OPERATIONS STRATEGY AND MANAGING CHANGE THE FIELD OF OPERATIONS MANAGEMENT

Efficiency – means doing something at the lowest possible cost.

– efficient process goal is to produce a good or provide a service by using the smallest input
of resources.
Effectiveness – means doing the right things to create the most value for the company.

 being efficient means using the fewest people possible at the counter while being effective,
though, means minimizing the amount of time that customers need to wait in line.
 Value – defined as quality divided by price.
 Reasons why do we need to study OM
1. A business education is incomplete without an understanding of modern approaches to
managing operations.
2. Operations management provides a systematic way of looking at organizational processes.
3. Operations management presents interesting career opportunities.
4. The concepts and tools of OM are widely used in managing other functions of a business.

Operations management (OM) – is defined as the design, operation, and improvement of the systems
that create and deliver the firm's primary products and services; OM is a functional field of business with
clear line management responsibilities.
 The essential difference between OM and OR/MS is that, Om is a field of management whereas
OR/MS is the application of quantitative to decision making in all fields. OM is concerned with
the management providing a service such as a product.
 Within the operations function, management decisions can be divided into three broad areas:
1. Strategic (long-term) decisions – Decisions made at the strategic level become the fixed
conditions or operating constraints under which the firm must operate in both the
intermediate and short term.
2. Tactical (intermediate-term) decisions – primarily addresses how to efficiently schedule
material and labor within the constraints of previously made strategic decisions; operational
planning and control decisions are made.
3. Operational planning and control (short-term) decisions – control are narrow and short-term
by comparison.

PRODUCTION SYSTEMS

A production system – uses resources to transform inputs into some desired output. Inputs may be raw
material, a customer, or a finished product from another system.
In general, transformation processes can be categorized as follows:
 Physical (as in manufacturing).
 Location (as in transportation).
 Exchange (as in retailing).
 Storage (as in warehousing)
 Physiological (as in health care).
 Informational (as in telecommunications).
These transformations are not mutually exclusive. For example, a department store can (1) allow
shoppers to compare prices and quality (informational), (2) hold items in inventory until needed
(storage), and (3) sell goods (exchange).

DIFFERENCES BETWEEN SERVICES AND GOODS PRODUCTION

Service – is an intangible process; is something that "can be dropped on your foot without hurting you."
 in services, location of the service facility and direct customer involvement in creating the output
are often essential factors
Goods – is the physical output of a process.
 McDonald's manufactures a tangible product, but because it is designed to have some contact
with the customer to complete the service production process, the firm is in the service
category. Also, from an operations perspective, customers are on the "shop floor" when
consuming many services. The shop floor may be called the front office, dining area, operating
room, or passenger cabin, depending on the industry. There are also many behind-the-scenes
activities with tangible inputs and outputs
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OM IN THE ORGANIZATIONAL CHART*

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 Exhibit 1.3 locates operations activities within a manufacturing
organization and two service organizations. Aside from
differences in terminology, the service organizations also differ
from the manufacturing firm in structure. The manufacturing
company typically groups operations activities to produce its
products in one department. Service firms scatter operations
activities throughout the organization. For example, reservations
scheduling in an airline is part of the production process for
airline travel, even though it is carried out by a non-operations
department. This is seen even more clearly in banking, where
there is often a retail operations department and a check-
processing operations department. Note that Chart C, based on
Ford's Customer Service Division, reflects the recent trend in
many organizations to organize around cross-functional core processes managed by teams. This focuses
more directly on the needs of the customer, enriches the work of the employee, and generally enhances
coordination. Note also that in both types of organization, it is typical for operations activities to account
for the lion's share of capital investment and workforce.

OPERATIONS AS SERVICE

In manufacturing, such services can be divided into core and value-added services that are provided to
internal and external customers of the factory.
The core services – customers want are products that are made correctly, customized to their needs,
delivered on time, and priced competitively (cost of production)
Value-added services – are services that simply make the external customer's life easier or, in the case of
internal customers, help them to better carry out their particular function.
Value-added factory services can be classified into four broad categories: information, problem
solving, sales support, and field support.
1. Information – is the ability to furnish critical data on product performance, process parameters,
and cost to internal groups (such as R&D) and to external customers, who then use the data to
improve their own operations or products.
2. Problem solving – is the ability to help internal and external groups solve problems, especially in
quality.
3. Sales support – is the ability to enhance sales and marketing efforts by demonstrating the
technology, equipment, or production systems the company is trying to sell.
4. Field support – is the ability to replace defective parts quickly or to replenish stocks quickly to
avoid downtime or stockouts.
Value-added services provided to external customers yield two benefits:
1. They differentiate the organization from the competition.
2. These services build relationships that bind customers to the organization in a positive way.

PLAN OF THIS BOOK

This book is about methods to effectively produce and distribute the goods and services sold by a
company

Strategic planning: Any company must have a comprehensive business plan that is supported by a
marketing strategy, operations strategy. and a financial strategy. How does a company ensure that
the three strategies support each other? (chapters 9-11)
Project management: Working on a project is a common assignment in any company. The success of
a project is frequently measured by our ability to complete the project on time and within budget.
How can we be confident we will meet these objectives? (chapters 8 and 17)
Decision analysis: Where should we locate our facility? What equipment should we buy or lease?
How many people should we hire? We need the skills to make important financial decisions that
relate to the resources that we use. How do we do this? Making fact-based decisions is what
operations management is all about, so this book coverage of decision-making approaches and tools.
(chapters 4-6)
Quality: Can we hope to be a successful business without constantly thinking about quality? An
essential element of process design is building quality into the process (chapter 7)
Supply chain management and e-commerce: Supply chain management and e-commerce are big
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news these days. What are they? Don't I have to be an expert in computers to work in these areas?
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(chapters 12-16)

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HISTORICAL DEVELOPMENT OF OM

 In the late 1950s and early 1960s, scholars began to deal specifically with operations
management as opposed to industrial engineering or operations research. Writers such as
Edward Bowman and Robert Fetter (Analysis for Production and Operations Management, 1957)
and Elwood S. Buffa (Modern Production Management, 1961) noted the commonality of
problems faced by all production systems and emphasized the importance of viewing pro-
duction operations as a system. They also stressed the useful application of waiting-line theory,
simulation, and linear programming, which are now standard topics in the field.
 In 1973 Chase and Aquilano's first edition of this book stressed the need "to put the
management back in operations management." Bob Jacobs joined the book team in 1997.

JIT AND TQC (1890s)

Just-in-time (JIT) production – is the major breakthrough in manufacturing philosophy. Pioneered by
the Japanese, JIT is an integrated set of activities designed to achieve high-volume production using
minimal inventories of parts that arrive at the workstation exactly when they are needed. The
philosophy-coupled with total quality control (TQC), which aggressively seeks to eliminate causes of
production defects – is the new cornerstone in many manufacturers’ production practices.
 In 1913 Henry Ford developed an assembly line to make the Model-T automobile. Quality
was a critical prerequisite for Ford. On-time delivery was also critical for Ford; the desire to
keep workers and machines busy with materials flowing constantly made scheduling critical.
Product, processes, material, logistics, and people were well integrated and balanced in the
design and operation of the plant.

MANUFACTURING STRATEGY PARADIGM (late 1970s and early 1980s)

Central to their thinking was the notion of factory focus and manufacturing trade-offs. They
argued that because a factory cannot excel on all performance measures, its management must
devise a focused strategy, creating a focused factory that performs a limited set of tasks
extremely well. This required trade-offs among such performance measures as low cost, high
quality, and high flexibility in designing and managing factories.

SERVICE QUALITY AND PRODUCTIVITY (1970s)

The great diversity of service industries-ranging from airlines to zoos, with many different types
in between-precludes identifying any single pioneer or developer that has made a major impact
in these areas. Mass production in the service sector.

TOTAL QUALITY MANAGEMENT AND QUALITY CERTIFICATION (late 1980s and 1990s)
All operations executives are aware of the quality message put forth by the so-called quality
gurus (W. Edwards Deming, Joseph M. Juran, and Philip Crosby). Helping the quality movement
along is the Baldrige National Quality Award, which was started in 1987 under the direction of
the National Institute of Standards and Technology. The Baldrige Award recognizes companies
each year for outstanding quality management systems. The ISO 9000 certification standards,
created by the International Organization for Standardization, now play a major role in setting
quality standards for global manufacturers.

BUSINESS PROCESS REENGINEERING (1990s)

The global economic recession in the 1990s pushed companies to seek innovations in the
processes by which they run their operations.
"Reengineering Work: Don't Automate, obliterate." – the approach seeks to make revolutionary
changes as opposed to evolutionary changes (which are commonly advocated in TQM). It does
this by taking a fresh look at what the organization is trying to do in all its business processes,
and then eliminating non-value-added steps and computerizing the remaining ones to achieve
the desired outcome.

SUPPLY CHAIN MANAGEMENT (1990s)

The central idea of supply chain management is to apply a total system approach to managing
the flow of information, materials, and services from raw material suppliers through factories
and warehouses to the end customer. Recent trends such as outsourcing and mass
customization are forcing companies to find flexible ways to meet customer demand. The focus
is on optimizing core activities to maximize the speed of response to changes in customer
expectations.
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ELECTRONIC COMMERCE (2000s)

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 The quick adoption of the Internet and the World Wide Web during the late 1990s was re-
markable. The term electronic commerce – refers to the use of the Internet as an essential
element of business activity. The Internet – is an outgrowth of a government network called
ARPANET, which was created in 1969 by the Defense Department of the U.S. government. This
new mode of operations is what we refer to as E-Ops.

CURRENT ISSUES IN OPERATIONS MANAGEMENT

1. Effectively consolidating the operations resulting from mergers. There is an interest today in
mergers, particularly of large companies. Often these mergers seem to offer great promise for
economies of scale and operations efficiency However, the reality is often different due to
differences in culture and technology infra structure.
2. Developing flexible supply chains to enable mass customization of products and services.
Broadening its product lines to provide the variety of choices that customers want. Not only to
produce so many different products but also to distribute the products to a global customer
base.
3. Managing global supplier, production, and distribution networks. The implementation of global
enterprise resource planning systems, now common in large companies, has challenged
managers to use all of this information optimally. This requires a careful understanding of
where control should be centralized and where autonomy is important, among other issues.
4. Increased "commoditization" of suppliers. Often there are many suppliers that can provide the
material needed by a company. Now, with the use of standard Internet communications and
with advances in production technology in the steel industry, there is little cost in switching
from one supplier to another. Suppliers use a computer term, plug compatible, to describe this
interchangeability. (products are nearly indistinguishable to another except for its price)
5. Achieving the "service factory." This term refers to the growing movement toward developing
personalized service for each customer, even though the company may have millions of
customers.
6. Enhancing value-added services. It is no longer sufficient to just ship good products. Business
customers want to be kept abreast of production progress, receive advance warning of model
changes, have on-site help in installing modifications, and have access to well-staffed help lines.
(provide additional services to the customers)
7. Making efficient use of Internet technology. Virtually all major companies use the Internet
throughout their production processes. Smoothly integrating the Web to each production stage
requires a coherent overall structure that smoothly blends what should be viewed as a portfolio
of websites.
8. Achieving good service from service firms. Manufacturing operations typically focus on the
efficient use of resources to create the end product. While service operations seek to be efficient
as well, they also must be concerned with managing the customer's experience during the
service encounter.

OPERATIONS STRATEGY AND MANAGING CHANGE*

Strategy should describe how a firm intends to create and sustain value for its shareholders. Typically, a
strategy breaks down into three major components:
(1) Operations effectiveness relates to the core business processes that are needed to run the
business. It is reflected directly in the costs associated with doing business.
(2) Customer management relates to understanding and leveraging customer relationships better. A
strategy that involves segmenting customers, for example, may take a little longer to realize,
something on the order of two to three years.
(3) Product innovation involves the development of new products, markets, and relationships to
sustain growth
A company's competitiveness refers to its relative position in comparison to other firms in the local or
global marketplace.
WHAT IS OPERATIONS STRATEGY?
Operations strategy is concerned with setting broad policies and plans for using the resources of a firm
to best support its long-term competitive strategy. It involves decisions that relate to the design of a
process and the infrastructure needed to support the process.
 Operations strategy can be viewed as part of a planning process that coordinates operational
goals with those of the larger organization. Since the goals of the larger organization change
over time, the operations strategy must be designed to anticipate future needs. The
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operations capabilities of a firm can be viewed as a portfolio best suited to adapt to the
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changing product and/or service needs of the firm's customers.

OPERATIONS COMPETITIVE DIMENSIONS

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COMPETITIVE DIMENSIONS
How do customers decide on which product or service to buy?
The major competitive dimensions that form the competitive position of a company include the
following.
 Cost – “Make It Cheap”
Within every industry, there is usually a segment of the market that buys solely on the basis
of low cost. To successfully compete in this niche, a firm must be the low-cost producer, but
even doing this does not always guarantee profitability and success.
 Product Quality and Reliability – “Make It Good”
Quality can be divided into two categories: product quality and process quality.
o The level of quality in a products design will vary with the market segment at which it is
aimed. Obviously, a child's first two-wheeled bicycle is of significantly different quality
than the bicycle of a world-class cyclist. The use of special aluminum alloys and special
lightweight sprockets and chains is important to the performance needs of the advanced
cyclist.
o Process quality is critical because it relates directly to the reliability of the product.
Regardless of whether the product is a child's first two-wheeler or a bicycle for an inter-
national cyclist, customers want products without defects. Thus, the goal of process
quality is to produce error-free products.
 Delivery Speed-"Make It Fast”
In some markets, a company's ability to deliver more quickly than its competitors may be
critical. Take, for example, a company that offers a repair service for computer-networking
equipment. A company that can offer on-site repair in only 1 or 2 hours has a significant
advantage over a competing firm that guarantees service only within 24 hours.
 Delivery Reliability-"Deliver It When Promised"
This dimension relates to the ability of the firm to supply the product or service on or before
a promised delivery due date.
 Coping with Changes in Demand-"Change Its Volume"
In many markets, a company's ability to respond to increases and decreases in demand is an
important factor in its ability to compete. The ability to effectively deal with dynamic market
demand over the long term is an essential element of operations strategy.
 Flexibility and New Product Introduction Speed-"Change it"
Flexibility, from a strategic perspective, refers to the ability of a company to offer a wide
variety of products to its customers. An important element of this ability to offer different
products is the time required for a company to develop a new product and to convert its
processes to offer the new product.
 Other Product Specific Criteria-"Support It"
Notice that most of the dimensions listed next are primarily service in nature. Often special
services are provided to augment the sales of manufactured products.
1. Technical liaison and support. A supplier may be expected to provide technical
assistance for product development, particularly during the early stages of design and
manufacturing.
2. Meeting a launch date. A firm may be required to coordinate with other firms on a
complex project. In such cases, manufacturing may take place while development work
is still being completed. Coordinating work between firms and working simultaneously
on a project will reduce the total time required to complete the project.
3. Supplier after-sale support. An important competitive dimension may be the ability of a
firm to support its product after the sale. This involves the availability of replacement
parts and, possibly, the modification of older, existing products to new performance
levels. Speed of response to these after-sale needs is often important as well.
4. Other dimensions. These typically include such factors as colors available, size, weight,
location of the fabrication site, customization available, and product mix options.

THE NOTION OF TRADE-OFFS

 Central to the concept of operations strategy is the notion of operations focus and trade-
offs. The underlying logic is that an operation cannot excel simultaneously on all competitive
dimensions.
 For firms with large existing manufacturing facilities, Skinner suggests the creation of a
plant-within-a-plant (PWP) concept, in which different locations within the facility are
allocated to different product lines, each with their own operations strategy. Under the PWP
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  Trade-offs – occur when activities are incompatible, so that more of one thing necessitates
less of another. (high quality is viewed as a trade-off to low cost)
 Straddling – occurs when a company seeks to match the benefits of a successful position
while maintaining its existing position.

ORDER WINNERS AND QUALIFIERS: THE MARKETING-OPERATIONS LINK

 Terry Hill, a professor at Oxford University, has coined the terms order winner and order qualifier
to describe marketing- oriented dimensions that are key to competitive success.
 An order winner is a criterion that differentiates the products or services of one firm from
another. Depending on the situation, the order-winning criterion may be the cost of the product
(price), product quality and reliability, or any of the other dimensions developed earlier.
 An order qualifier is a screening criterion that permits a firm's products to even be considered as
possible candidates for purchase.
 Today the order winners for automobiles vary greatly depending on the model. Customers know
the set of features they want (such as reliability, design features, and gas mileage), and they
want to purchase a particular combination at the lowest price, thus maximizing value.

THE CORPORATE STRATEGY DESIGN PROCESS

Robert Kaplan and David Norton in The Strategy Focused Organization have developed a generic strategy
map template that they use in consulting work. The template is a starting point for the strategy design
process and is tailored for a particular firm.

FINANCIAL PERSPECTIVE
Whether companies use return on investment, return on capital employed (ROCE), economic
value added (EVA), or some other value-based metric as the high-level financial objective, they
have two basic strategies for driving financial performance: growth and productivity. The
revenue growth strategy focuses on developing new sources of revenue and profitability. It
generally has two components:
1. Build the franchise. Develop new sources of revenue from new markets, new products, or
new customers.
2. Increase customer value. Work with existing customers to expand their relationship with the
company.
The productivity strategy features the efficient execution of operational activities in support of existing
customers. Productivity strategies focus on cost reduction and efficiency. It generally has two
components:
1. Improve cost structure. Lower the direct costs of products and services, reduce indirect costs,
and share common resources with other business units.
2. Improve asset utilization. Reduce the working and fixed capital needed to support a given level
of business by great utilization, more careful acquisition, or disposal of parts of the current and
fixed asset base.

THE CUSTOMER PERSPECTIVE

The customer perspective is the heart of the strategy and defines how growth will be achieved. The
value proposition defines the specific strategy to compete for new customers or increased share of
existing customer businesses. The following are three different ways to differentiate service
1. Product leadership. A product leadership company pushes its products into the realm of the
unknown, the untried, or the highly desirable. (the leading product)
2. Customer intimacy. A customer-intimate company builds bonds with its customers: it knows the
people to whom it sells and the products and services it needs.
3. Operational excellence. Operationally excellent companies deliver a combination of quality,
price, and ease of purchase that no one else can match. Good examples of these companies are
McDonald's Corporation, Southwest Airlines, and Dell Computer Corporation.

THE INTERNAL PERSPECTIVE

The internal perspective defines the business processes and the specific activities that the organization
must master to support the customer value proposition. It is important that strategy not only specify the
desired outcomes but also describe how these outcomes will be achieved.
 A product leadership strategy would require a leading-edge innovation process that creates
new products with best-in-class functionality and brings them to market rapidly.
 Customer management processes might focus on rapid acquisition of new customers to
consolidate the early mover advantage that a product leader creates.
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 A customer intimacy strategy requires excellent customer management processes such as

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relationship management and solution development.

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  A strategy of operational excellence emphasizes cost, quality, the quickness of operating
processes, excellent supplier relationships, and speed and efficiency of supply and distribution
processes.
 Cost minimization implies an emphasis on efficiency, high labor productivity, and
standardization. These companies have a complete disconnect between the internal and
customer perspectives of their strategy.

THE LEARNING AND GROWTH PERSPECTIVE

The learning and growth perspective defines the intangible assets needed to enable activities and
customer relationships to be performed at high levels of performance. There are three principal
categories:
1. Strategic competencies are the strategic skills and knowledge required by the work- force to
support the strategy.
2. Strategic technologies are the materials and process technologies, information systems,
databases, tools, and network required to support the strategy.
3. Climate for action provides the cultural shifts needed to motivate, empower, and align the
workforce behind the strategy.
Kaplan and Norton have developed their concept of "The Balanced Scorecard" to tell the story of how
well an integrated strategy is being executed. They propose that an integrated set of measures be
developed to track performance from financial, customer, internal, and learning and growth
perspectives. Cause-and-effect linkages in strategy maps describe a path by which improvements in the
capabilities of intangible assets get translated in tangible customer and financial outcomes.

Kaplan and Norton use the example of Rockwater, a division of Brown & Root Energy Services. Rockwater
is an undersea contractor that does projects with major oil companies around the world. Rockwater
developed a strategy to improve its return-on-capital financial performance through two strategic
themes:
(1) operations excellence, reducing costs and improving quality; and
(2) customer management, developing long-term partnerships with targeted (Tier I) customers
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