Lecture 2 Operations Performance en Operations Strategy Operations Management for IBA (30J203) School of Economics and Management SUPPLY CHAIN MANAGEMENT Dr. Tom A.E. Aben Thursday 7 September 2023 Today’s agenda • Recap last week: HC-01 • Announcements • Chapter 2 – Operations Performance • Chapter 3 – Operations Strategy 2 Recap last week: HC-01 Output of Operations (good/service spectrum) • The output of operations is a mixture of goods and services Psychotherapy clinic Management consultancy Computer system services • Tangible • Can be stored • Production precedes comsumption • Low customer contact • Can be transported • Quality is evident Restaurant Specialist machine tool manufacturer Aluminium smelting Crude oil production PURE GOODS • Intangible • Cannot be stored • Production and consumption are simultaneous • High customer contact • Cannot be transported • Quality difficult to judge PURE SERVICES 4 Information-transformation-output model • All operations create and deliver services and products by changing inputs into outputs using an input-transformation-output proces. 5 Operations come in all shapes and sizes • 4-V model – a typology for operations and processes Low Volume High High High Variety Low High Variation in demand Low High Visibility Low 6 Announcements Announcements • Teams for the group assignments are finalised! • To check your group: Canvas → People → click on the right tab • Taking the course for the first time? Team assignment is COMPULSORY! • Start working on the team assignment as soon as possible! • First deadline is coming up quickly → next week already! • Double check the rotation schedule on Canvas for your team 8 Chapter 2 Operations Performance Three levels of operations performance 10 Operations performance at the societal level Lobby groups Shareholders ‘Society’ Top management Staff Suppliers Customers Staff representative bodies Government Regulatory bodies 11 Triple Bottom Line (TBL) performance • How can operations impact TBL performance? • Also known as the 3P’s → People, Planet en Profit Planet – The environmental account, measured by environmental impact of the operation People – The social account, measured by the impact of the operation on the quality of people’s lives Sustainability Profit – The economic account, measured by profitability, return on assets, etc. of the operation 12 It is not always easy to focus on all three Ps… • BrewDog: • Focuses on brewing and selling CO2neutral beer (PLANET) • Focuses on earning money for their shareholders (PROFIT) • However, they ‘forgot’ about their employees and treated them badly (PEOPLE) 13 Operations performance at the strategic level Learning Risk Capital Cost Revenue 14 Operations performance at the operational level • The five performance objectives → QSFDC model Quality Being RIGHT Speed Being FAST Dependability Flexibility Cost Being ON TIME Being ABLE TO CHANGE Being PRODUCTIVE 15 The benefits of excelling at the five objectives Minimum price, highest value Cost Quick delivery On time delivery Minimum cost, maximum value Speed Fast throughput Internal benefits Error-free processes Quality Dependability Reliable operation Ability to change Flexibility Error-free products and services External benefits Frequent new products, maximum choice 16 What does Quality mean in… … a hospital (e.g. ETZ, the local hospital in Tilburg) • Patients receive the most appropriate treatment • The treatment is carried out correctly • Patients are consulted and informed • Staff are polite, friendly and helpful 17 What does Quality mean in… … a car factory (e.g. Tesla) • All assembly is done according to specifications • The product is reliable • All parts are made to specifications • The product is attractive and blemish-free 18 Two common meanings of ‘Quality’ • Quality as the specification (“a detailed description”) of a product or service • E.g.: Kobe beef is a type of Wagyu beef coming from cows that are bred and raised in a specific region in Japan under ‘more humane conditions’ and slaughtered according to specific rules and only in specific designated slaugherhouses. • Quality as the conformance (“being right”) with which the product or service is produced • E.g.: fast food chains such as McDonalds and Burger King may buy cheaper meat, but their conformity must be high • OM definition of quality: “Consistent conformance to customer’s specification” • In other words, it is about “being right” 19 External and internal benefits of conformance quality • External: • It improves the product or service in the market, or at least avoids customer complaints • Internal: • It prevents errors that might slow down throughput speed • It prevents errors that cause internal unreliability and low dependability • It prevents errors that cause wasted time and effort, saving costs 20 External and internal benefits of conformance quality Cost Speed Dependability Internal benefits Quality Products and services according to specification Flexibility External benefits 21 What does Speed mean in… … a supermarket (e.g. Walmart) • The time taken for the total transaction of going to the supermarket, making the purchase, and returning kept to a minimum • The immediate availability of goods 22 What does Speed mean in… … a car factory (e.g. Tesla) • The time between dealers (or customers) requesting a vehicle of a particular specification and receiving it kept to a minimum • The time to deliver spares to service centres kept to a minimum 23 External and internal benefits of Speed • External: • It is related to the elapsed time between a customer asking for a product or service and receiving it • It often increases the value of the product or service for customers • Internal: • It helps overcome internal problems by maintaining dependability • It reduces the need to manage transformed resources as they move through the operation, saving costs 24 External and internal benefits of Speed Cost Quick delivery Speed Dependability Internal benefits Quality Flexibility External benefits 25 What does Dependability mean in… … a hospital (e.g. ETZ, the local hospital in Tilburg) • Proportion of appointments which are cancelled are kept to a minimum • Keeping t appointment times • Test results, X-rays, etc. are returned as promised 26 What does Dependability mean in… … a bus company (e.g. FlixBus) • Keeping to the published timetable at all points on the route • Constant availability of seats for passengers 27 HOWEVER: what if the bus leaves too early? • Is the bus still reliable if the bus leaves early? • NO! • See also the example from Japan about travelling by train on pages 50-51 in the book • The same applies to DHL, UPS, Uber Eats, etc. 28 External and internal benefits of Dependability • External: • It improves the product or service on the market, or at least avoids customer complaints • Internal: • It prevents late delivery from slowing down throughput speed • It prevents delays that cause disruptions and wasted time and effort, saving costs 29 External and internal benefits of Dependability Cost On time delivery Speed Dependability Internal benefits Quality Flexibility External benefits 30 Flexibility → what does it mean? • Flexibility has several distinct meanings but is always associated with an operation’s ability to change • Change what? • The products and services it brings to the market – Product/service flexibility • The mix of products and services it produces at any one time – Mix flexibility • The volume of products and services it produces – Volume flexibility • The delivery time of its products and services – Delivery flexibility 31 Different dimensions of flexibility (e.g. at Bavaria) • Different types of flexibility at one company (e.g. at Bavaria) • Product flexibility → Introduction of a new type of beer • Mix flexibility → Different types of beer produced (Radler, IPA, etc.) • Volume flexibility → Influence of season, lighter beers in the summer, darker beers in the winter • Delivery flexibility → Delivering more or less beer, depending on specific events • Think of introduction weeks for students, festivals, etc. 32 What does Flexibility mean in… … a supermarket (e.g. Walmart) • The introduction of new goods or promotions • A wide range of goods on stock • The ability to adjust the number of customers served • The ability to obtain out-of-stock items (very occasionally) 33 What does Flexibility mean in… … a car factory (e.g. Tesla) • The introduction of new models • A wide range of options available • The ability to adjust the number of vehicles manufactured • The ability to reschedule manufacturing priorities 34 External and internal benefits of Flexibility Cost Speed Dependability Internal benefits Quality Flexibility External benefits Frequent new products/services Wide range Volume and delivery changes 35 What does Cost mean in… … a hospital (e.g. ETZ, the local hospital in Tilburg) Bought-in materials and services Technology and facilities costs Staff costs 36 What does Cost mean in… … a supermarket (e.g. Walmart) Bought-in materials and services Technology and facilities costs Staff costs 37 What does Cost mean in… … a bus company (e.g. FlixBus) Bought-in materials and services Technology and facilities costs Staff costs 38 What does Cost mean in… … a car factory (e.g. Tesla) Bought-in materials and services Technology and facilities costs Staff costs 39 External and internal benefits Low price, high margin or both Cost On time delivery Quick delivery Speed Dependability Internal benefits Quality Products and services according specification Flexibility External benefits Frequent new products/services Wide range Volume and delivery changes 40 Polar diagrams • Polar diagrams are used to indicate the relative importance of each performance objectives for an operation or process • They can also be used to differentiate between different products and services produced by an operation or process Cost Dependability Speed Quality Flexibility 41 EXAMPLE: using polar diagrams • Comparing a taxi service vs. a bus service Taxi service Cost Bus service Speed Dependability Quality Flexibility 42 Summary • Q-S-F-D-C • Including the different shapes/dimensions of Quality and Flexibility • External AND internal benefits of performance objectives • Polar diagrams: two ways to use these • Balanced Scorecard (self study) IMPORTANT: skip the part about the “efficient frontier” (pages 63-64)! 43 Chapter 3 Operations Strategy The Slack et al. model of Operations Management 45 What is strategy? 46 What is strategy? 47 What is strategy? • Coming from the Greek word: ‘strategos’ → to lead an army 48 So… what exactly is strategy? • Setting broad objectives that direct an enterprise towards its overall goal • Planning the path (in general terms, not in very specific terms) that will achieve these goals • Stressing long-term objectives rather than short-term objectives • Dealing with the total picture rather than stressing individual activities • Being detached from, and standing above, the confusion and distractions of day-to-day activities It is the total pattern of decisions and actions that influence the long-term directions of the business 49 What are operations? (Recap from Chapter 1) • ‘Operations’ are the processes related to the creation and delivery of products and services • ‘Operational’ is the opposite of ‘strategic’, that is: daily and detailed • Both the operational and the strategic aspect of operations 50 So… what exactly is operations strategy? • Operations strategy is the pattern of decisions and actions that shape the long-term vision, objectives and capabilities of the operation and its contribution to the overall strategy of the business • But what does this mean…? 51 Operations Strategy – examples • Aldi: offering minimal service for quick sales at low prices (also keeping stocks as low as possible) • McDonalds: offering minimal service for selling food and drinks fast at low prices (also keeping stocks as low as possible) • Dell: designing and manufacturing modular computers to create flexibility to enable customisation while reducing costs • Zara: buying materials and clothes from small local companies (located in Spain, Portugal, Morocco and Turkey) instead of buying it from large companies in China 52 What is the role of the operations function? Operations as implementer of strategy Operations as supporter of strategy Operations as driver of strategy Strategy Strategy Operations Operations Operations Strategy Operations implements strategy Operations supports strategy Operations drives strategy 53 Increasing strategic impact The 4 stage model of operations contribution STAGE 4 Give an operations advantage Redefining industry expectations STAGE 3 Link strategy with operations Clearly the best in the industry STAGE 2 Adopt best practices As good as competitors Holding the organisation back Based on Hayes & Wheelwright Driving strategy Supporting strategy STAGE 1 Correct the worst problems Implementing strategy Internally neutral Externally Internally neutral supportive Externally supportive Increasing operations capabilities 54 Operations Strategy – Apple • Apple is known for its high-quality, aesthetic and user-friendly products • Process outsourcing: little to no customisation • Responsive supply chain as it relies mainly on air transportation • Apple invests a lot → they are known for periodic production introductions They used to reason as follows: We (Apple) know what you (customer) want → Operations drives strategy! 55 The four perspectives on operations strategy Top-down perspective Reflect what the whole group of business wants to do Operations resources perspective Develop resources and processes so that their capabilities can be exploited in their chosen markets Market requirement perspective Operations strategy Translated intended market position so as to provide the required objectives for operations decisions Learn from day-to-day activities so as to cumulatively build strategic capabilities Bottom-up perspective 56 Top-down and Bottom-up perspectives on strategy 57 The Market requirement perspective • Different market demands → different operational objectives Competitive factors Performance objectives If the customers value these… Then, operations will need to exceed in… Low price Cost High quality Quality Fast delivery Speed Reliable delivery Dependability Innovative products and services Flexibility (products/services) Wide range of products and services Flexibility (mix) The ability to change the timing or quantity of products and services Flexibility (volume and/or delivery) 58 Order winner and order qualifier • Order winner: contributes directly and significantly to winning customers • Order qualifier: not the most important factor, but important in other ways. • These are the factors that customers take into account 59 Order winners and order qualifiers – example • Suppose you are going to buy a new car and you find three cars with the price, colour and fuel consumption that you are looking for. Aston Martin Porsche Ferrari • Of these three cars, one car (the Aston Martin) has a three-year warranty and it is an automatic. You decide to buy that car. • What are the order winners and order qualifiers for you as a customer? 60 The Operations resources perspective Operational resources can provide long-term competitive advantage if they are… • Valuable • Rare • Difficult to imitate • Difficult to substitute Resource-based View (RBV) of the firm (Barney, 1991) 61 Why are we studying this? • To create clarity about concepts • To understand that Operations is not an island • It is important to know what the organisation’s strategy is in relation to its operations! • To understand that choices regarding business operations can have far-reaching consequences • To create clarity about order qualifiers/order winners which helps to set priorities 62 Summary • Definition of operations strategy • The operations function has three distinct strategic roles • There are four perspectives on operations strategy • Order winning vs. Order qualifying factors IMPORTANT: you can skip the part about “The ‘line of fit’ between market requirements and operations capabilities”, so from page 93 at the bottom to page 101 at the top 63 See you next week! • Next week, will we focus on • Chapter 4 (product and service innovation) • Chapter 6 (process design) Tuesday 12 September 2023 08:45 – 10:30 Cube 1 64