Introduction Operations Strategy and Productivity

1. IntroductionOperations Strategy and Productivity MD707 Operations Management Professor Joy Field

2. Operations and Operations Management Defined • Operations • The production of goods and services; the transformation process that converts inputs to outputs • Operations Management • The management of systems or processes that transform inputs into finished goods and services • The purpose of the operations function is to add value during the transformation process. Value-added is the difference between the cost of inputs and the value or price of outputs. Operations can add value by decreasing the cost of inputs or increasing the value of outputs or both.

3. Value-Added • Inputs • Land • Labor • Capital • Information Transformation/ Conversion Process • Outputs • Goods • Services Feedback Control Feedback Feedback Transformation Process

4. Louis Vuitton Then • Operations design prior to 2007 … • It took 20 to 30 craftsmen eight days to put together each “Reade” tote bag. • Separate workers would do each individual step in the assembly process. • Inflexible production process and extensive rework (up to 50% of certain products). • When new designs caught on, they often sold out, creating large backlogs and unhappy customers. • Fresh collections of products were shipped to its boutiques every 12 weeks. • Salespeople advising customers would also retrieve items from the stockroom if they weren’t available on the shop floor.

5. Louis Vuitton Now • Current operations … • Clusters of 6 to 12 workers can assemble a LV-logo bag in a single day. • Workers are cross-trained to enable them to do several different assembly tasks. • Production cells increase operational flexibility and allow flaws to be recognized earlier and fixed more easily. • While scarcity of high-end fashion items can create an aura of desirability, Louis Vuitton has taken steps to better understand what customers want and avoid unintended product shortages. • Fresh collections of products are shipped to its boutiques every 6 weeks. • Separate stockroom employees send items from the stockroom, increasing the productivity of salespeople and customer satisfaction.

6. Key Operations Principles • Aggregation Principle • The higher the level of aggregation of resources and information, the more predictable operations becomes (e.g. forecasts of total product volume tend to be more accurate than forecasts of individual products). This is a manifestation of the Central Limit Theorem. • Uncertainty Principle • The more uncertainty in operations, the greater the need to employ extra resources to cope with this uncertainty. Alternatively, the greater the stability and predictability, the leaner operations can function. • Efficiency Principle • All else being equal, operations should function as efficiently as possible.

7. Productivity • Measures of productivity

8. Productivity Problem A news service matches relevant news stories (often before the news story is even published) to client interests based on criteria provided by the client. If the client is, in fact, interested in the news story, it is electronically sent to the client, and the client is charged $7 per story. A department of the news service operates 24/7, with a total of 30 employees, each of whom works 40 hours per week at an average pay rate of $25 per hour. Each employee identifies an average of 3000 news story/client matches week, of which only 45% are actually purchased by the client. Material costs are $10,000 per week, and overhead costs are $95,000 per week. • Calculate the multifactor productivity for the news clipping service department.

9. Definitions of Operations Strategy • An operations strategy is a set of goals, policies, and self-imposed restrictions that together describe how the organization proposes to direct and develop all the resources invested in operations so as to best fulfill its mission. • Other definitions of operations strategy: • An operations strategy consists of a pattern of decisions that, over time, enables a business unit to achieve a desired operations structure, infrastructure, and set of specific capabilities in support of competitive priorities. • An operations strategy is a set of policies in both process choice and infrastructure design that are consistent with the existing ways products win orders, while being able to reflect future developments in line with changing business needs. • The successful implementation of an operations strategy creates value for the customer.

10. Order Qualifiers and Order Winners • Order-qualifiers are those criteria that a company must meet for a customer to even consider it as a possible supplier. Companies need only be as good as competitors. • Order-winners are those criteria that win the order. Companies need to be better than their competitors.

11. Levels of Strategy Corporate What business are we in? Divisional (business) How do we compete? Fin HR Mkt Prod Devpt Ops Role of each function?

12. Structural decision categories Capacity Facilities Vertical integration (sourcing) Information/process technology Infrastructural decision categories Workforce Organization Control/quality systems Capabilities Unique to each firm Competitive priorities Cost Quality High performance design Consistent quality Time Rapid delivery On-time delivery Flexibility Customization Volume flexibility Service Location Components of an Operations Strategy

13. Criteria for Evaluating an Operations Strategy • Consistency (internal and external) • Between the operations strategy and the overall business strategy • Among the decision categories that make up the operations strategy • Between the operations strategy and the other functions’ strategies • Between the operations strategy and the business environment (resources available, competitive behavior, governmental restraints, etc.) • Contribution (to competitive advantage) • Making trade-offs explicit, enabling operations to set priorities that enhance the competitive advantage • Directing attention to opportunities that complement the business strategy • Promoting clarity regarding the operations strategy throughout the firm • Providing the operational capabilities that will be required by the business now and in the future

14. Operations Strategy FormulationContent • Mission • The operations mission specifies what operations must accomplish for the business to succeed. It states the purpose of the operations function and competitive priorities as they relate to the customer and competition. • Objectives • Operations objectives should be defined in concise, measurable terms, as part of the operations strategy. They should be specific statements of expected results – a refinement of the mission. • Operational strategies • Structural and infrastructural decisions are stated in strategic terms. They must be formulated to support the operations mission and objectives and should be consistent with each other and with what is intended to be accomplished by operations. • Policies • Structural and infrastructural decisions are stated in tactical terms in support of the operational strategies. • Distinctive competence • The competitive priorities provide a framework for developing a distinctive competence, which is realized through the implementation of the operations strategy and the use of the firm’s resources. It is what sets operations apart from the competition and, thus, can be defined in terms of uniqueness.

15. McDonald’s Example • McDonald’s operations mission • McDonald’s operational strategies (structural) • Capacity • Growth as needed through additional stores - but capacity added carefully • Well-utilized - franchisee's well-being depends on heavily utilization • Facilities • Distributed facilities, each facility being very similar to the next, all focused around a similar menu with some local variations (especially by country) • Vertical integration (sourcing) • Partnership arrangement • Long-term relationship with suppliers to promote innovation and quality improvement • Information/process technology • High degree of process understanding, emphasis on "fool-proof" processes • A leader in the technology of fast-food delivery

16. McDonald’s Example(cont.) • McDonald’s operational strategies (infrastructural) • Workforce • Franchisees: well-trained, carefully selected, entrepreneurs • Operators: high-turnover, lower-paid • Organization • Guidelines provided by corporation, but franchisees push to locally optimize • Control/quality systems • Centralized buying • Bulk contracts • "Push" system for basic supplies, "pull" system day-to-day in the restaurants