Chapter Two

Operations Strategy &

Competitiveness
 2.1 Definition – Operations Strategy

 It is the process of setting broad policies & plans for

using the resources of the firm to best support the firm’s
long- term competitive strategy
 Action plan to achieve goals - mission
 Strategies exploit opportunities and strengths,
neutralize threats, and avoid weaknesses
 Operations strategy answers the question: How can a
firm’s operations function best contribute to the
organization’s overall strategy?
 The Operations Strategy is how you pursue the goals
of adding value using your key business
 The Big Picture
Corporate Strategy
How the organization is going to pursue its mission.

Operations Strategy
Operations is organization’s core business function!
Operations strategy is how that core business function is
going to add value in support of the corporate strategy.
It requires continuous, cross-functional interaction.
The operations strategy should be customer driven.
 Strategic Process
Organization’s
Mission

Functional Area
Missions

Finance/
Marketing Operations
Accounting
 Operations Strategy

Strategy Process Example

Customer Needs More
Product/Quality

Increase Org.
Corporate Strategy
Size/use better tech

Increase Production
Operations Strategy
Capacity/Invest on R&D

Decisions on Processes
and Infrastructure Build New Factory
 Strategy Formulation
• Building distinctive competencies
• Environmental scanning
• SWOT Analysis
• Order qualifiers:
• Characteristics that customers perceive as minimum standards
of acceptability to be considered as a potential purchase
• Order winners:
• Characteristics of an organization’s goods or services that cause
it to be perceived as better than the competition
• Order wining & order qualifying criterion change over
time
 Competitive Dimensions
• Cost
• Quality and Reliability Competitiveness:
• Delivery How effectively an organization meets
– Flexibility the wants and needs of customers
– Speed relative to others that offer similar
– Reliability goods or services.
• Coping with Changes in Demand
• Customer Value: customer benefits – customer cost
• New Product Introduction
– Speed
– Flexibility
 Dealing with Trade-offs
For example I: if we reduce costs by reducing product
quality inspections, we might reduce product quality.

Example II: if we improve

customer service problem
solving by cross-training Cost
personnel to deal with a wider-
range of problems, they may
Flexibility Delivery
become less efficient at dealing
with commonly occurring
problems. Quality
 Cont’d …
 The Operation function focuses on:
 Cutting costs on the system such as materials, labor
and facilities
Study the operation system carefully to eliminate
waste
Offering training to employees to maximize
productivity and minimize scrap
Automating the operations system of the company so
that productivity will be increased
Both Order Winners and Qualifiers can become
Order Losers, if:
• Quality
• Delivery
• Speed
• Reliability
• Any other factors that made customers look to you,
suddenly become unacceptable.
The four-stage model of Operations contribution

Redefining industry STAGE 4

ns
expectations tio Give an
p era operations
Increasing strategic impact

o
n of advantage
ti o STAGE 3
Clearly the best in u
the industry ntrib Link strategy
ate
gy
o st r
i ngc with operations
ng
rea
s STAGE 2 rivi
As good as the In c ing
D
Adopt best rt
competitors practice po
up egyS
ng at
STAGE 1 t i st r
Holding the m en
Correct worst e
pl y
organization back problems Im ateg
st r
Internally Externally Internally Externally
neutral neutral supportive supportive
Increasing operations capabilities
How can the contribution of the operations
function be assessed?

Neutral Supportive

Stage 1 Stage 3
Internally Objective is to minimise Objective is for ‘operations’
the negative impact of to provide credible support
‘operations’. for the business strategy.

Stage 2 Stage 4
Externally Objective is for ‘operations’ Objective is for ‘operations’
to help the business to provide a source of
maintain parity with its competitive advantage.
competitors.
 Example - the south west airline compete on
cost
• Its operation function is designed to support
cost- strategy
– Facilities are streamlined
– Only one type of airplane is used
– Short flight routs
– All unnecessary costs are eliminated
– Employees are trained to perform many functions
• Because of this strategy south west has been a
model for the airline industry for many years
 Improving Responsiveness to Customers
 Without customers, organizations cease to exist.
• Non-profit and for-profit firms all have customers.
• Managers need to identify who the customer is and
their needs.
 What do customers want? Usually customers prefer:
• A lower price to a higher price
• High quality over low quality
• Fast service over slow service
– Also good after sale support
• Many features over few features
• Products tailored to their specific needs
 Competitiveness Value Map
Higher Premium
Poor value
value
Relative Price

Average
value

Economy
value Outstanding
value

Lower

Inferior Relative Quality Superior

 10 Strategic OM Decisions
1. Goods and service 6. Human resources and
design job design
2. Quality
7. Supply chain
3. Process and capacity management
design
4. Location selection 8. Scheduling
5. Layout design 9. Maintenance
10. Inv.mgt
Resources and capabilities lead to Competitive
Advantage when they are:

Valuable allow the firm to exploit opportunities or

neutralize threats in its external environment

Rare possessed by few, if any, current and potential

competitors

Costly to Imitate when other firms either cannot obtain

them or must obtain them at a much
higher cost

Nonsubstitutable the firm must be organized appropriately to

obtain the full benefits of the resources in order
to realize a competitive advantage
 Competitive priorities
• Competitive priorities are goals and objectives (e.g. large
product variety and low product costs) that guide
management actions (Koufteros et al., 2002)
• Teece and Pisano (1994) stated that management’s role is
to organize these competencies to create capabilities that
customer’s desire
• Strategy Begins with Priorities
Competition Us
(Them) Differentiation (Core competencies)

• Competitive capabilities are more direct

antecedents to the economic outcome of the firm
 Developing Manufacturing Strategy
 Objectives:
• Translate required priorities (typically obtained from marketing)
into specific performance requirements for operations
• Make the necessary plans to assure that operations (and
enterprise)capabilities are sufficient to accomplish them
 Steps:
1. Segment the market according to the product group,
2. Identify the product requirements, demand patterns & profit
margins of each group,
3. Determine the order winners & order qualifiers for each group
4. Convert order winners into specific performance requirements
 Developing Service Strategy
Most of the procedures are alike with the manufacturing:
• Tools to win the competition
1. Place less emphasis on short-term financial payoffs &
invest more in R&D
2. Invest in people & equipment to improve capability
3. Work on communication barriers within the organization
& develop a sense of common interest
4. Treat labor as a resource to be nurtured, not just a cost to
avoided,
5. Emphasis on process innovations rather than product
innovation
Operations Planning and
Controlling
 Cont’d …
 OPC is an infrastructural decision that allow
an organization to attack the different set of
operational issues

OPC has two purposes :

i. Planning the system
ii. Planning the use of the system
 Key Issus in OPC
• Aggregate production planning
• Scheduling
• Inventory management
Operation Planning Process

Process Planning
Long
Range Strategic Capacity Planning

Medium Aggregate Planning

Range
Manufacturing Services
Master Production Scheduling

Material Requirements Planning

Order Scheduling Weekly Workforce &

Customer Scheduling
Short
Range Daily Workforce &
Customer Scheduling
 OPC- Aggregate Production
Planning
• Is the determination of the quantity and timing of
production for intermediate range
• Is the big picture approach to planning for the
intermediate terms
• Why Aggregate production planning?
– Is used to allocate the resources in an efficient
manner while satisfying the forecast demands over
the planning horizons
 Decision Variables in APP
• There are two decision variables to be considered in
Aggregate production planning
– Demand options – attempt to smooth out changes in
demand pattern by influencing through:- Pricing
promotion, backlogs, product mixes
– Capacity options- attempt to absorb fluctuations in
demand by changing- inventory level, work force ,
overtime/slack time, subcontracting and using part
time workers
 Strategies for APP
• Maintain a level work force
• Maintain a steady output rate
• Match demand period by period
• A combination of decision variables
 Cont’d …
• Strategies in APP can be grouped into three main
categories:
1. Chase strategy – matching capacity to demand: the
planned output for any period would be the expected
demand for that period
– Pros of chase strategy
• Low inventory investment and backlogging
– Cons of chase strategy
• Expense of adjusting output and work force
• Loss of productivity
• Lower quality
 Cont’d …
2. Level Strategy – maintaining a steady output rate while
meeting the variations in demand by a combination of
inventories overtime, part time and subcontracting
- Pros of level strategy
- Level of output rates
- Stable work force
- Cons of level strategy
- Increased inventory
- increased backlogs
3. Hybrid strategy
 Examples of APP
• Eagle Waters has the following aggregate demand
requirements and other data for the upcoming four
quarters.
Quarter Demand
1 1300
2 1400
3 1500
4 1300
 Cont’d …
• Previous quarter's output 1500 units
• Beginning inventory 200 units
• Stock out cost $50 per unit
• Inventory holding cost $10 per unit
• Hiring workers $4 per unit
• Firing workers $8 per unit
• Unit cost $30 per unit
• Overtime $10 extra per unit
 Cont’d …
• Which of the following production plans is better:
– Plan A—chase demand by hiring and firing
– Plan B—produce at a constant rate of 1200 and
obtain the remainder from overtime?
 Operations Scheduling- Key
Concepts
• Scheduling is a time table for performing activities,
utilizing resources and allocating facilities.
• It lies at the heart of the process because it is related to
workflow which is related to cash flow.
• Effective scheduling can yield:
– cost savings
– increase productivity
– jobs completed on time
– Company competitive advantage in terms of customer
services.
 Cont’d …
• Scheduling is done based on the job sequencing. Job
sequencing is attained using priority rules and to evaluate
the priority rules the following standard measures should
be used.
– meeting due dates
– minimizing the flow time ( the time that a job spends
in the process)
– minimize work in process inventory
– minimize idle time of machineries and work centers
 Cont’d …
• Priority rules and techniques
– FCFS ( first come first served) orders run in the order
they arrive in the department
– SPT (shortest processing time) run the job with the
shortest completion time first, next shortest and so on.
– EDD (earliest due date) run the job with the earliest
due date first
– LCFS (last come first served)- the rule occurs
frequently by default
– LS (least slack)- the slack is calculated as the
difference between the time remaining before its due
date minus the processing time remaining. Orders with
the shortest slack are run first
 Sequencing n jobs on 2 machines or
work centers
• Johnson’s rule
– Managers use to minimize the make span for a
group of jobs to be processed on two machines
(work centers)
– It also minimize the total idle time at the work
centre
 Steps
• Determination of the optimum sequence involves these
steps
– List the jobs at each work centre
– Select the job with the shortest processing time – if
the shortest time is at the first work centre schedule
that job first; if the time is at the second work centre
schedule the time last
– Eliminate the job and its time from further
consideration
– Repeat step 2 and 3
 Example

• E.g. a group of six jobs Job wc1 wc2

to be processed through a A 5 5
two step operation,
determine a sequence B 4 3
that will minimize the C 8 9
total completion time for
D 2 7
the group of jobs
E 6 8
F 12 15
 Cont’d ….

• select the job with the D E C F A B

shortest processing time it
is D
• Since the time is at the
first centre schedule job D
first. Eliminate from
further consideration
• Job B has the next shortest
time, since it is at the
second work centre
schedule at the last
Thank You!