Operations & Supply Chain Management

Amsterdam MBA
Prof.dr. Jack A.A. Van der Veen

4 February 2014

1. O&SCM introduction &

Operations Strategy

1
 1. O&SCM Introduction & Operations Strategy · 2

Session outline
 What is Operations & Supply Chain Management?
 Definition
 Why is it important?

 Course organisation
 Objectives
 Structure

 Operations Strategy
 What / Why a strategy?
 How to develop an Operations Strategy
 1. O&SCM Introduction & Operations Strategy · 3

Production & Logistics

: product - flow
C
o
n
s
u
Supplier Manufacturer Wholesaler Retailer m
e
r
Reverse Logistics s

Purchasing Physical distribution

(Inbound Logistics) Production (Outbound Logistics)

Supply Chain
 1. O&SCM Introduction & Operations Strategy · 4

Supply Chains are customer focussed

 1. O&SCM Introduction & Operations Strategy · 5

SCM within an organization

Suppliers Interface Company Interface Customers

Flow of products / services

Information flow

Monetary flow
 1. O&SCM Introduction & Operations Strategy · 6

Transformation Process
INPUT OUTPUT
Jobs / Tasks
• Raw Materials Products
Transformation
• Information
Process
• Customers Services

Resources
• Facilities
• Machines
• Staff Operations Management:
Management of the Transformation Process
in an effective and efficient way
 1. O&SCM Introduction & Operations Strategy · 7

Output: Products & Services

“continuum”
Products Services

Intangible
Self-service groceries Production in interaction with customer
• Can not be stored
• More variation, less time-bound, etc.
Car

Computer

Fast Food Restaurant

Tangible
Production independent from customer Gourmet Restaurant
• Can be stored
• Less variation, less time-bound, etc. Management Consulting
 1. O&SCM Introduction & Operations Strategy · 8

Operations Management
 Managing the Transformation Process in an effective and efficient
way

 Effective: Do the right job Create Value

 The right products
 To the right customer
 At the right time
 At the right quality

 Efficient: Do the job right Reduce waste

 At minimal costs
 1. O&SCM Introduction & Operations Strategy · 9

Examples:
Tata Steel, KLM/Air France,
Transformation Process UPS, Hospital, Supermarket,
Library, Hotel, ABS
Aspect that is transformed
Trans- Physiological Psycho-
formed Physical Inform. Possession State logical
property property Location Storage
Input State

Material

Inform.

Customer
 1. O&SCM Introduction & Operations Strategy · 10

(Transformation) Process

INPUT OUTPUT
Jobs / Tasks
• Raw Materials Products
• Information
• Customers Services

Resources
• Facilities
• Machines
• Staff Operations & Process Management:
Management of the (Transformation) Process
in an effective and efficient way
 1. O&SCM Introduction & Operations Strategy · 11

Business Processes
 Transformation process = Primary process
 Production process
Process Management:
Management of the Process
in an effective and efficient way

 Other typical business processes

 Product development process
 Order handling process
 Complaint handling process
 Budgeting process
 Decision making process
 …
 Also, e.g., Law suits, Political asylum requests, …
 1. O&SCM Introduction & Operations Strategy · 12

Process
 Group of activities that create value to a customer
 Customer focussed!
 Group!
 Usually: activities come from different functional departments

Organisation
C
u
s
t
o
PROCESS
m
e
r
s

Functional “silos”
 1. O&SCM Introduction & Operations Strategy · 13

Mapping a process: Process Flow Diagram

 Cardboard boxes Production

Completed
Raw Materials Products

Cardboard Cutting and

production Gluing

Value adding activity

WIP Inventory
with Standard sizes Transport /
Hand-off
Inventory / Queue
 1. O&SCM Introduction & Operations Strategy · 14

Jobs / Tasks
 Flow through the process
 Products
 Customers
 Information

 Require time on Resources (“processing time”)

 Machines, facilities
 Human resources

 Examples:
 Jobs: Patients in a Hospital - Resources: Doctors, Beds
 Jobs: Groups of Students - Resources: Teachers, Classrooms
 Jobs: Airplanes at an Airport - Resources: Runways, Gates
 1. O&SCM Introduction & Operations Strategy · 15

Case: Reviewing a process at the FEB

(UvA)
Dir Dir OWI PD
Bedrijfsv
3. For approval 2. For approval
4.Approval

1.Invoice+ VAR
P&O Programme Manager

5. Entered into system

10. Check on budget

7. For approval External

in self-service tool
Prof
9. Admin as cost for the
programme
FEZ
AC
8. Payment

6. Entered in UvA data for payment

 1. O&SCM Introduction & Operations Strategy · 16

Pizza Restaurant (material processor)

Sauce
Prep

Take order Spread

Dough
Prep

Unload & Load

Bill Bake
pack Set timer
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Dental Clinic (People Processor)

cleaning
Hygienist #1

Exam by
Check-in Hygienist #2 Check-out
dentist

Hygienist #3
 1. O&SCM Introduction & Operations Strategy · 18

Retail Bank (Information Processor)

credit line Credit Research Staff

application Credit
Check;
Package
Underwriters
Design
Approval of credit line
Mortgages Approval of mortgage
application
Appraisal
Package
Design
Mortgage Sales Staff
 1. O&SCM Introduction & Operations Strategy · 19

Transformation Process: Unit of Analysis

Business Unit

Department

Person

Also e.g. Sales-office, Finance department

 1. O&SCM Introduction & Operations Strategy · 20

Why is OM important?
 Each and every company has an Operations Function
 Michael Porter Value Chain
 Interfaces
Firm Infrastructure

Support Human Resource Management

Activities
Technology Development
Procurement

Inbound Operations Outbound Marketing

Logistics Service
Logistics &
Sales

Primary Activities Added

Value
Source: Michael E. Porter, Competitive Advantage. Free Press, 1985
 1. O&SCM Introduction & Operations Strategy · 21

Interfaces with other areas

Engineering
HRM

•Automation
•Capacity Planning
•Product development
•Skills, Education
•Job design

Operations

• Inventory • Investments
• Promotions • Cost allocation

Marketing Finance
 1. O&SCM Introduction & Operations Strategy · 22

Why is OM important?
 Each and every company has an Operations Function
 Value Chain
 Interfaces

 Quite frequently a substantial part of the assets of the company and

most people working for the company are in Operations
 E.g. Heineken: 80% of the assets, 70% of the people

 Operations can be one of the sources for achieving competitive

advantage
 Examples?
 1. O&SCM Introduction & Operations Strategy · 23

Are Operations supportive?

 Operations can be one of the sources for achieving competitive
advantage
 Examples?

Internally Neutral Externally Neutral

Minimize negative Achieve parity with

effect of operations competitors

Internally Supportive Externally Supportive

Provide support to Operations contribute to

Business strategy competitive advantage
 1. O&SCM Introduction & Operations Strategy · 24

Case: Wal-Mart
Business Objective:
Make available to customers: medium quality products at
every day low prices when and where needed

Operations
Operations Strategy
Speed • POS, EDI, Satellite communic.
• Accurate, rapid information • Cross-docking
• Rapid transportation
• Continuous replenishment
Cost • Supplier relationships
•Low inventory
•Low cost procurement
 1. O&SCM Introduction & Operations Strategy · 25

Case: Dell
Business Objective:
Produce customized PCs incorporating the latest technology
at competitive price / performance

Operations
Operations Strategy
Customization • Direct model
• Customer contact • Assemble-to-order
• Flexible process
• Supplier relationships
Cost
•Low process cost
•Low cost procurement
 1. O&SCM Introduction & Operations Strategy · 26

“One Manager’s view”

Profits (I)

Marketing (V)

Operations (R)

V = I * R or I = V/R
 1. O&SCM Introduction & Operations Strategy · 27

Session outline
 What is Operations & Supply Chain Management?
 Definition
 Why is it important?

 Course organisation
 Objectives
 Structure

 Operations Strategy
 What / Why a strategy?
 How to develop an Operations Strategy
 1. O&SCM Introduction & Operations Strategy · 28

The area of Operations (& SC) Management

 One of the traditional key functions in the organization, hence there
is a vast body of knowledge available
 Fairly “simple” concepts that are easy to understand …
but usually pretty hard to implement
 Concepts can be applied in virtually all organizations, …
but implementation issues are quite different for different
organizations
 There is a wide range of formal (mathematical) models that are
used heavily in these fields (of which only a few are covered here)
 O&SCM is frequently more “just do it” than about long discussions
and philosophies
 1. O&SCM Introduction & Operations Strategy · 29

Course objectives
 Introduction to the key concepts of Operations and Supply Chain
Management
 To understand O&SCM issues in general business context

 To show the importance of O&SCM as well as the need for an

integrated vision on O&SCM in any organisation

 To provide students with an opportunity to identify, analyze and resolve

typical problems which arise in O&SCM

 To highlight the linkages of O&SCM to other business areas

 To introduce issues and tools & techniques in O&SCM environments

 To discuss O&SCM implementation issues

 1. O&SCM Introduction & Operations Strategy · 30

Module organisation
 6 Class sessions

 Literature: selected chapters from the Textbook

 Mini-cases (as of Lecture 2; read before coming to class)

 Test exam problems

 Review questions
 2 sets of Exercises

 2 Case assignments (group work) 40%

 Final exam (individual) 60%

 Open book
 Literature + Lectures + Cases
 General questions about applying the theories + Exercises
 1. O&SCM Introduction & Operations Strategy · 31

Optimal learning environment

 What you can expect from me
 Sharing my view and experience in the field of O&SCM
 Clarity about what to do when
 24 hour reply policy for questions
 On-time delivery of grades and feedback

 What I expect from you

 Be on time
 Participate in lectures
 Read/study the materials provided
 Perfect deadline performance

 Together we can create an optimal learning environment

 1. O&SCM Introduction & Operations Strategy · 32

Session outline
 What is Operations & Supply Chain Management?
 Definition
 Why is it important?

 Course organisation
 Objectives
 Structure

 Operations Strategy
 What / Why a strategy?
 How to develop an Operations Strategy
 1. O&SCM Introduction & Operations Strategy · 33

Strategy
 The total pattern of the decisions and actions which position the
organization in its environment and are intended to achieve its long-
term goals.

How to get there?

“Ist”/ “Soll”/
“AsIs” “ToBe”

“Where we are” “Where we want to be”

Mission
SWOT
 1. O&SCM Introduction & Operations Strategy · 34

The Strategy Hierarchy

Corporation Corporate
Strategy

Business- Business- Business- Business

Unit I Unit II Unit III Strategy

Functional
Finance Operations Marketing
Strategy
 1. O&SCM Introduction & Operations Strategy · 35

Issues in Strategy
 Corporate Strategy
 What Business to be in? What to acquire? / What to divest?
 How to allocate cash?

 Business Strategy
 What are the strategic objectives?
 How to compete?

 Operations Strategy
 How to contribute to the strategic objectives?
 How to manage the resources?
 1. O&SCM Introduction & Operations Strategy · 36

Not-for-profit
Why is a Strategy needed? requires
a strategy?
 Focus: Solid understanding of customer value created
 Differentiation: Achieving a (sustainable) competitive advantage
 Outperform the competition
 Defines “Order winners”
 Alignment: Create a consistent pattern in (strategic) decisions
throughout the organization
 And consistent over a longer period
 Priorities: Shows where to put your money/efforts, and how to make
trade-offs
 Provides the “objective function” when making decisions

 Examples:
 Sales is emphasizing freshness of all products, whereas Operations tries to cut cost
by maximizing “utilization”: OK?
 If you want to be an innovative company with respect to new products, should you:
use dedicated equipment like robots OR have a highly skilled and flexible workforce?
 1. O&SCM Introduction & Operations Strategy · 37

Alignment

Business
Strategy

Operations M&S F, C & A HRM

Functional
Strategy

Coordination / alignment of
(1) Functions within a firm; and (2) between firms

Strategy
Deployment
 1. O&SCM Introduction & Operations Strategy · 38

Strategy implies making choices

 1. O&SCM Introduction & Operations Strategy · 39

Operations Strategy determines all decisions

Business
Strategy

Competencies

Operations Strategy
Resources Processes
(Asset Portfolio) (Activity Network)

Sizing Timing Type Location Supply Product Demand Innovation

How much When increase What kinds of Where should Buy-Make & Process How match How and when
capacity to or reduce resources are resources be how manage Which tech , demand to to improve and
invest in? resources? best? located? suppliers? Methods, available supply innovate?
System..?
 1. O&SCM Introduction & Operations Strategy · 40

Operations “Design”

Supply Chain R&D

Design:
Purchasing Product
S Distribution
T Decisions
R
A
T
E Facility
G Decisions:
Location Process
Y
Layout Selection
Capacity
 1. O&SCM Introduction & Operations Strategy · 41

Operations “Planning & Control”

DESIGN

S
T
R
A Aggregate Master Planning & Control
T Production Production System:
E Planning Schedule MRP
JIT
G
OPT
Y

Inventory
Scheduling
Management
 1. O&SCM Introduction & Operations Strategy · 42

The 5 Key Performance Measures

 Cost

 Quality
 Quality products, Innovative products
 Quality service

 Speed

 Dependability

 Flexibility (change-ability of Operations)

 Volume-flexibility
 Delivery-flexibility
 Mix-flexibility
 Product-flexibility (Customization)
 1. O&SCM Introduction & Operations Strategy · 43

Examples of KPIs used in organisations (I)

 Cost
 Utilization: used time / available time
 Productivity: items produced / labor usage
 Inventory turns: items sold / average inventory

 Quality
 % defective produced (goal: Zero defects)
 # of complaints

 Speed
 Order lead time
 Time-to-market of new product
 Time to volume
 1. O&SCM Introduction & Operations Strategy · 44

Examples of KPIs used in organisations (II)

 Dependability
 Fill rate
 Lost sales
 % deliveries in time (Just-in-time deliveries, JIT production)

 Flexibility
 Absorb significant fluctuations in Demand
 Change-over times
 # SKUs (level of customization)
 Adaptability to new technologies
 1. O&SCM Introduction & Operations Strategy · 45

Performance measures
Overall strategic objectives

Market Operations & Financial

strategic Logistics strategic
objectives strategic objectives
objectives

Customer Agility Resilience

satisfaction

Quality Speed Cost

Dependability Flexibility
• Defects per unit • Mean time • Customer • Time to • Transaction
• Level of between query time market cost
Customer failures • Order lead • Product range • Labour
complaints • Lateness time • Customization productivity
• Scrap level complaints • Throughput level • Machine
time efficiency
 1. O&SCM Introduction & Operations Strategy · 46

Importance of key performance measures

Lower prices
(or higher profits)

Faster customer Cost On-time

response deliveries
Depend-
Speed
ability

Quality Flexibility
Wider variety
Error-free products More customisation
and services More innovation
Cope with volume
fluctuations
 1. O&SCM Introduction & Operations Strategy · 47

From Quality to Profitability

Quality Less Scrap, Fire-fighting Improved

Improvement Productivity

Increased Attraction of
Perceived Quality New Customers

Increased
Customer Revenues / Profitability
Retention Market Share
 1. O&SCM Introduction & Operations Strategy · 48

Operations Strategy
Define a Priority on the 5 key performance measures
Differentiation Operational
Strategy determines efficiency
desired position frontier “Natural”
High Trade-off

Cut Cost

Inefficient
Low Improve Operations
Differentiation
Example:
AH Vs. Aldi
KLM Vs. Ryan Air Cost
Low High
 1. O&SCM Introduction & Operations Strategy · 49

Operations Strategy
 No matter what the Operations Strategy is; Operations
Management is always striving for Operational Efficiency
 Be ON (and not BELOW) the “Natural trade-off curve”
 Operational Efficiency in itself is NOT an Operations Strategy

 Operations Strategy: The priority between the 5 key performance

measures
 What is most important
 What is relatively less important

 Answers the question:

What is the desired position
ON the Operational Efficiency frontier?
 1. O&SCM Introduction & Operations Strategy · 50

Operations Strategy
 Determine a desired position on the 5 key performance measures
 Trade-offs between all (pairs of) Key Performance Measures

(Low) Cost Polar diagram

Speed
Dependability

Quality Flexibility
 1. O&SCM Introduction & Operations Strategy · 51

Decisions and their impact: Examples

 Decentralized production rather than centralized production
 Fast delivery
 High cost (no economies of scale)
 High flexibility (customization)

 Keeping inventories of end-items rather than zero-inventories

 Fast delivery
 High cost

 Stable production schedule rather than following demand

 Low cost due to high utilization
 High (standard) quality
 Low volume-flexibility
 1. O&SCM Introduction & Operations Strategy · 52

Porter’s Generic Business Strategies

 Cost leadership: Source: M.E. Porter, Competitive Strategy
 Low-cost
 Standardized product / Process

 Product Differentiation:
 High-Quality product;
 Easily Adaptable Processes

Broad Broad Broad

(Industry-wide) Cost Differentiation

Narrow
(Particular Focus Focus
Cost Differentiation
segment)
Low Cost Differentiation
 1. O&SCM Introduction & Operations Strategy · 53

Example: Ikea

Broad Broad Broad

(Industry-wide)
Cost Differentiation
Narrow
Focus Focus
(Particular
segment) Cost Differentiation

Low Cost Differentiation

 1. O&SCM Introduction & Operations Strategy · 54

How to develop a Strategy?

Genius, Vision,
Idea of an
ENTREPRENEUR

What do the What do the

Determining COMPETITORS
CUSTOMERS
want? The Operations Strategy do?
(relative importance 5 KPIs)

The stage in the The capabilities

PRODUCT/SERVICE in the
life-cycle COMPANY
 1. O&SCM Introduction & Operations Strategy · 55

Strategy based on product characteristics

Efficient Process: Responsive Process:
• Large batches • Low volumes
• Make-to-stock • Make-to-order
Functional Products
• Mature
• Low margin
• Low variety Match Mismatch

Innovative Products
• New
• High margin
• High variety Mismatch Match

Source: M.L. Fisher, “What is the right SC for your products” (HBR ,1997)
 1. O&SCM Introduction & Operations Strategy · 56

Impact of demand / supply circumstances

Demand uncertainty
Low High
Delivery uncertainty

Efficient (Lean) Responsive

Low
Supply Chain Supply Chain

Resilient Agile
High
Supply Chain Supply Chain

Source: Hau Lee, “Aligning SC Strategies with Product uncertainties” (CMR, 2002)
 1. O&SCM Introduction & Operations Strategy · 57

Review Question 1
 Consider the Dutch Railways / Nederlandse Spoorwegen (NS), and
especially the unit responsible for transportation of persons

 Define at least one performance measures in each of the five

categories (Quality, Speed, Dependability, Flexibility and Cost)

 Which of these performance measures would be considered

most important?
Why?
 1. O&SCM Introduction & Operations Strategy · 58

Review Question 2
 INPHONE is a producer of components that are used by the
telecom industry.
In INPHONE’s business strategy the following phrase can be found:
“always being able to provide our customers with the most
innovative technology”

 Develop an Operations Strategy to support this business

strategy
 1. O&SCM Introduction & Operations Strategy · 59

Review Question 3
 Some of the companies which operate on a global scale are of the
opinion that:
“The only real answer to the productivity-challenge is to open
facilities where labor rates are cheap”

 Comment on this statement from a Operations Strategy point

of view
 1. O&SCM Introduction & Operations Strategy · 60

Course Materials
 Textbook
 Chapter 1: Operations and Processes
 Chapter 2: Operations Strategy