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
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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
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Information-transformation-output model
• All operations create and deliver services and products by changing inputs into outputs using an
input-transformation-output proces.
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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
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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
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Chapter 2
Operations Performance
Three levels of operations performance
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Operations performance at the societal level
Lobby groups
Shareholders
‘Society’
Top management
Staff
Suppliers
Customers
Staff representative
bodies
Government
Regulatory
bodies
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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
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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)
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Operations performance at the strategic level
Learning
Risk
Capital
Cost
Revenue
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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
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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
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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
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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
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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”
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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
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External and internal benefits of conformance quality
Cost
Speed
Dependability
Internal
benefits
Quality
Products and
services according
to specification
Flexibility
External
benefits
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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
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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
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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
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External and internal benefits of Speed
Cost
Quick
delivery
Speed
Dependability
Internal
benefits
Quality
Flexibility
External
benefits
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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
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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
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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.
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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
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External and internal benefits of Dependability
Cost
On time
delivery
Speed
Dependability
Internal
benefits
Quality
Flexibility
External
benefits
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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
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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.
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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)
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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
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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
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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
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What does Cost mean in…
… a supermarket (e.g. Walmart)
Bought-in
materials
and
services
Technology
and facilities
costs
Staff costs
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What does Cost mean in…
… a bus company (e.g. FlixBus)
Bought-in
materials
and
services
Technology
and facilities
costs
Staff costs
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What does Cost mean in…
… a car factory (e.g. Tesla)
Bought-in
materials
and
services
Technology
and facilities
costs
Staff costs
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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
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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
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EXAMPLE: using polar diagrams
• Comparing a taxi service vs. a bus service
Taxi service
Cost
Bus service
Speed
Dependability
Quality
Flexibility
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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)!
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Chapter 3
Operations Strategy
The Slack et al. model of Operations Management
45
What is strategy?
46
What is strategy?
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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
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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
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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…?
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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
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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
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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
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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?
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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
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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
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