Positioning the Firm: Cost

Waste elimination
relentlessly pursuing the removal of all waste
Examination of cost structure
looking at the entire cost structure for reduction potential
Lean production
providing low costs through disciplined operations

1-1
Positioning the Firm: Speed
Fast moves, Fast adaptations, Tight linkages
Internet
Customers expect immediate responses
Service organizations
always competed on speed (McDonalds, LensCrafters,
and Federal Express)
Manufacturers
time-based competition: build-to-order production and
efficient supply chains
Fashion industry
two-week design-to-rack lead time of Spanish retailer, Zara
1-2
Positioning the Firm: Quality
Minimizing defect rates or conforming to design
specifications
Ritz-Carlton - one customer at a time
Service system designed to move heaven and earth
to satisfy customer
Employees empowered to satisfy a guests wish
Teams set objectives and devise quality action plans
Each hotel has a quality leader
1-3
Positioning the Firm: Flexibility
Ability to adjust to changes in product mix,
production volume, or design
Mass customization: the mass production of
customized parts
National Bicycle Industrial Company
offers 11,231,862 variations
delivers within two weeks at costs only 10% above
standard models
1-4
Policy Deployment
Policy deployment
translates corporate strategy into measurable
objectives
Hoshins
action plans generated from the policy
deployment process
1-5
Policy Deployment
Derivation of an Action Plan Using Policy Deployment
1-6
Balanced Scorecard
Balanced scorecard
measuring more than financial performance
1. finances
2. customers
3. processes
4. learning and growing
Key performance indicators
set of measures to help managers evaluate
performance in critical areas
1-7
Balanced Scorecard Worksheet
1-8
Balanced Scorecard
1-9
Radar Chart

Dashboard

Copyright 2011 John Wiley & Sons, Inc. Copyright 2011 John Wiley & Sons, Inc.
Operations Strategy
Products
1-10
Services Process
and
Technology
Capacity
Human
Resources
Quality
Facilities
Sourcing Operating
Systems
Copyright 2011 John Wiley & Sons, Inc. Copyright 2011 John Wiley & Sons, Inc.
Decision Analysis
Quantitative methods
a set of tools for operations manager
Decision analysis
a set of quantitative decision-making
techniques for decision problems in which
uncertainty exists
Example of an uncertain situation
demand for a product may vary between 0 and
200 units, depending on the state of market
Supplement 1-11
Problem Formulation
A decision problem is characterized by decision
alternatives, states of nature, and resulting
payoffs.
The decision alternatives are the different
possible strategies the decision maker can
employ.
The states of nature refer to future events, not
under the control of the decision maker, which
may occur in the future. States of nature should
be defined so that they are mutually exclusive
and collectively exhaustive. Examples,
high or low demand for a product
good or bad economic conditions

Payoff Tables
The consequence resulting from a specific
combination of a decision alternative and a
state of nature is a payoff.
A table showing payoffs for all combinations
of decision alternatives and states of nature is
a payoff table.
Payoffs can be expressed in terms of profit,
cost, time, distance or any other appropriate
measure.
Payoff Table
Payoff table
method for organizing and illustrating payoffs from
different decisions given various states of nature
Payoff
outcome of a decision

Supplement 1-14
States Of Nature
Decision a b
1 Payoff 1a Payoff 1b
2 Payoff 2a Payoff 2b
Copyright 2011 John Wiley & Sons, Inc. Copyright 2011 John Wiley & Sons, Inc.
Decision Making
Decision making under risk
probabilities can be assigned to the
occurrence of states of nature in the
future
Decision making under uncertainty
probabilities can NOT be assigned to the
occurrence of states of nature in the
future
Supplement 1-15
Decision Trees
A decision tree is a chronological representation
of the decision problem.
Each decision tree has two types of nodes;
round nodes correspond to the states of nature
while square nodes correspond to the decision
alternatives.
The branches leaving each round node
represent the different states of nature while the
branches leaving each square node represent
the different decision alternatives.
At the end of each limb of a tree are the payoffs
attained from the series of branches making up
that limb.
Decision Making Criteria Under
Uncertainty
Maximax
choose decision with the maximum of the
maximum payoffs
Maximin
choose decision with the maximum of the
minimum payoffs
Minimax regret
choose decision with the minimum of the
maximum regrets for each alternative
Supplement 1-17
Decision Making Criteria Under
Uncertainty
Hurwicz
choose decision in which decision payoffs are
weighted by a coefficient of optimism, alpha
coefficient of optimism is a measure of a
decision makers optimism, from 0 (completely
pessimistic) to 1 (completely optimistic)
Equal likelihood (La Place)
choose decision in which each state of nature is
weighted equally
Supplement 1-18
Southern Textile Company
Supplement 1-19
STATES OF NATURE

Good Foreign Poor Foreign
DECISION Competitive Conditions Competitive Conditions
Expand $ 800,000 $ 500,000
Maintain status quo 1,300,000 -150,000
Sell now 320,000 320,000
Maximax Solution
Supplement 1-20
STATES OF NATURE

Good Foreign Poor Foreign
DECISION Competitive Conditions Competitive Conditions
Expand $ 800,000 $ 500,000
Maintain status quo 1,300,000 -150,000
Sell now 320,000 320,000


Expand: $800,000
Status quo: 1,300,000 Maximum
Sell: 320,000

Decision: Maintain status quo

Maximin Solution
Supplement 1-21
STATES OF NATURE

Good Foreign Poor Foreign
DECISION Competitive Conditions Competitive Conditions
Expand $ 800,000 $ 500,000
Maintain status quo 1,300,000 -150,000
Sell now 320,000 320,000


Expand: $500,000 Maximum
Status quo: -150,000
Sell: 320,000
Decision: Expand
Minimax Regret Solution
Supplement 1-22
States of Nature
Good Foreign Poor Foreign
Competitive Conditions Competitive Conditions
$1,300,000 - 800,000 = 500,000 $500,000 - 500,000 = 0
1,300,000 - 1,300,000 = 0 500,000 - (-150,000)= 650,000
1,300,000 - 320,000 = 980,000 500,000 - 320,000= 180,000
Expand: $500,000 Minimum
Status quo: 650,000
Sell: 980,000
Decision: Expand
Hurwicz Criteria
Supplement 1-23
STATES OF NATURE

Good Foreign Poor Foreign
DECISION Competitive Conditions Competitive Conditions
Expand $ 800,000 $ 500,000
Maintain status quo 1,300,000 -150,000
Sell now 320,000 320,000
= 0.3 1 - = 0.7

Expand: $800,000(0.3) + 500,000(0.7) = $590,000 Maximum
Status quo: 1,300,000(0.3) -150,000(0.7) = 285,000
Sell: 320,000(0.3) + 320,000(0.7) = 320,000
Decision: Expand
Equal Likelihood Criteria
Supplement 1-24
STATES OF NATURE

Good Foreign Poor Foreign
DECISION Competitive Conditions Competitive Conditions
Expand $ 800,000 $ 500,000
Maintain status quo 1,300,000 -150,000
Sell now 320,000 320,000
Two states of nature each weighted 0.50
Expand: $800,000(0.5) + 500,000(0.5) = $650,000 Maximum
Status quo: 1,300,000(0.5) -150,000(0.5) = 575,000
Sell: 320,000(0.5) + 320,000(0.5) = 320,000
Decision: Expand
Copyright 2011 John Wiley & Sons, Inc. Copyright 2011 John Wiley & Sons, Inc.
Decision Making under Risk
(with Probabilities)
Risk involves assigning probabilities to
states of nature
Expected value
a weighted average of decision outcomes
in which each future state of nature is
assigned a probability of occurrence
Supplement 1-25
Copyright 2011 John Wiley & Sons, Inc. Copyright 2011 John Wiley & Sons, Inc.
Expected Value
Supplement 1-26
EV (x) = p(x
i
)x
i


n


i =1
x
i
= outcome i
p(x
i
) = probability of outcome i
where
Decision Making with Probabilities
Supplement 1-27
STATES OF NATURE

Good Foreign Poor Foreign
DECISION Competitive Conditions Competitive Conditions
Expand $ 800,000 $ 500,000
Maintain status quo 1,300,000 -150,000
Sell now 320,000 320,000
p(good) = 0.70 p(poor) = 0.30
EV(expand): $800,000(0.7) + 500,000(0.3) = $710,000
EV(status quo): 1,300,000(0.7) -150,000(0.3) = 865,000 Maximum
EV(sell): 320,000(0.7) + 320,000(0.3) = 320,000

Decision: Status quo
Expected Value of Perfect Information
Frequently, information is available which can
improve the probability estimates for the states of
nature.
The expected value of perfect information (EVPI) is
the increase in the expected profit that would result
if the decision maker knew with certainty which
state of nature would actually occur.
The EVPI provides an upper bound on the
expected value of any sample or survey
information. Thus, it is the maximum amount that
might be paid to gain information that would result
in a decision better than the one made without
perfect information.

EVPI
Good conditions will exist 70% of the time
choose maintain status quo with payoff of
$1,300,000
Poor conditions will exist 30% of the time
choose expand with payoff of $500,000
Expected value given perfect information
= $1,300,000 (0.70) + 500,000 (0.30)
= $1,060,000
Recall that expected value without perfect
information was $865,000 (maintain status quo)
EVPI= $1,060,000 - 865,000 = $195,000
Supplement 1-29
Sequential Decision Trees
A graphical method for analyzing decision
situations that require a sequence of decisions
over time
Decision tree consists of
Square nodes - indicating decision points
Circles nodes - indicating states of nature
Arcs - connecting nodes
Supplement 1-30
Evaluations at Nodes
Compute EV at nodes 6 & 7
EV(node 6)= 0.80($3,000,000) + 0.20($700,000) = $2,540,000
EV(node 7)= 0.30($2,300,000) + 0.70($1,000,000)= $1,390,000
Decision at node 4 is between
$2,540,000 for Expand and
$450,000 for Sell land
Choose Expand
Repeat expected value calculations and decisions at
remaining nodes
Supplement 1-31
Decision Tree Analysis
Supplement 1-32
6
7
2
1
3
4
5
$1,160,000
$1,360,000
$790,000
$1,390,000
$1,740,000
$2,540,000
0.60
0.40
$225,000
Market growth
$2,000,000
$3,000,000
$700,000
$2,300,000
$1,000,000
$210,000
0.80
0.40
0.70
0.30
$1,290,000
0.20
0.60
$450,000
Risk Analysis
Risk analysis helps the decision maker
recognize the difference between:
the expected value of a decision
alternative, and
the payoff that might actually occur
The risk profile for a decision alternative
shows the possible payoffs for the decision
alternative along with their associated
probabilities.
Sensitivity Analysis
Sensitivity analysis can be used to determine
how changes to the following inputs affect
the recommended decision alternative:
probabilities for the states of nature
values of the payoffs
If a small change in the value of one of the
inputs causes a change in the recommended
decision alternative, extra effort and care
should be taken in estimating the input value.