Chapter 3
Strategy and Value:
Competing Through
Operations
McGraw-Hill/Irwin
©The McGraw-Hill Companies, Inc. 2008
Supply Chains
A supply chain encompasses all activities associated
with the flow and transformation of goods from the raw
material stage (extraction), through the end user, as
well as the associated information flows.
3-2
Supply Chains
Basic
Producer
Converters
Fabricators
Assemblers
Support Services
Transport
Storage
Finance, etc.
• Basic Producer – Extract or creates basic material such as iron ore
from Mines, or creates natural resources such as wheat etc.
• Converter – use basic material as their input and refines them
• Fabricator – Converts refined materials into usable components
such as doors
• Assembler – Assembles components into finished products such as
houses
3-3
Supply Chain
• The entire network starting from basic producers,
converter, fabricators, and assembler is the supply chain.
Supply chain can be for product or service.
3-4
Supply Chains
Generic
Supply Chain
Model
3-5
Make or Buy
• Make or buy is a strategic decision. It affects productivity
and competitiveness. Thinking on this issue has changed
due to globalization, pressure to reduce costs, downsize,
and focus on the firm’s core competencies. Trend is
toward outsourcing.
• Make was favored by large organization resulting in
backward integration and ownership of a large range of
manufacturing.
• New approach is to buy.
3-6
Reasons for Make
• Maintain core competency
• Need for small quantity and/or no supplier is interested in
providing the product
• Quality standards are so high that no supplier can meet it
• Reliable Supply source
• Technological secrets
• Cheaper to make
• Maintain steady labor force
• Avoid Sole-source dependency
3-7
Reasons for Buying
•
•
•
•
•
No technical knowledge
Better quality
Lower cost
More flexibility
Inadequate capacity
3-8
Integration
• Purchasing can be extended to take the form of vertical
integration.
• Vertical Integration – ability to produce goods or service
previously purchased.
Backward Integration (upstream) – A firm purchases its
supplier, i.e. Ford buying U.S. Steel.
Forward Integration (downstream) – A firm makes the
finished product, i.e. Intel buying Dell.
3-9
Vertical Integration
 Developing the ability to produce goods or
service previously purchased
 Integration may be forward, towards the
customer, or backward, towards suppliers
 Can improve cost, quality, and inventory but
requires capital, managerial skills, and
demand
 Risky in industries with rapid technological
change
3-10
Subcontract
• Prime Contractor who may bid out to other contractors
(subcontractor)
• Subcontract – A purchase order written with more explicit
terms and conditions to provide specific product or
service
• Subcontract
- Will it take a long period of time?
- Will it be costly?
3-11
Outsource
To buy something a company has been making in-house.
Contracting with a third party to provide some aspect of
product or service.
• Managers must decide which tasks will be outsourced and
which will be in-house.
If outsourced, should there be many suppliers or a single
supplier
(janitorial, food, security, IS, payroll, logistic)
3-12
Outsourcing
Outsourcing has become easier, because:
• Ability to communicate electronically
• Cost comparison is possible due to cost accounting tools
3-13
Why Outsource?
Organizational
Improvement
Financial
- Focus on core
- Obtain New
- Reduce Cost
competencies
expertise/skills
- Promote organizational – Keep pace with
- Adjust fixed
change
technology
cost ratio
- Increase flexibility to – Improve operating - Make capital
meet changing business
performance
funds available
3-14
Why Outsource?
Organizational
Improvement
Financial
- Meet demand for - Improve management – Generate cash
product or service
control
- Gain market access - Expand capacity
- Increase
shareholder value
3-15
Outsourcing
• Outsourcing allows companies to:
- expand business without adding additional capacity
- use the knowledge and technology of others who are
better in providing that service
However, some companies may not outsource due to
concern for quality where a company can maintain tighter
control.
3-16
RISKS OF OUTSOURCING
• Loss of Control
• Exposure to suppliers risks – financial, poor quality,
resources, etc.
• Lack of flexibility
3-17
Outsourcing
• Outsourcing decisions are crucial because they affect
efficiency and responsiveness of supply chain. Choose
suppliers if they can respond quickly to customer’s
demand and who are cost efficient.
• Obstacle to Achieving Strategic fit (Do they meet all your
goals?)
- Increasing variety of products. The increased variety of
products complicates the supply chain by making forecast
for each product difficult. The uncertainty of demand will
affect efficiency or responsiveness
3-18
Outsourcing
- Decreased product life cycle
Product life cycle has been reduced. Product life now can
be measured in months. Shorter life cycle increases
uncertainty, makes coordination between supply and
demand difficult.
- Demanding customers
Customers want faster service, lower price and quality. It
puts a pressure on the supplier to meet their requirements
while keeping manufacturing lower cost.
3-19
Outsourcing
• Less Integration
As more and more companies outsource, this makes the
supply chain more complicated. As each company has its
own policies and interests, the chain is hard to coordinate.
Each chain is working toward its own goals rather than
for the interest of the chain.
• Increased Globalization
Supply chain has gone global. Obviously, it has provided
an opportunity for companies to select global suppliers
who may offer quality and cheaper product. But it also
makes coordination difficult.
3-20
Mission
Mission/Strategy
• Mission - where you are going
3-22
Mission
• Organization’s purpose for being
• Provides boundaries & focus
• Answers ‘How can we satisfy
people’s needs?’
• Expressed in mission statement
© 1995 Corel Corp.
3-23
Factors
Affecting Mission
Philosophy &
Values
Profitability
& Growth
Environment
Mission
Customers
Public Image
Benefit to
Society
3-24
Mission Statement
• Product Mission
To make, distribute and sell a quality product at a
reasonable price and with continual customer service.
• Economic Mission
To serve customers and maintain profitability and grow
while increasing value of stockholder and maintaining
high morale of employees.
• Social Mission
To operate the business ethically, and in socially
responsible manner, while contributing to the benefit of
the society.
3-25
Strategy
Strategy - how you are going to get there
Strategy
• Action plan to achieve mission
• Shows how mission will be
achieved
• Company has a business
strategy
• Functional areas have
strategies
© 1995 Corel Corp.
3-27
Strategy Process
Environmental
Analysis
Company
Mission
Business
Strategy
SWOT
Analysis
Functional Area
Strategies
Marketing
Decisions
Operations
Decisions
Fin./Acct.
Decisions
3-28
The Strategic Hierarchy
• Mission Statement
• Corporate Strategy
• Business Strategy
• Operations Strategy
3-29
The Strategic Hierarchy
• Mission Statement
– A short statement of what a business does, what its values are, who are customers, and
why. It describes why an organization exists and describes what is important to the
organization, called its core values.
• Corporate Strategy
– Broad and general objectives of the company
– Defines the businesses the corporation will engage in and how resources will be
expended in these businesses.
– Sets expectations for business performance
• Business Strategy
It identifies the firm’s targeted customers and sets time frames and performance
objectives for the business.
– The general basis on which the business will compete
• Cost Leadership
• Differentiation
• Focus
3-30
The Strategic Hierarchy
• Functional Strategy
Translates a business strategy into specific action for the functional
areas such a marketing, human resources, and finance.
– Sets priorities so that day-to-day decisions support business
strategy
3-31
Business & Operations Strategy
• Understand what is
“valued” in the market
• Choose which attributes
to emphasize
Cost
4
Cost
Quality
Response
Time
Dependability
1
3
Quality
2
Dependability
X
Convenience
• Prioritize those
attributes
Style/
Fashion
X
X
Ethics
• Design operations to
support those priorities
X
Flexibility
Response
Time
Technology
X
Flexibility
X
Personalization
REMINDER:
Operations management is “The
management of resources used to
create saleable products and
services”
3-32
Operations Strategy
• Operations Strategy
– How to design the operation
– How to allocate productive
resources
Functional strategies
must support one
another as well as the
higher level strategies!!
3-33
Strategic planning is performed by
senior-level management to provide
general guidance on broad, long-range
goals (taking multiple years), such as
targeting a market sales growth rate
for the organization as a whole.
Tactical planning is performed
by middle-level managers to
develop implementation tactics
for middle-range goals
(taking a year or two), such
as acquiring additional facilities
to support the growth strategy.
Strategic Planning
Tactical Planning
operational Planning
Operational planning is performed
by lower-level managers to
implement short-range goals
(monthly, weekly or day-to-day
business activities), such
as scheduling increased overtime
for truck drivers to support the
growth strategy.
Operations Strategy
• Align the value being created (cost, quality, response
time, dependability, convenience, etc.) with resource
decisions (inventory, workforce, capacity, facilities)
so that your investment in resources creates what
customers expect and you get a financial return on
that resource investment that is better than your
alternatives.
3-36
Supply Chain Strategy
• Strategy deals with the value created for customers
• The position of the company in the market determined by
the value it creates for customers.
• Value is created by:
- Price
- Quality
- Service
Some of these factors are operational, but suppliers do affect
value. That is why supply chain management is very
important in creating value.
3-37
Keiretsu Networks
 A middle ground between few suppliers and
vertical integration
 Supplier becomes part of the company
coalition
 Often provide financial support for suppliers
through ownership or loans
 Members expect long-term relationships and
provide technical expertise and stable
deliveries
 May extend through several levels of the
supply chain
3-39
DEFINITION of 'Keiretsu
A Japanese term describing a loose conglomeration of firms sharing
one or more common denominators. The companies don't
necessarily need to own equity in each other.
Example of 'Keiretsu'
One example would be the close relationship between AOL and Sun
Micro (now owned by ORACLE). The two firms don't have
ownership in each other, but they work closely on various projects.
Sun Micro builds computer hardware and software. The firm is best
known for developing workstations and operating environments for
the UNIX operation system, and more recently, for developing and
promoting the Java programming language.
Supply-Chain Strategies
 Negotiating with many suppliers
 Long-term partnering with few
suppliers
 Vertical integration
 Keiretsu
 Virtual companies that use suppliers
on as needed basis
3-41
Characteristics of High ROI Firms
•
•
High quality product
High capacity utilization
Measure of how much of the total available capacity actually being used
(actual/designed)
•
•
•
High operating effectiveness
Measure of how much of the total available capacity should been used under
the given conditions (expected/designed)
High investment intensity
Measure of how extensive are the resource used (getting the most out of the
least)
Low direct cost per unit (efficiency)
3-42
Environmental Scanning
• Enables the business to stay abreast of changes in
–
–
–
–
–
–
Technology
Customer expectations
Competitor’s offerings
Global politics
Regulations
Costs of inputs
3-43
Structural vs. Infrastructural Decisions
• Structural - Related to tangible resources (buildings,
equipment, process, supply-chain integration)
• Examples
– Capacity
• High vs. Low volume Equipment, Adding capacity, Flexibility of
capacity
– Facilities
• Location, size, design, number of facilities
– Process Technology
• Layout, Automation
– Vertical Integration/Supplier Relationships
• Supplier links, partnerships, integration vs. outsourcing
3-44
Structural vs. Infrastructural Decisions
• Infrastructural - Related to systems used to
enhance the utilization and control of structural
resources
• Examples
– Human Resources
• Skill level, part vs. full time, salaries
– Quality
• Prevention vs. detection, control, specifications, supplier involvement
– Planning & Control
• Inventory management, vendor policies
3-45
Strategic Decision Categories and Value
Structural and infrastructural
decisions affect value, and
ultimately whether or not
the customer’s needs are met.
REMINDER:
Operations management is “The
management of resources used to
create saleable products and
services.” The structural and
infrastructural decisions dictate how
those resources are used.
3-46
Performance Dimensions
The relative importance of performance dimensions can be highlighted by:
- Order qualifier – performance dimension on which a customers expect a minimum
level of performance.
• Order qualifiers are "those competitive characteristics that a firm must exhibit to
be a viable competitor in the marketplace." (APICS Dictionary 2008)
- Order winner – performance dimension that differentiates a company’s product or a
service from its competitor.
• Order winners are "those competitive characteristics that cause a firm's
customers to choose that firm's goods and services over those of its competitors.
Order winners can be considered to be competitive advantages for the firm. Order
winners usually focus on one rarely more than two of the following strategic
initiatives: price/cost, quality, delivery speed, delivery reliability, product design,
flexibility, after-market service, and image." (APICS Dictionary 2008).
3-47
Performance Dimensions
Industrial chemical market example:
- Buyers of industrial chemicals expect a certain level of
purity before considering to buy – order qualifier. After
purity is established other factors such as cost, delivery
speed, and flexibility will be additional considerations –
order winner.
- From the supplier’s perspective, product quality is the
order qualifier; cost, delivery speed and flexibility are
order winner.
3-48
Performance Dimensions
• Suppose two suppliers, A and B, that are competing headto-head in industry.
Suppose supplier A meets the quality requirement but
falls below Supplier B on all but one dimension
(delivery). But Supplier B has purity below minimum,
Supplier B will be dropped.
3-49
Performance Dimensions
Understanding what the relevant order qualifier and order winner are
helps operations and supply chain manager to formulate strategy:
- helps identify potential problem
- helps clarifies the issues surrounding decision on trade-offs
- helps manager to prioritize their efforts
- In the example above, supplier must take care of quality problem,
then protect or increase its delivery and cost advantages. If
increasing quality increases cost, it evaluates trade-off.
3-50
Order Losers, Order Qualifiers, Order
Winners
Example: Taking a group of children to lunch
• Order Qualifier: hamburgers and fries are available.
• Order Winner : a cool toy is given with the meal.
• Order Loser : bad tasting food, soggy fries, etc.
Example: Selecting a bank after moving to a new city
•
Order Qualifiers : ATM access, online banking
drive-up window
•
Order Winner
: free checking, no ATM fees for
other banks’ ATMS
•
Order Loser
: No ATM access, no online access.
3-51