B7801 Operations Management

Introduction

18 August 2000
Nelson M. Fraiman

p. 1
Outline

• Course requirements and administration

• What is this course about?

• The role of operations and its impact on the firm’s

performance

• Begin operations strategy discussion

p. 2
Course requirements
• Readings
– Casebook
– The Goal
• Class participation (20%)
– Bring tent cards to every class
• Case assignments (28%)
– 4 assignments (see schedule)
– groups of 3 max.
– executive summary format (1 page + exhibits)
• Midterm exam on 22 September 2000 (25%)
• Project (27%)

p. 3
Course administration
• Web syllabus
– http://www.gsb.columbia.edu/faculty/nfraiman
– “One-stop shopping” for ...
• schedule of assignments
• case questions
• data sets
• announcements
• useful links
– Bookmark it and check it often!
• Office hours: W 5-6:30 pm and by appointment
• Chatroom hours: W 6:30 – 7:30 pm
[email protected]
212 854 2076
405A Uris Hall
• TA:Srinivas Krishnamoorthy
• [email protected]

p. 4
What exactly are a firm’s operations ?

p. 5
The activities/processes involved in
producing the firm’s outputs
retailers
(products & services)
customers
suppliers plants distribution
center

customer
replenishment
service
orders
orders/service requests

How does (or could) the firm’s work get done?

What is the business impact?

p. 6
Ex: Can of Coke
• Where did you buy it? How did it get there?
• Where was it made?
• What is it made of? Where did the materials come from?
• When was it made?
• Why did you buy it?
• How did someone know you were going to buy it?
• Is the quality okay? How do “they” know the quality is okay?
• How many other units where made at the same time?
• Does the plant produce other products? How many?
• Do different plants produce different products? Why/why not?
• Why is this can of Coke produced and distributed this way?
• Are there alternatives?
• What decisions had to be made to make all this possible?

p. 7
Operations at “Coke” is the entire range
of activities and processes involved in
producing and distributing this can of
Coke to you the end consumer.

p. 8
Coca-Cola Enterprises (CCE)
(images and figures from www.cokecce.com)

• World’s largest bottler of nonalcoholic beverages,

$13.4B 1998 revenue

• Markets, produces and distributes Coke and other soft

drinks, waters and teas

• What do operations at CCE entail?

p. 9
Geographical market CCE serves

3.8 Billion cases distributed ‘98

72% of North America

All of Belgium, Great Britain,

Luxembourg and The Netherlands

90% of France

p. 10
CCE Infrastructure

• 66,000 employees

• 444 production/distribution facilities

• 47,235 vehicles

• 1.9M vending machines/dispensers

p. 11
Typical facility distributes over 300
product/package combinations
North America:
Products of The Coca-Cola Company: Coca-Cola classic, caffeine
free Coca-Cola classic, diet Coke, caffeine free diet Coke, Sprite, diet
Sprite, Cherry Coke, diet Cherry Coke, Barq's, Citra, Fanta, Fresca,
Fruitopia, Hi-C fruit drinks, Mello Yello, Minute Maid and diet Minute
Maid soft drinks, Minute Maid juices, Mr. PiBB, POWERaDE,
SURGE, and TAB

Products of Other Companies: Canada Dry, Dr Pepper,

Diet Dr Pepper, Evian, Mendota Springs, NAYA, Nestea, Cool from
Nestea, diet Nestea, Schweppes, Seagrams, and Squirt

International markets:
Aquarius, Buxton Mineral Water, caffeine free Coca-Cola, caffeine free
Coca-Cola light, Canada Dry, Capri Sun, Cherry Coke, Coca-Cola,
Coca-Cola light, caffeine free diet Coke, diet Coke, Dr Pepper, Fanta,
Five Alive, Kia-Ora, Lilt, Malvern Waters, Minute Maid juices, Nestea,
Oasis, Perrier Mineral Water, Schweppes, Sprite, Sprite light, and Vittel Water

p. 12
Process

p. 13
(cont.)

p. 14
A day in the life of CCE’s operations ...
In the early morning hours, U.S. warehouse employees finish filling
sales orders from the day before, then place the products on delivery
trucks for distribution to our customers by our employees. In Europe,
where delivery systems to our customers vary, warehouse employees
load trucks for bulk delivery to customer warehouses, or for local
delivery. We deliver most of our products in Europe to customer
warehouses rather than directly to stores.

Still early in the morning, sales managers, account representatives,

merchandisers, and drivers across the Company convene at our sales
centers to plan the day's efforts and discuss sales opportunities.

Local delivery drivers then check their already-loaded trucks, make

sure loads are correct, and head to market using routes created the
day before by dispatchers at each sales center. Each day, local
delivery drivers routinely deliver and help merchandise 400 or more
cases of product.

Sales personnel assemble marketing materials, organize their call

lists, handle paperwork, then begin their work assisting customers.
Account representatives will call on 15 or more customers each day,
working with those customers as beverage experts to help them grow
their business.
p. 15
Throughout the day, the production lines keep rolling, bottling the
product needed to keep the pipeline full. Some lines operate 24 hours
a day; most lines operate at least 20 hours. This continuous
production helps assure product freshness, keeps inventories to a
minimum, and helps keep costs down by making maximum use of our
facilities. Generally, warehouses in Europe and North America
completely turn over their inventory in seven days.

As local drivers deliver product to our customers, they record the

deliveries on hand-held computers that help them reconcile their
deliveries at the end of the day. In all of our territories, merchandisers
then work in the stores to display our products attractively and
correctly. As account managers call on customers, they send in new
orders, electronically or by phone, keeping the cycle of sales,
production, and delivery moving forward.

Information Systems personnel make certain that important Company

operating and sales data are available to managers, generally within 24
hours. Managers and administrative employees work to provide
front-line employees the tools they need. For example, they create
marketing programs and strategies, plan fleet requirements, develop
and conduct employee training programs, and provide overall local and
company-wide leadership.

p. 16
Consider repeating this exercise for each
product/service in the room!

• Products • Services
– pencils – credit cards
– paper – bank accounts
– laptop computers – telephone service
– cell phone – cell phone service
– clothes – pager
– shoes – ISP
– contact lenses/eyeglasses – medical care
– furniture – insurance
– carpet – MBA education
– food & beverage .
. .
. .
.
p. 17
 What is involved in operating this
business?

• Plant Management • Inventory Control

• Product Development • Order Processing
• Purchasing / Vendor Relations • Service Parts / Repairs
• Distribution • Service Center Management
• Quality Control • Work Methods/Procedures
• Process Engineering • Site Selection
• Facility Layout • New Service Development
• Production Planning • Work Force Planning
• Capacity Planning • Technology Planning

This is a wide range of activities –

How should we begin thinking about them?

p. 18
 Operations Management
Definition

Operations management may be defined as the

design, operation, and improvement of the

production system that creates the firm’s primary

products and services

p. 19
 Operations Management

Marketplace

Corporate Strategy

Finance Strategy Operations Strategy Marketing Strategy

Operations management

Inputs: Outputs:
People Systems Technology Processes
Materials Products
Customers Services
Leadership

Production System
p. 20
The activities/processes involved in
producing the firm’s outputs
retailers
(products & services)
customers
suppliers plants distribution
center

customer
replenishment
service
orders
orders/service requests

How does (or could) the firm’s work get done?

What is the business impact?

p. 21
 Some more processes..
A service process...
make ticketing airport in-flight collect
reservations check-in services baggage

A product development process...

product product process sourcing production
concept engineering engineering ramp-up

p. 22
 OM Involves Managing Transformations

Transformation
Input Process Output
(Value Adding)

• Leadership
Transformation is • People
enabled by “LPPST” • Processes
• Systems
• Technology

p. 23
 Transformations

• Physical--manufacturing
• Locational--transportation
• Exchange--retailing
• Storage--warehousing
• Physiological--health care
• Informational--telecommunications

p. 24
Operations impact business performance
1) Creating value for the customer
price
quality
variety
speed
convenience
service
innovation

2) Returns to shareholders
ROA

PROFIT ASSET FINANCIAL

ROE = x x
MARGIN TURNOVER LEVERAGE

Operations impact ROA ... … not financial leverage

p. 25
CCE’s 1998 ROA
Where and how do operations impact performance?
1998 INCOME Base
Net Operating Revenues 13,414
Cost of sales 8,391
Gross Profit 5,023
SG&A + Delivery 4,154
Operating Income 869

1998 ASSETS
Acct. Rec. 1,337
Franchises 13,956
Inventory 543
Plant & Equipment 4,891
Other 405
Total Assets 21,132

Oper. Inc. 4.11%

ASSETS
p. 26
Key operations drivers of ROA
• Revenue
– better quality, service, speed, variety
– product/service availability
– supply-demand matching (markdowns/discounting)
• Cost of goods
– effective purchasing & sourcing
– scrap/waste reduction
• S,G & A
– production & service delivery costs
– labor productivity
• Asset turnover
– facility and equipment utilization
– inventory turnover

p. 27
What if CCE improved operating
performance a little?
Explanation?
1998 INCOME Base Modified %
Net Operating Revenues 13,414 13,448 0.25%
Cost of sales 8,391 8,349 -0.50%
Gross Profit 5,023 5,098 1.50%
SG&A + Delivery 4,154 4,133 -0.50%
Operating Income 869 965 11.08%

1998 ASSETS
Acct. Rec. 1,337 1,337
Franchises 13,956 13,956
Inventory 543 434 -20.00%
Plant & Equipment 4,891 4,402 -10.00%
Other 405 405
Total Assets 21,132 20,534 -2.83%

Oper. Inc. 4.11% 4.70%

ASSETS
p. 28
What if CCE’s operating performance
declined a little?
Explanation?
1998 INCOME Base Modified %
Net Operating Revenues 13,414 13,380 -0.25%
Cost of sales 8,391 8,433 0.50%
Gross Profit 5,023 4,948 -1.50%
SG&A + Delivery 4,154 4,175 0.50%
Operating Income 869 773 -11.08%

1998 ASSETS
Acct. Rec. 1,337 1,337
Franchises 13,956 13,956
Inventory 543 652 20.00%
Plant & Equipment 4,891 5,380 10.00%
Other 405 405
Total Assets 21,132 21,730 2.83%

Oper. Inc. 4.11% 3.56%

ASSETS
p. 29
Summary: CCE

OI/A ROE
Poor operations 3.56% ?

Base case 4.11% ?

Improved operations 4.70% ?

p. 30
Summary: CCE

OI/A ROE
Poor operations 3.56% 1.84%

Base case 4.11% 5.78%

Improved operations 4.70% 9.73%

ROE based on interest and tax expenses of $728 and equity of $2,438.

p. 31
1998 Annual Report: Comments on Operations

“We improve volume by improving service, especially in well-developed

markets. If we reduce out-of-stocks at a full service location, for
example, we reduce the times a purchase occasion is missed.”

“The [capital investment] program is absolutely essential. We simply have

to do the things necessary to build our base of production, warehouses,
trucks, and people while still investing in high margin cold drink
opportunities. We see the opportunities every day, and this capital
program prepares us to meet the needs they create. “

“The bottling business favors larger bottlers that have the ability to purchase
in large quantities, produce more efficiently, and make the investments in
people and systems needed to compete in today's environment.
…acquisitions enable us to take advantage of efficiencies and economies of
scale and create value for the Company and our share owners.”

p. 32
Stock price performance ...

p. 33
 CCE ’99 quality problems in Europe
“In the biggest recall in Coke history, the governments of France, Belgium,
Luxembourg and the Netherlands have ordered products from Coca-Cola
Co., off their shelves after dozens of people who drank the soft drinks
became ill. “

“As Coca-Cola Co. tries to regain its footing in Europe after a contamination
scare that caused the biggest product recall in the company's 113-year
history, executives have made a rare admission: that mistakes were made
in manufacturing. “

“As the bans on Coke products continued into Monday, June 21, Ivester
issued a memo to all of his company's 28,000 employees. The subject was
the ‘Belgian Issue,’ and it said, among other things, that the company's
‘quality control processes in Belgium faltered.’ ”

Source: NYTimes June 1999

p. 34
Where does knowing something about
operations matter in your career?

• Managing a business
• Justifying real investments (corp. finance)
• Industry analysis/fundamental investing
• Restructuring initiatives (consulting)
• Merges & acquisitions (cost structure/synergies)
• New business planning

p. 35
Operations strategy in a nutshell

WHAT do we need to do well operationally to succeed?

HOW are we going to do it?

– What collection of assets, resources and processes (e.g.

configuration) do we need?

– What capabilities do we need?

p. 36
p. 37
 Some Current OM Challenges

• Speeding product development time

• Developing production systems to enable

mass customization of products and
services

• Managing global production networks

• Developing and integrating new process

technologies into existing production
systems

p. 38
 Some Current OM Challenges (Continued)

• Achieving high quality quickly and

maintaining it in the face of restructuring

• Managing an increasingly diverse

workforce

• Conforming to environmental constraints,

ethical standards, and government
regulations

p. 39
 Summary
• Our focus in this course is on the business impact
of a firm’s operations
– creating value for customers
– providing returns to the firm
• Operations strategy provides the blueprint for
achieving superior operating results
– What do we need to provide?
– How are we going to provide it?
• Strategy and operational excellence are distinct
but complimentary concepts; both are important.
• A good working knowledge of operations will be
important many times in your career.

p. 40
How are operating results achieved?

investment FIRM outputs

quality
plant variety
equipment customer
convenience
inventory

?
service

revenue
costs
materials
labor
energy

How do we structure what goes on inside the

“black box” so that the firm captures value?

p. 41
“The burden of it all is on the shoulders of management. Labor works
along under any system. There is little or no concern in the shop
whether the best method is being used, whether the best results are
being had from materials and from the motions of men; it is a day’s
work just the same.
The difference in a day’s work is in production value, and this is the
business of management.”

Henry Ford
Today and Tomorrow (1926)

p. 42
From; Wickham Skinner, Harvard Business Review,
May-June 1969

“A company’s operations function typically is either a competitive

weapon or a corporate millstone. It is seldom neutral. Yet, the
connection between operations and corporate success is rarely
seen as more than the achievement of high efficiency and low
costs ..

…what appears to be routine operations decisions frequently

come to limit the corporation’s strategic options, binding it with
facilities, equipment, personnel, and basic controls and policies to
a noncompetitive posture which may take years to turn around.”

p. 43
Operations Strategy
Starts with business strategy (business model)
Viability Test
Two key questions:
1) To what (quantifiable) extent do our customers prefer our product to
alternatives? (Or prefer it less than alternatives?)
2) To what extent do we have a cost advantage or disadvantage
relative to the providers of the alternatives?

A viable strategy must have:

customer preferences exceeding a cost disadvantage, or
cost advantages exceeding a disadvantage in customer
preferences, or, in the best of worlds,
customer preferences and cost advantages together.

Not to mention sustainability . . .

p. 44
 Operations Strategy Framework
1) WHAT do we need to do well to succeed?
Objectives?
• low cost
• high variety Qualifier ...
• high quality Parity with competitors; necessary
for basic survival.
• speed/convenience
• service/support
• innovation
vs.
Priorities? Differentiator ...
• cost / quality Excellence (best in class performance);
• cost / variety distinguishes you from your
• cost / speed competitors.
• speed / quality
• speed / variety

p. 45
Strategy vs. Operational Excellence
(Porter HBR ‘96)

H Variety

strategy
Where on the frontier should we position
ourselves?

operational excellence
How do we get to (and stay on) the
efficient frontier?
L Cost
L H
WARNING: The efficient frontier is constantly shifting!
p. 46
 Operations strategy
Structural elements Infrastructure elements
– capacity – work force
– facilities organization & skills
– vertical integration – customer relations
– technology/equipment – process expertise
– quality programs
Measures of – logistics planning
Performance
– cost

– quality

– speed How do we go about formulating

– variety an operations strategy?
– service p. 47
 Operations Strategy: A Summary

There are many ways to compete and firms cannot

be all things to all people…there are tradeoffs in
operating decisions about structure(bricks and
mortar,machinery) and infrastructure (people,
systems, procedures)…an operating strategy’s success
is determined by the coherence of the pattern
across decision categories, and by the match
between operations strategy and the other functional
and overall business strategies…over the long term
an operations strategy is deemed successful if it
guides the organization in building capabilities
essential to attaining competitive advantage.

p. 48
2) HOW will we achieve our objectives?
Infrastructure
• Facilities
• Equipment/technology
• Employees

Processes
• How will the infrastructure be used?
• What is the work method?
• Communication and control

Capabilities
• Expertise/knowledge
• Gained by targeted development and learning over time

p. 49
Some examples ….

p. 50
kozmo.com / urbanfetch.com
• History
– kozmo.com
• Founded 1997 by Joseph Park, Yong Kang (former investment
bankers).
• Serves NY, Boston, San Francisco, Seattle and Washington
D.C.
– Urbanfetch.com
• Founded 1999 by Ross Steven (Ph.D. in finance & statistics)

• Business objectives/concept
– The “Polaroid” of e-commerce
– “Amazon in an hour”
– Instant gratification
– NY customer quote: “If I could get everything delivered, I
would.”

p. 51
p. 52
Operating strategy is a “secret”
Park:
“It’s basically a localized same-day Fed-Ex system. Everything is
tied to the integrated data pipeline connected to the Web.”

Stevens:
“We have a hub-and-spoke network. The heavy lifting in this
business in designing the internal fulfillment and external
distribution systems, and ours is proprietary. We have heavy-
duty algorithms that route orders in optimal fashion.”

“There are such efficiencies in our business that we can afford to

pay our couriers above market wages.. [and] we’ve eliminated
tipping.”

Source: NY Times, 10/21/99 p. 53

 A “guess” at the design … Information system

Regional
warehouse

Small footprint,
frequent replenishment
in-city shipments
stocking points

bicycle route
delivery

300+ couriers
p. 54
Results …

?
p. 55
Benetton SpA
• Business objectives
– Youth/fashion market
– Bring color fashion to knitwear (“United Colors of Benetton”)
– Small, easy-to-operate store format
– Competitive quality/price point
• Operating strategy
– Vertical integration to lower costs
• Sheep farms
• Largest wool buyer in the world
• Knitting
• Distribution
– Economies of scale through technology
• Automated knitting
• Automated distribution center

p. 56
– Flexibility
• Selected subcontracting of labor intensive operations
• Garment dyeing process provides postponement (delayed
differentiation) capability

store
knitting cutting sewing dyeing

store orders

– Franchise network
• Close contact to customers (owners match customer base)
• “Agents” manage and develop the network freeing Benetton to
focus on product development, production and distribution

p. 57
• Results
– $610/sq-ft. sales vs. $125 typical European store (‘84)
– 2,500+ variations in a typical collection (94’)
– Replenishment orders filled in 10 days
– Target 85% of sales at full price (only 15% markdown)
– 70% owned by Benetton family (Mkt Cap. $U.S. 3.2B)
– Somewhat poor returns of late (ROA of 6.32% vs. industry
avg. of 9.62% over last 5 yrs.)

p. 58
Dell Computer
• Business objectives
– Produce customized PCs incorporating the latest technology
Target institutional and experienced-consumer markets
– Service/support relationship with large institutions
• Operating strategy
– Direct sales, direct customer relationship
– Build-to-order production
– Extensive supplier partnerships + 3rd party logistics
Caliper Logistics

Intel
Dell End Customer
(CPU’s)

Quantum
(disk drives)
UPS
STB Systems
(video cards)
Sony
(monitors)
p. 59
• Operating performance
– Components on average are 60 days “newer” than those in
IBM/Compaq
– Can build a computer in 6 hours.
– 7-10 days of inventory (PC’s depreciate 1-2% per week)
– Build-to-order allows extra service options ...
• user-specific software configurations
• asset tags

• Financial performance
– 200% return on invested capital
– negative 8 days cash-conversion cycle
– $1,000 invested in 1990 worth $564,700 by Jan. 1999.

p. 60
• Some quotes from Michael Dell
“When the company started, I don’t think we knew how far the direct model
could take us. It has provided a consistent underlying strategy for Dell
despite a lot of change in our industry”

“We substitute information for inventory and ship only when we have real
demand from real end customers.”

“Its not just that we sell direct, it’s also our ability to forecast demand - It’s
both the design of the product and the way the information from the
customer flows all the way through manufacturing to our suppliers.

“So looking for value shifts is probably the most important dimension of
leadership. Then there’s the question of managing such a tightly
coordinated value chain - and there it’s all about execution.”
Source: HBR, March/April 98

p. 61
Southwest Airlines
History
– Started 1971 with 3 Boeing 737’s serving 3 Texas cities.
– Operates 296 Boeing 737 (as of 6/99) serving 56 airports
Business objective
– Short-haul (avg. 1 hr. flight), city-pair markets
– Leisure and business-commuter market (not transient
business market)
– Low prices; good service
Operating strategy
– Point-to-point, shuttle-like routes (no hub & spoke network)
– Quick turnaround at gates
– Single equipment class (all 737 fleet)
– Simple boarding process and in-flight service
– Simple fare structure

p. 62
• Performance
– 20 min. avg. turnaround at gate (1/2 industry avg.)
– Lowest cost structure of all major U.S. airlines
– High customer satisfaction
• Rated #1 domestic airline in ‘97 by Money Magazine
• Lowest lost luggage & missed connection rate; high on-time perf.
– 25 consecutive years of profitability (only consistently profitable
U.S. airline)

p. 63
“Southwest is and always has been a very different airline — from the
operating strategy we employ to the way we treat our Employees and
Customers. But the difference we are most famous for is our ability to
generate high profits with low fares. The secret, of course, is low costs,
and our operating strategy is a significant ingredient of our low cost
formula.

Our operating strategy is unique in the airline industry, and it has, indeed,
revolutionized air travel over the last 26 years. We start with a principal
focus on the shorthaul traveler, where our average flight time is about an
hour. We streamline service to meet the shorthaul traveler’ s needs. Then,
we identify city pairs that can generate substantial amounts of business
and leisure traffic with Southwest service.

We offer lots of flights to meet business travelers’ demands for schedule

convenience and flexibility. We offer low fares that meet all travelers’
needs, especially leisure travelers. We specialize in nonstop, not
connecting, service. In our experience, this is what Customers want in
shorthaul markets. And it is far more cost-efficient than the accepted “hub
and spoke” industry standard.

p. 64
This market focus allows us to be substantially more efficient and
productive than the rest of the airline industry. Our aircraft and airport
facilities are used continuously throughout the day, maximizing utilization
and minimizing ground time. Our aircraft “turn” times at the airport are
less than half the industry standard. Therefore, we get lots more use of our
aircraft and much lower unit costs.

We also use only one aircraft type, the Boeing 737, in an all-coach
configuration. This substantially reduces costs versus the industry due to
simplified operations, training, scheduling, and maintenance. Our fleet of
737s is young, safe, comfortable, clean, and perfectly suited for shorthaul
flights.

Our fare structure is simple and this means the cost of selling our product
is less than industry average. Over 60 percent of our Customers buy
travel on Southwest on a ticketless basis — it is easier for our Customers
and less expensive for Southwest than a paper ticket. Boarding the
aircraft is also fast and efficient.

Finally, and most importantly, we have a Culture that values efficiency,

hard work, innovation, and simplicity. Our People have the will and the
desire to produce low costs. That’ s how the low cost producer keeps
finding ways to reduce costs further.”
Source: 1997 Annual Report

p. 65
“Waussau Paper” (disguised name)
• The situation
– Paper manufacturer in Wisconsin
– Money-losing operation for many years
– Major shareholder called BCG to get opinion about shutting Waussau
paper down
• Operations
– Large number of small, narrow machines (less efficient than modern,
wide machines)
– Cost 1/3 higher than best competitors
• Reevaluated strategy
– Life as a paper mill customer
• Deliveries only once every 4-7 days
• Must buy in 40,000 lb. lots (1 truck load)
• 5 weeks for special orders (color) due to traditional mill scheduling for most
efficient run lengths
• Few colors/specialty papers stocked due to low turnover
Source: George Stalk, BCG

p. 66
 – BCG’s suggested positioning
• premium prices & high service for color and specialty paper
• 2 trucks/day to customer locations
• Overnight delivery
• 2,000 lb. minimum order size
• 2 week production cycle
– Operating strategy
• Exploit small run size capability of older machines
• Computerize order entry and scheduling to speed up processing
• Tandem drivers to deliver overnight
• Excess capacity to allow rapid turnaround time
• Expanded customer base (small sales to large numbers of customers not
big sales to a few customers)
• Performance
– Spectacular shareholder returns in the last 10 yrs.
– BCG lead partner “bought his house” on his stock options
– Company is replicating strategy by buying up other small mills.

p. 67
What generic ideas are there in these
examples?

p. 68
Characteristics of an effective operations strategy:

• Internally and externally consistent with...

– corporate/business strategy
– other functional strategies (marketing, finance, R&D)
– pattern of structural/infrastructure investment
– competitive environment (customers, competitors)
• Explicit recognition of trade-offs
– targets key performance dimensions
– sets clear priorities/promotes clarity
• Builds core operations capabilities
– competitive advantages
– new opportunities
• Timeless and enduring

... defined by what managers do , not what they say.

p. 69
 Some reasons for inconsistencies

• Operations has a new task but

continues the old policies and structure
• The organization lacks a focus. It is
attempting to cover too many
technologies or too many products and
markets, too wide a range of volume…
• The organization has the wrong
equipment and process technology for
the present task

p. 70
 Some reasons for inconsistencies

• The organization uses only economic

hurdles for capital investment instead
of also considering what operations
must do to become a competitive
weapon
• The organization’s decision
orientation is based too much on
achieving economies of scale instead
of looking at total performance.

p. 71
 Linking Strategies to Missions

Mission Investment Marketing Sales

Requirements Strategy Strategy

Low Unit Cost Automation Narrow line and Price

conservative design competition

Tight Incremental Special market Price

tolerances performance segment premium

High service Inventory Image of dependability Rapid

level delivery

Wide line Multiple setups Broad market coverage Full line

and short runs

Custom Reserve Ability Analysis of

service capacity to respond customers’
needs

Product Product Market New market

innovation development leadership segments

p. 72
 The Classic Facility Missions

Mission Facilities Infrastructure Labor

Low Unit Cost Specialized Materials Repetitive

machines linked planning & control work
by the time cycle

Tight Reliable control of Building quality into Heightened

Tolerances components and product and process responsibility
systems design of workers for
product quality

High service Reserve machine Inventory management Overtime and

level capacity idle time

Wide line General purpose Production scheduling Changing

machines and inventory assignments
of tools

Custom General purpose Design to cost Reliance on

service machines workers skills

Product Flexible general Design and industrial Team

innovation purpose machines engineering responsiveness

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Summary
• Operations strategy provides the operational blueprint
for executing a business strategy
– What do we need to provide?
– How are we going to provide it?

• The operations strategy must be consistent with the

business strategy. Strategy and operational
excellence are distinct concepts, but they may be
intimately related.

• An operating strategy that is aligned with the key

business objectives of the firm can produce startling
operating and financial performance.

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