Unit 1

Concepts of managing operations

Chapter 2: Operations Strategy for product and services
Lesson 3: Operations Strategy

Learning Objectives
Understanding the role of operations strategy as a source of
competitive strength in a global marketplace
Linking marketing strategy to operations strategy through the use of
competitive priorities
Distinguish between the make-to-stock, standardized-services,
assembly-to-order, make-to-order, and customized-services strategies
and how they relate to competitive priorities

Good Morning students, today we are going to introduce the concept of

what is known as operations strategy. We would learn to appreciate the
importance of the concept as applicable in Production and operations
systems. We start with a brief idea of Strategic planning.

Strategic planning
Strategic planning is the process of thinking through the current mission of
the organization and the current environmental conditions facing it, then
setting forth a guide for tomorrow’s decisions and results.

Operations strategy is concerned with setting broad policies and plans for
using the resources of the firm to best support the firm’s long-term
competitive strategy.
Operations Management Decisions
Consider first the
Strategic (long-term) decisions
Well the relevant points over here are-
How will we make the product?
Where do we locate the facility or facilities?
How much capacity do we need?
When should we add more capacity?
The other types of decisions would be-
Tactical (intermediate-term) decisions
Well, the relevant points over here are-

How many workers do we need?

When do we need them?

Should we work overtime or put on a second shift?

When should we have material delivered?

Should we have material delivered?

Should we have a finished goods inventory?

Dear friends, let us now move over to:-
Operational Planning & Control (short-term) decisions
Well, the relevant points over here are-
What jobs do we work on today or this week?

Who do we assign to what tasks?

What jobs have priority?

An 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.

An operations strategy involves decisions that relate to:

the design of a process; and,
the infrastructure needed to support the process.

Process design includes:

1) the selection of appropriate technology;
2) sizing the process over time;
3) the role of inventory in the process; and,
4) locating the process.

Infrastructure decisions involve:

1) the logic associated with the planning and control systems;
2) quality assurance and control approaches;
3) work payment structures; and,
4) the organization of the operations function.
Now then, what is a strategy?
Well, simply stated:-

Strategy is a common vision that unites an organization,

provides consistency in decisions, and keeps the organization
moving in the right direction. Strategy formulation consists of
four basic steps:
Defining a primary task. The primary task is usually expressed in a
firm’s mission statement. The mission may be accompanied by a
vision statement that describes what the organization sees itself
becoming.

Assessing core competencies. Core competency is what a firm

does better than anyone else, its distinctive competence. Based
on experience, knowledge, and know-how, core competencies
represent sustainable competitive advantages. For this reason,
products and technologies are seldom core competencies.

The advantage they provide is short-lived, and other companies

can readily purchase, emulate or improve on them. Core
competencies are more likely to be processes, a company’s
ability to do certain things better than a competitor. Thus, while
a particular product is not a core competence, the process of
developing new products is. Core competencies are not static.
They should be nurtured, enhanced, and developed over time.
Close contact with the customer is essential to ensuring that a
competence does not become obsolete.
 Determining order winners and order qualifiers.
A firm is in trouble if the things it does best are not important to
the customer. That’s why it’s essential to look toward customers
to determine what influences their purchase decision. Order
qualifiers are the characteristics of a product or service that
qualify it to be considered for purchase by a customer. An order
winner is the characteristic of a product or service that wins
orders in the marketplace-the final factor in the purchasing
decision.
For example, when purchasing a CD player, customers may
determine a price range (order qualifier) and then choose the product
with the most features (order winner) within that price range. Or they
may have a set of features in mind (order qualifiers) and then select
the least expensive CD player (order winner) that has all the required
features. It is important for a firm to meet the order qualifiers and
excel on the order winner. If it does not, perhaps a segment of the
market could be targeted that more closely matches the firm’s
expertise. Or the firm could begin developing additional competencies
that are more in tune with market needs.

Positioning the firm.

No firm can be all things to all people. Strategic positioning involves
making choices choosing one or two important things on which to
concentrate and doing them extremely well. A firm’s positioning strategy
defines how it will compete in the marketplace-what unique value it will
 deliver to the customer. An effective positioning strategy considers the
strengths and weaknesses of the organization, the needs of the
marketplace, and the position of competitors.

Senior management, with input and participation from different levels of

the organization, develops a corporate strategic plan in concurrence with
the firm’s mission and vision, customer requirements, and business
conditions. The strategic plan focuses on the gap between the firm’s
vision and its current position.
It identifies and prioritizes what needs to be done to close the gap and
provides direction for formulating strategies in the functional areas of the
firm, such as marketing, operations, and finance. It is important that strategy
in each of the functional areas be internally consistent as well as consistent
with the firm’s overall strategy.

Corporate strategy coordinates the firm’s overall goals with its core
competencies. Firms succeed by taking advantage of what they do
particularly well that is, the organization’s unique strengths. Core
competencies are the unique resources and strengths that an
organization’s management considers while formulating strategy.
These competencies include the following:

Workforce: A well-trained and flexible workforce allows

organizations to respond to market needs in a timely fashion. This
competency is particularly important in service organizations, where
the customer comes in direct contact with the employees.
Facilities: Having well-located facilities-offices, stores, and plants is a
primary advantage because of the long lead time needed to build new
ones. Expansion into new products or services may be accomplished
quickly. In addition, flexible facilities that can handle a variety of
products or services at different levels of volume provide a
competitive advantage.

Market and Financial Know-How: An organization that can easily

attract capital from stock sales, market and distribute its products, or
differentiate its products from similar products on the market has a
competitive edge.

Systems and Technology: Organizations with expertise in information

systems will have an edge in industries that are data and information
intensive, such as banking. Particularly advantageous is expertise in
Internet technologies and applications such as business-to-consumer
and business-to-business systems. Having the patents on a new
technology is also a big advantage.

Dear students, at this point allow me to share with all of you a

rather fascinating study by Porter.

A study by Porter (1990) showed that companies achieving

international leadership employed strategies that took advantage of
their core competencies. They achieved competitive advantage by
designing new products, installing new production technologies,
adapting training programs, using quality control techniques, and
improving supplier relationships.
The same is true today except that the Internet has caused many
companies to reevaluate their core competencies.

Based on the corporate strategy, a market analysis categorizes the

firm’s customers, identifies their needs, and assesses competitor’s
strengths.

An interface between marketing and operations is necessary to

provide a business with an understanding of its markets from both
perspectives. Terry Hill has coined the terms order winners and order
qualifiers to describe marketing-oriented priorities 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, or other priorities.

An order qualifier is a screening criterion that permits a firm’s

products to even be considered as possible candidates for purchase.
Professor Hill relates a firm must re-qualify the order qualifiers
everyday it is in business.
It is important to remember that the order-winning and order-
qualifying criteria may change over time.

This information is used to develop competitive priorities which are

the operating advantages that the firm’s processes must possess to
outperform competitors.

Priorities needed to remain competitive are different for different

companies. Keys to success in operations strategy lie in identifying
what the priority choices are, in understanding the consequences of
each choice, and in the trade-offs involved.

From the early work of C. Wickham Skinner at the Harvard Business

School and the more recent work of Terry Hill at the London Business
School, a few basic operations priorities have been identified as:
o Cost
o Product quality and reliability
o Delivery speed
o Delivery reliability
o Ability to cope with changes in demand
o Flexibility and new product introduction speed
o Other criteria: technical liaison and support, meeting a launch date,
supplier after-sale support.

Central to the concept of operations strategy during the late 1960s and
1970s was the notion of operations focus and trade-offs. The
 underlying logic was that an operation could not excel simultaneously
on all performance measures.

Management had to decide which parameters of performance were

critical to the firm’s success, and then concentrate or focus the
resources of the firm on those particular characteristics.

For those firms with large existing manufacturing strategies, Skinner

suggested the creation of a Plant-within-a-plant (PWP) concept, in
which different locations within the facility would be allocated to
different product lines, each with their own operations strategy.

Events in the world marketplace during the 1970s and 1980s-

specifically, the growing intensity in competition-forced these
companies to reexamine the concept of operations strategy, especially
in terms of the so-called necessary trade-offs.

Managers began to realize that they did not really have to make trade-
offs between these different strategies. What emerged instead was a
realization of the need to establish priorities as dictated by the
marketplace. Further, it was recognized that these priorities will
change over time.

This calls for another interesting research findings conducted at Boston

University. Let me explain.
 According to a research undertaken at Boston University, called the
Manufacturing Futures Survey, as manufacturing firms continue to
improve their performance, the requirements for being competitive
also change. The results of four surveys are indicated below:

1990 1992 1994 1996

1. Conformance 1.Conformance 1.Conformance 1.Conformance
Quality Quality Quality Quality
2. On-time 2.Product 2.On-time 2.Product
delivery reliability delivery reliability
3. Product 3.On-time 3.Product 3.On-time
reliability delivery reliability delivery
4. Performance 4.Performance 4.Low price 4.Low price
quality quality
5. Low price 5.Low price 5.Fast delivery 5.Fast
delivery

From the above, it appears that quality alone does not satisfy customers
any longer. The customer is looking for the combination of quality and
related criteria (conformance quality, delivery speed, and product
reliability) at a low price. A currently used term for this combination of
customer requirements is value. Value to the customer means buying a
product with the most important attributes at the lowest price possible. To
improve value, we must either improve upon those criteria that are most
important to the customer, reduce cost to the customer, or do both.
The competitive priorities and the directives from corporate strategy
provide input for the functional strategies, or the goals and long-term
plans of each functional area.

A company that is considered to be world class recognizes that its

ability to compete in the marketplace depends on developing an
operations strategy that is properly aligned with its mission of serving
the customer. A company’s competitiveness refers to its relative
position in comparison to other firms in the local or global
marketplace.

Effective strategies can be achieved in two ways-by performing

different activities from those of competitors or by performing the
same activities better. Operations plays an important role in either
approach. It can provide support for a differentiated strategy, and it
can serve as a firm’s distinctive competence in executing similar
strategies better than competitors.

The operations function helps strategy evolve by creating new and

better ways of delivering a firm’s competitive priorities to the
customer. Once a firm’s competitive priorities have been established,
its operating system must be configured and managed to provide for
those priorities. This involves a whole series of interrelated decisions.

Basically, operations strategy links long- and short-term operations

decisions to corporate strategy. Continuous cross-functional
interaction must occur in implementing operations strategy. For
 example, operations needs feedback from marketing to determine how
much capacity to allocate to various product lines, and operations
must work with finance regarding the timing of funding of increased
capacity. Thus, in identifying the operational capabilities needed for
the future, the operations manager must work closely with the
managers of other functional areas.

Friends, you should all appreciate the role of a linkage mechanism plays
in this regard. I would explain further.

Operations strategy must be linked vertically to the customer and

horizontally to other parts of the enterprise. The general process is that
customer needs related to new-product or current-product
requirements give rise to performance priorities that then become the
required priorities for operations.
The operations priorities are linked to enterprise capabilities because
operations cannot satisfy customer needs without the involvement of
R&D and distribution and without the direct or indirect support of
financial management, human resource management, and information
management.
Given its performance requirements, an operations division uses its
capabilities (as well as those of its suppliers) to achieve those
requirements-that is, to win orders. These capabilities include
technology, systems, and people. CIM, JIT, and TQM represent
fundamental concepts and tools used in each of the three areas.
Let us now focus our attention to the main objectives of manufacturing
strategy development.
 The main objectives of manufacturing strategy development are:

To translate required priorities (typically obtained from marketing)

into specific performance requirements for operations, and

To make the necessary plans to assure that operations (and enterprise)

capabilities are sufficient to exploit them.

The steps for developing priorities are:

1. Segment the market according to the product group.

2. Identify the product requirements, demand patterns, and profit

margins of each group.

3. Determine the order winners and order qualifiers for each group.

4. Convert order winners into specific performance requirements.

Through its strategic planning process, each functional area is

responsible for identifying ways to develop the capabilities it will
need to carry out functional strategies and achieve corporate goals.
This input, along with the current status and capability of each area, is
fed back into the corporate strategic planning process to indicate
whether corporate strategy should be modified.
Well friends, I hope all of us have clearly understood the various aspects
of strategic planning and OM decision framework discussed during the
lecture. It’s time now to focus on:-

A quality –productivity strategy

Improving quality is one important way to maintain a competitive position in
today’s markets. Quality can be promoted to customers and employees.
Consumers want quality products and services, and employees at all levels
in the organization like to be associated with a winner. Most people
associate high quality with a winning competitive position.
Although employees may balk when they are encouraged to work more
productively (because they feel they are being told to work faster), very few,
if any, will argue with quality as goal.
From an economic perspective, when quality is emphasized and
subsequently improved, waste is decreased or eliminated. Hours are not
wasted reworking products. Material is not thrown away. Operations costs
are reduced. At the same time, the customer receives products and services
that are ‘fit’ for use.
Moreover, prices can be lowered to share this productivity gain with
customers, thereby stimulating an increase in the firm’s market share. Or,
alternatively, the higher-quality product (as compared with competitors’
product offerings) can command a premium price and temporarily secure a
market niche.
Market niche is often temporary since high price invites competitors. To
employees, these results mean increased job security because of a sound
competitive position. Stockholders can benefit through higher overall a
winner – a message some firms and managers seem to understand better than
others.

Conversion process is the central element of the production and operations

function. The work of operations management revolves around conversion,
where resource inputs are converted or transformed into useful products and
services.
This conversion process is present in most organizations, but it is distinctly
different for a bank, an aerospace firm, or a public utility. The basic
technologies of operations differ among industries as well as within various
organizations in any one industry. In the public utility, for example, the firm
requires engineering skills to design facilities, maintenance skills for various
mechanical and electrical applications, and operating skills for larger pieces
of equipment used in operations. The blending of labour, land, capital and
management – and the scientific expertise needed for this task – are at the
very heart of technology in operations.

In some instances, machinery is substituted for hard labour. Mechanization

is the process of bringing about the use of equipment and machinery in
production and operations. In a bank for example, some jobs – such as
reconciling checking accounts and preparing statements – are mechanized.
Other tasks, such as the interview in which information is gathered by a loan
officer to start the loan process, are not mechanized.
Well friends, all of us are aware that the Organizations today face decisions
about which technology to use and the degree of mechanization. Many of the
challenges for improved productivity and quality are answered by managers
and owners as they adopt more sophisticated technologies and increased
mechanization. Competitors who effectively substitute capital and
equipment for labour to lower operating costs may increase market share
very quickly.
Let us take an example.

For example, highly mechanized companies in Japan and Korea caused the
U.S. steel industry to lose market shares. On the other hand, mechanization,
when it is unnecessary or inappropriate, may be quite costly. A firm may be
saddled with high fixed costs relative to other companies in the industry.
Management may be unable to reduce variable costs of manufacturing
sufficiently to recover the costs of mechanization.
My friends, now we are approaching the end of today’s discussion.
Before we wind up for the day, let’s address two more issues that
warrant your urgent attention.

Value engineering and value analysis

The purpose of value analysis/value (VA/VE) engineering is to simplify
products and processes. Its objective is to achieve equivalent or better
performance at a lower cost while maintaining all functional requirements
defined by the customer. VA/VE does this by identifying and eliminating
unnecessary cost. Technically, VA deals with products already in production
and is used to analyse product specifications and requirements. Purchasing
departments use VA as a cost reduction technique.
Performed before the production stage, value engineering is considered a
cost-avoidance method. In practice, however, there is a looping back and
forth between the two for a given product. This occurs because new
materials, processes, and so forth require the application of VA techniques to
products that have previously undergone VE. The VA/VE analysis approach
involves brainstorming such questions as:
Does the item have any design features that are not necessary?

Can two or more parts be combined into one?

How can we cut down the weight?

Are there non-standard parts that can be eliminated?

Productivity Measurement
Productivity is a common measure of how well a country, industry, or
business unit is using its resources (or factors of production). Since
operations management focuses on making the best use of the resources
available to a firm, productivity measurement is fundamental to
understanding operations-related performance. In its broadest sense,
productivity is defined as

Outputs
Productivity =
Inputs

To increase productivity, we want to make this ratio of outputs to inputs as

large as practical.

Productivity is a relative measure, and needs to be compared with something

else. Productivity comparison can be made in two ways. First, a company
can compare itself with similar operations within its industry, or it can use
industry data when such data are available. For example, comparing
productivity among the different stores in a franchise.

Another approach is to measure productivity over time within the same

operation. Here we would compare our productivity in one time period with
that of the next.
Productivity may be expressed as partial measures, multifactor measures, or
total measures. If we are concerned with the ratio of output to a single input,
we have a partial productivity measure. If we want to look at the ratio of
output to a group of inputs (but not all inputs), we have a multifactor
productivity measure. If we want to express the ratio of all outputs to all
inputs, we have a total factor measure of productivity that might be used to
describe the productivity of an entire organization or even a nation.

Numerical Example of Productivity Measures

Exercise 1. Ritu Brar makes fashionable garments. During a particular week
employees worked 360 hours to produce a batch of 132 garments, of which
52 were “seconds” (meaning that they were flawed). Seconds are sold for
Rs90 each at Brar’s Factory Outlet Store. The remaining 80 garments are
sold to retail distribution, at Rs200 each. What is the labour productivity
ratio?

Solution
Value of output = (52 defective X Rs90/defective) + (80
garments X Rs200/garment)

= Rs20,680

Labour hours of input = 360 hours

Output Rs 20,680
Labour productivity = =
Input 360hours

= Rs57.44 in sales per hour

Points to ponder