolls Royce - quality
Sam Adams / Deschutes Brewing - quality
Lightspeed - quality /flexibility / customization
Dell – flexibility / customization
Operations Strategy 4
Cost leadership - cheaper
• Lower cost (usually but not always price) than
main competitors
• Examples
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South West (price)
General Motors (price)
Wal-Mart (price)
Maytag – Neptune washers (cost)
• Less H2O and power
• Fewer repairs (increased availability)
Operations Strategy 5
Quick response - faster
• We can provide a product (or service) faster and or
more reliably than the competition
• Examples
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McDonalds (Fast)
Fed-Ex (Fast&Reliable)
Panasonic (Fast)
Caterpillar (Fast&Reliable)
Sony (Fast)
Chrysler (Fast)
• PT Cruiser verses GM’s retro car – due in 2006.
Operations Strategy 6
Order winners and qualifiers: a way to view
competitive priorities
• Order qualifier: those
attributes our product
must have to compete
– Airline
• safety
• access (to destinations)
– Appliance
• functionality
• standard sizes and power
requirements
• Order winner: those
attributes that differentiate
our products:
– Airline:
• price (Southwest)
• access (American)
– Appliance
• financing (Kenmore)
• cost (Magic Chef)
• durability (Maytag)
Operations Strategy 7
A process is?
• From an operations standpoint a process is a set of
organized activities that are performed to add value for our
customer
– manufacturing processes
• fabricate / assemble / machine / form
– service processes
– there are many other processes directly related to OM
• order taking processes
• order filling processes
• inventory processes
• From a broader perspective everything we do has a
processes that can be understood, managed and improved
upon
Operations Strategy 8
More process
• The choice of process for any activity will effect:
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how fast it is
how easy it is to change (flexibility)
how expensive it is to buy and to operate
the quality of the outputs
the ability to customize outputs
• This is true for any business activity
– What are accounting processes ? Finance ? Marketing ?
MIS ?
Operations Strategy 9
How work flows through our processes
influences our ability to be faster, better and
or cheaper.
• There are two basic ways for work to flow through
processes for either a good or service
1) The Line Flow: all orders move through the same steps
in the same sequence (line and continuous on product
process matrix)
2) The Jumbled Flow: each order goes through different
steps in potentially different orders (job shop and batch
processing on product process matrix)
Operations Strategy 10
Low
Volume
One of a
Kind
I.
Job
Shop
II.
Batch
III.
Assembly
Line
IV.
Continuous
Flow
Few
High
Multiple
Major
Volume,
Products, Products,
High
Low
Higher StandardVolume Volume
ization
Flexibility (High)
Unit Cost (High)
Commercial
Printer
French Restaurant
Heavy
Equipment
Coffee Shop
Automobile
Assembly
Burger King
Sugar
Refinery
Flexibility (Low)
Unit Cost (Low)
Operations Strategy 11
Key points of the product process matrix
• There are direct links between how we wish to sell
(marketing) and how we produce our products / services
• As we become more efficient we tend to become less
flexible
• Line / continuous flows are faster (for standard products)
than batch or job shops
• Job shops and batch production allows much more
customization
– Pirelli verses other tire companies
• Continuous production is very standardized and very low
cost (per unit basis - very expensive to install)
Operations Strategy 12
Other issues
• How does our process effect quality?
– Line flows are generally fast and inexpensive - does
that mean they are low quality ?
• Are line flows always faster than jumbled type
flows?
• What happens when we move off the diagonal
– high volume job shop
– low volume continuous production ?
• Does this seem to apply for services ?
Operations Strategy 13
Line flow verses jumbled flow
Line
Jumbled
Output- product
or service
Strength
Equipment
Scheduling
Level of WIP
Special Concern
Operations Strategy 14
Order processing
• Make to order (MTO) verses make to stock
(MTS).
– MTO : we receive an order before we produce our good
or service.
• lead time = backlog + production + order processing time
– MTS : customer orders are satisfied out of inventory.
• lead time = order processing time
Operations Strategy 15
MTO - make to order
• Benefits
• Drawbacks
• Variations
– ETO: engineer to order
– ATO: assemble to order (BTO is usually a form of ATO
as well)
Operations Strategy 16
MTS - make to stock
• Benefits
• Drawbacks
• Services: We can not inventory a pure service.
How about impure services ?
Operations Strategy 17
Group exercise
• MTS / Line: Pizza by the slice
– American dream – no special orders at lunch
• MTO / Line: Dominos – only make a pie when
you order it- make it how you want it
• MTS / Jumbled: Pizza Hut Lunch Buffet – all sorts
of vaguely Italian food sitting and waiting for youcan’t make pasta in a pizza oven
• MTO / Jumbled: Pasta Petes (Italian restaurant and
pizza place in Eugene)
Operations Strategy 18
Group exercise questions
• What are the order qualifiers for your industry?
– Do these have any influence on process choice?
• What are the order winners for each individual
company?
– Would you expect similar order winners for companies
in other industries with similar processes?
Operations Strategy 19
Interaction of work flows and order
processing
• Note how our strategy / order winners are related
to the choices we make.
– If customers demand lots of variety and you compete
on costs what will you do?
• ATO on a line is one possibility
• MTS jumbled flow is another possibility
• What is the difference between the two choices?
– In the same market if you competed on higher levels of
customization what would you do?
• MTO and jumbled?
• The key point here is that our processes should
match our strategy !
Operations Strategy 20
Customer service and OM
• Definition: giving the customer what they want, when they
want it, every time they want it .
• How can OM effect CS ?
– process choice
– process location
– inventory
– scheduling
– capacity planning
• Does service link to the strategy?
• Does service = satisfaction ?
Operations Strategy 21
Does service = satisfaction ?
Quality
Cost
Satisfaction
Design
Service
Operations Strategy 22
Elements of satisfaction
• Cost and quality: two chief concerns of OM that
we will discuss in detail.
• Service: OM strategy decisions impact service.
– Why does service stink article and banks
• Design: Not a traditional OM responsibility.
However, at many companies OM has a part in the
design of products and process.
Operations Strategy 23
Why is OM involved in design ?
• In order to produce a design we must have the
operational capability. Many companies wish to
answer the question “can we make it” early in the
design process.
– Time to design a product
– Cost of design and design changes
• Design processes
– Traditional – Harlan Co
– Concurrent: DFM and DFE
• DFX- design for X (something)
Operations Strategy 24
Harlan co
• Small KC company that makes equipment to
move planes around airports (tractors?)
– Very traditional design process
– Engineers will specify an entirely new part when an
existing one will do
• Lots of excess parts- lower volumes increase prices and
reduces quality.
– Production does not see the design until it is “ready” for
assembly – and then they often have to toss it back over
the wall
– Purchasing is in same position as production
Operations Strategy 25
Advantages of concurrent design and DFX
• Speed: no more tossing things over the wall.
• Cost- problems surface earlier in the design
process (also effects speed).
• Quality - do not try and make things we are not
capable of.
• Example – Xerox DFE (environment)
– All copiers are designed to be remanufactured
• Have to be easy to disassemble and rebuild
– Use more screws and other hard fasteners as opposed to
clips
• generally use standard sized parts even when new models
introduced
Operations Strategy 26
Generalizing from design processes
• DFX / concurrent design are ways to link multiple
functions – can you expand upon this to other
types of processes that also involve other
functions?
– Another way of asking this question: If you are
in charge of process that influences a number of
other people (functions, members of the supply
chain) does the idea of concurrency have value?
• i.e. Development of marketing plans
• Key point- you may never be involved in design
processes- but you are likely to be working with a
process that involves multiple entities and the notion
of concurrency may matter a great deal.
Operations Strategy 27
Specific choices and strategy
• Work flow: line flows are generally cheaper. They
are also faster for standard products, but slower (if
this is even possible) for custom products.
• Order processing: MTS has higher inventory costs
but is faster. What type of products are MTS ?
MTO ? What can we do to try and decrease leadtime in MTO ?
Operations Strategy 28
More strategy choices
• Design: By involving manufacturing in design we
may be able to reduce costs and lead-time. WHY ?
• Key point: Our company’s definition of customer
service and satisfaction leads to specific
operations strategy choices. As it leads to specific
marketing / accounting/ etc. / choices.
Operations Strategy 29
Strategy: conclusions
• OM goals are to be faster, better and / or cheaper.
• What is the purpose of operations strategy.
– To determine the right mix of faster, better, and cheaper
to satisfy our customers (to prioritize or if you will to
make trade-offs).
• process choice, work flow, order processing,
inventory, capacity, etc..
Operations Strategy 30