Operations and Supply Strategy

Dr. Venkateswara Rao Korasiga

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OBJECTIVES
 Operations and Supply Strategy
 Competitive Dimensions
 Order Qualifiers and Winners
 Strategy Design Process
 A Framework for Manufacturing Strategy
 Service Strategy Capacity Capabilities
 Productivity Measures
 DEFINITION
 The determination of the long run goals and
objectives of an enterprise, the adoption of
courses of action and the allocation of
resources necessary for carrying out these
goals

Alfred Chandler, Strategy and Structure

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WHAT IS OPERATIONS AND SUPPLY STRATEGY?

 Operations and supply strategy is

concerned with setting broad policies
and plan for using the resources of a
firm to best support its long-term
competitive strategy.
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COMPETITIVE DIMENSIONS

 Cost or Price
 Make the Product or Deliver the Service Cheap
 Quality
 Make a Great Product or Deliver a Great Service
 Delivery Speed
 Make the Product or Deliver the Service Quickly
 Delivery Reliability
 Deliver It When Promised
 Coping with Changes in Demand
 Change Its Volume
 Flexibility and New Product Introduction Speed
 Change It
 Other Product-Specific Criteria
 Support It
DRIVERS OF COST ADVANTAGE

ECONOMIES OF SCALE • Indivisibli\ties

• Specialization and division of labor

ECONOMIES OF LEARNING • Increased dexterity

• Improved organizational routines

• Process innovation
PRODUCTION TECHNIQUES • Reengineering business processes

PRODUCT DESIGN • Standardizing designs & components

• Design for manufacture

• Location advantages
INPUT COSTS • Ownership of low-cost inputs
• Non-union labor
• Bargaining power

CAPACITY UTILIZATION • Ratio of fixed to variable costs

• Speed of capacity adjustment

RESIDUAL EFFICIENCY • Organizational slack; Motivation &

culture; Managerial efficiency
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DEALING WITH TRADE-OFFS

For example, if we reduce costs by reducing product

quality inspections, we might reduce product quality.

For example, if we
improve customer Cost
service problem solving
by cross-training Flexibility Delivery
personnel to deal with a
wider-range of
Quality
problems, they may
become less efficient at
dealing with commonly
occurring problems.
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ORDER QUALIFIERS AND WINNERS

DEFINED

Order qualifiers are the basic criteria

that permit the firms products to be
considered as candidates for purchase
by customers

Order winners are the criteria that

differentiates the products and services
of one firm from another
 THE NATURE OF DIFFERENTIATION
DEFINITION: “Providing something unique that is valuable to the
buyer beyond simply offering a low price.” (M. Porter)

THE KEY IS TO CREATE VALUE FOR THE

CUSTOMER

TANGIBLE INTANGIBLE
DIFFERENTATION DIFFERENTATION
Observable product characteristics: Unobservable and subjective
• size, color, materials, etc. characteristics that appeal to
• performance customer’s image, status,
• packaging identity, and desire for exclusivity
• complementary services

TOTAL CUSTOMER RESPONSIVENESS

Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
ECONOMIES OF SCALE: THE LONG-RUN
COST CURVE FOR A PLANT

Sources of scale economies:

- technical input/output relationships
- indivisibilities
- specialization

Cost per
unit of
output

Minimum Units of output

Efficient Plant per period
Size: the point
where most scale
economies are
exhausted
TRADE-OFFS

Management has to decide which parameters of

performance are critical to the firm’s success and
then concentrate on those resources of the firm on
these particular characteristics.
VERTICAL INTEGRATION
Vertical integration is a strategy used by a company to gain
control over its suppliers or distributors in order to increase the
firm’s power in the marketplace, reduce transaction costs and
secure supplies or distribution channels.
Forward integration is a strategy where a firm gains
ownership or increased control over its previous customers
(distributors or retailers).
Backward integration is a strategy where a firm gains
ownership or increased control over its previous suppliers.
VERTICAL INTEGRATION
Vertical integration (VI) is a strategy that many companies use to gain control
over their industry’s value chain.
This strategy is one of the major considerations when developing corporate level
strategy.
The important question in corporate strategy is, whether the company should
participate in one activity (one industry) or many activities (many industries)
along the industry value chain.
For example, the company has to decide if it only manufactures its products or
would engage in retailing and after-sales services as well.
Two issues have to be considered before integration:
Costs. An organization should vertically integrate when costs of making the
product inside the company are lower than the costs of buying that product in the
market.
Scope of the firm. A firm should consider whether moving into new industries
would not dilute its current competencies. New activities in a company are also
harder to manage and control. The answers to previous questions determine if a
company will pursue none, partial or full VI.
The example below illustrates a general industry value chain and none, partial or
full VI of a corporate operating in that industry.
LEVEL OF INTEGRATION
Difference between vertical and horizontal integrations

VI is different from horizontal integration, where a corporate usually

acquires or mergers with a competitor in a same industry.
An example of horizontal integration would be a company competing in
raw materials industry and buying another company in the same industry
rather than trying to expand to intermediate goods industry.
Horizontal integration examples: Kraft Foods taking over Cadbury, HP
acquiring Compaq or Lenovo buying personal computer division from
IBM.

The picture illustrates the difference between vertical and horizontal

integrations, which was discussed in previous paragraph.
TYPES OF VERTICAL INTEGRATION
FIRMS CAN PURSUE FORWARD, BACKWARD OR
BALANCED STRATEGIES.

Many businesses around the world use vertical integration to gain competitive
advantage. Some of the examples include: Apple Inc., Samsung Electronics,
The Coca Cola Company, Alphabet (Google) Inc., Ford Motor Company,
Toyota Motor Corporation and many other businesses.
FORWARD INTEGRATION
If the manufacturing company engages in sales or after-sales
industries it pursues forward integration strategy.
This strategy is implemented when the company wants to achieve
higher economies of scale and larger market share.
Forward integration strategy became very popular with increasing
internet appearance.
Many manufacturing companies have built their online stores and
started selling their products directly to consumers, bypassing
retailers.
Forward integration strategy is effective when:
Few quality distributors are available in the industry.
Distributors or retailers have high profit margins.
Distributors are very expensive, unreliable or unable to meet firm’s
distribution needs.
The industry is expected to grow significantly.
There are benefits of stable production and distribution.
The company has enough resources and capabilities to manage the
new business.
 BACKWARD INTEGRATION
When the same manufacturing company starts making
intermediate goods for itself or takes over its previous
suppliers, it pursues backward integration strategy.
Firms implement backward integration strategy in order to
secure stable input of resources and become more efficient.
Backward integration strategy is most beneficial when:
Firm’s current suppliers are unreliable, expensive or cannot
supply the required inputs.
There are only few small suppliers but many competitors in the
industry.
The industry is expanding rapidly.
The prices of inputs are unstable.
Suppliers earn high profit margins.
A company has necessary resources and capabilities to
manage the new business.
 ADVANTAGES AND DISADVANTAGES
Advantages of the strategy:

• Lower costs due to eliminated market transaction costs

• Improved quality of supplies
• Critical resources can be acquired through Vertical Integration
• Improved coordination in supply chain
• Greater market share
• Secured distribution channels
• Facilitates investment in specialized assets (site, physical-assets and human-assets);
• New competencies.
• Disadvantages

Disadvantages of VI:

• Higher costs if the company is incapable of managing new activities efficiently

• The ownership of supply and distribution channels may lead to lower quality products and
reduced efficiency because of the lack of competition
• Increased bureaucracy and higher investments leads to reduced flexibility
• Higher potential for legal repercussion due to size (An organization may become a
monopoly)
• New competencies may clash with old ones and lead to competitive disadvantage.
MAKE OR BUY DECISON
The make-or-buy decision is the act of
making a strategic choice between
producing an item internally (in-house) or
buying it externally (from an outside
supplier). The buy side of the decision also
is referred to as outsourcing. Make-or-buy
decisions usually arise when a firm that has
developed a product or part—or significantly
modified a product or part—is having
trouble with current suppliers, or has
diminishing capacity or changing demand.
Make-or-buy analysis is conducted at the
strategic and operational level. Obviously, the
strategic level is the more long-range of the
two. Variables considered at the strategic level
include analysis of the future, as well as the
current environment. Issues like government
regulation, competing firms, and market trends
all have a strategic impact on the make-or-buy
decision. Of course, firms should make items
that reinforce or are in-line with their core
competencies. These are areas in which the
firm is strongest and which give the firm a
competitive advantage.
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OPERATIONS AND SUPPLY STRATEGY FRAMEWORK

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WHAT IS PRODUCTIVITY?
DEFINED

Productivity is a common
measure on how well resources
are being used. In the broadest
sense, it can be defined as the
following ratio:
Outputs
Inputs
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TOTAL MEASURE PRODUCTIVITY

Total Measure Productivity = Outputs

Inputs

or
= Goods and services produced
All resources used
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PARTIAL MEASURE PRODUCTIVITY

 Partial measures of productivity =

 Output or Output or Output or Output

Labor Capital Materials Energy
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MULTIFACTOR MEASURE PRODUCTIVITY

Multifactor measures of productivity =

Output
Labor + Capital + Energy

or

Output
Labor + Capital + Materials
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EXAMPLE OF PRODUCTIVITY MEASUREMENT

 You have just determined that your service

employees have used a total of 2400 hours of labor
this week to process 560 insurance forms. Last
week the same crew used only 2000 hours of labor
to process 480 forms.
 Which productivity measure should be used?
 Answer: Could be classified as a Total Measure or
Partial Measure.
 Is productivity increasing or decreasing?
 Answer: Last week’s productivity = 480/2000
= 0.24, and this week’s productivity is =
560/2400 = 0.23. So, productivity is
decreasing slightly.
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QUESTION BOWL

An operations and supply strategy is concerned

with which of the following?
a. Setting specific policies and plans
b. Short-term competitive strategies
c. Coordination of operational goals
d. All of the above
e. None of the above

Answer: c. Coordination of operational

goals
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QUESTION BOWL

Typically a strategy breaks down into

what major components?
a. Operations effectiveness
b. Customer management
c. Production innovation
d. All of the above
e. None of the above

Answer: d. All of the above

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QUESTION BOWL

A criterion that differentiates the products

and services of one firm from another
can be which of the following?
a. An order qualifier
b. An order winner
c. PWP
d. KPI
e. None of the above

Answer: b. An order winner

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QUESTION BOWL

A travel agency processed 240 customers on Day 1

with a staff of 12, and 360 customers the on Day
2 with a staff of 15. What can be said about the
productivity shift from Day 1 to Day 2?
a. An increase in productivity from Day 1 to Day 2
b. A decrease in productivity from Day 1 to Day 2
c. The same productivity from Day 1 to Day 2
d. Can not be computed from data above
e. None of the above

Answer: a. An increase in productivity from Day 1 to Day

2(Day 1 productivity = 240/12=20
Day 2 productivity = 360/15=24)
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End of Chapter 2