Operations Strategy Handbook

Operations Strategy

OpsStrat

2

Content

Why Operations Strategy? 1

Operations Strategy approach 2

What is Operations Strategy – the elements in Operations Strategy? 3

Selected Operations references 4

3

The world is changing – how about your Operations Strategy?

A NEW STRATEGY FOR OPERATIONS?

• The world is changing rapidly – same goes for

your customers and suppliers

• You are required to constantly improve your

operations

• Is optimising your current operating model

sufficient or do you need to rethink?

• A great Operations Strategy is what makes the

sum of all operational capabilities of your

business a competitive advantage

• Does your Operations Strategy fit in relation to

environmental changes or changes in future

customer demand?

4

To realise the vision and create value, Operations Strategy must consider

both market requirements, operations resources and cost of capital

REAL WORLD PERSPECTIVE FINANCIAL PERSPECTIVE

Customer

interaction

Revenues

Satisfy

customer

needs

Make

money

Use

operations

resources

Customers

Capabilities

Suppliers

Partners

Investors

Payment

Products/

services

Payment

Resources/

services Returns

Capital

Understand needs

Choose customers

Deliver products/

services

Define operating model

Define capital

structure

Choose investors

Expenses

is created if

Economic value

ROIC

Operating profit margin

EBIT/Sales

Capital efficiency

Sales/Invested capital

Tax

(1- Tax rate)

WACC

Cost of debt after tax

Proportion of debt

D/(D+E)

Cost of equity

Proportion of equity

E/(D+E)

>

5

There are two paths to strategic value creation – exploration and

optimisation

TWO PATHS TO STRATEGIC VALUE CREATION ... ... AND HOW THEY CAN WORK IN A REAL WORLD PERSPECTIVE

VALUE CREATION

• Invention of

business

• Rethinking current

operating model

• Intuition, feeling,

hypotheses about

the future,

originality

• Uneven, false

starts and

significant leaps

forward

• High risk with

potential of big

reward

• Long term

• Administration of

business

• Current operating

model

• Systematically

honing and refining

within current state

• Analysis,

reasoning, data

from the past,

mastery

• Measured, careful

incremental steps

• Low risk but small

reward

• Short term

EXPLORATION OPTIMISATION

Customer

interaction Revenues

Satisfy

customer

needs

Make

money

Use

operations

resources

Expenses

Exploration: Reinvent the operating model with new manufacturing

footprint, distribution footprint, technologies and/or network partner

integration

Optimisation: Optimize your current operating model through

continuous improvements and improvement project within the current

footprint, processes and competencies

6

Market Requirements drives the need for Operations Resources

• Capacity

• Supply Network

• Process Technology

• Development &

Organisation

• Quality

• Speed

• Dependability

• Flexibility

• Cost

Corporate

Strategy

Market

Requirements

Bottom-up

Experience

Operations

Resources Operations

Strategy

ACHIEVING THE PERFECT FIT

• Depending on the market requirements, the operational resources will have to be configured differently. Have you ensured the perfect

fit or are you wasting resources?

Source: Slack & Lewis

7

Configuring your operating model must be based on your customers’

demand

Impact on relationship

The below model describes the four generic configurations of the supply chain

in relation to ”relationship to customer” vs. ”predictable demand”.

Collaboration and

forecasting

Request for low

cost and high

reliability

Innovative and

creative solutions

Balance service

and costs

High Low

Predictable demand

”AGILE”

”LEAN”

”CONTINUOUS

REPLENISH-

MENT’

”FULLY

FLEXIBLE”

Loose

Tight

Relation-

ship to

customer

Impact on Operations Strategy

The below model divides supply chains into four dedicated conveyor belts

based on different demand flow types. All supply chains demonstrate value-add

and clear value propositions against the customers’ buying behaviour. For each

flow type, the marketplace is analysed and used for configuration of related

supply chains.

Flow types Types of supply chains

Cavitation

Surge

Semi-wave

Base

”Fully flexible”. Unplanned and unplannable

demand due to unknown customers with

exceptional, sometimes emergency, requests

”Agile”. Usually unplanned, at least until the last

possible moment. May result from promotions,

new product launches, fashion marketing,

unplanned stock-outs or unforeseen opportunities

”Lean”. Regular pattern of demand, quite

predictable and forecastable, although it may

be seasonal. Tends to be mature low-risk

products/services

”Continuous replenishment”. Very predictable

demand from known customers. Easily managed

through tight collaboration with collaborative

customers

Source: Gattorna

8

Content





9

We believe that Operations Strategy should be the result of cascading

and aligning the overall strategic decisions to operations

STRATEGY CONSISTS OF FIVE KEY CHOICES WHICH ARE CASCADED DOWNWARDS WITH UPWARD FEEDBACK LOOPS …

What is our

winning

aspiration?

Where will we

play?

How will we

win?

What

capabilities

must be in

place?

What

management

systems are

required?

The purpose of the company

Where we will compete:

Geography, products,

segments, channels, value

chain stages

The unique way to win: Our

value proposition and our

competitive advantage

The set and configuration of

capabilities needed to win in the

chosen way

The systems and measures that

enable the capabilities and

support the choices

Strategic choices are cascaded to the next level as an overall strategic direction, but upward

feedback loops from the business and functional units are essential part in strategy development

Corp

ora

te

Opera

tions

Winning

aspiration

Where to play

How to win

Capabilities

Management

systems

Winning

aspiration

Where to play

How to win

Capabilities

Management

systems

Source: Roger Martin

10

Choices in Operations Strategy

What is our winning

aspiration?

Where will we play?

How will we win?

What capabilities must

be in place?

What management systems

are required?

• Choices: What is the guiding purpose for Operations in terms of supporting corporate and

business unit strategies?

• Example: Operating cost/Delivery performance/Working capital (choose one!)

• Choices: What position will we take in the value chain? What will be the focus areas in

Operations to support corporate and business unit strategies?

• Examples: Where to produce? How to launch? Who to integrate to (customer or

supplier)? Make/buy

• Choices: How will we perform the activities to support corporate and business

unit strategies? How will we allocate internal and external resources to maximise

productivity?

• Examples: S&OP, Late customisation, VMI, Outsourcing/partnership, Platforms

• Choices: What specific capabilities must be in place in Operations? How will

we upgrade the maturity of capabilities needed to support activities?

• Examples: Competencies, IT/technology, Organisation, Sourcing

• Choices: What systems, skills and structures are required to support the

capabilities? How will the organisational design look like in Operations?

How will we measure success?

• Examples: Performance Management systems, Governance structures

11

Our operating model serves as a platform for analysing and designing

how Operations will support the value creation process

Why an operating model?

The cost and effectiveness of a business is

largely determined by how well the

business operating model is designed and

implemented.

What is it?

An operating model defines how people,

organisation, processes and technology

are designed to deliver one or several

strategic choices to support the overall

customer value propositions.

How to use?

The operating model is used when defining

how operations will support the value

creation process.

OPERATING MODEL

Market

Requirements

Operations

Resources

- Operational

Performance

Objectives

Suppliers and

Partners

Customers

Competitors

Development

and

Organisation

Capacity

Process

Technology

Supply

Network

12

It is essential to frame the conditions: What needs to be true for

Operations to execute on the overall strategic choices?

What is it?

A clear specification of the conditions that

must be true for a strategic option to be

valid.

Why?

Part of a simpler, more effective and

engaging approach to strategy

development more focused on choice:

Deeply analytical, but focused on what

really matters.

By framing the right prerequisites we can identify the real strategic options

Strategic

choice

Operations

capabilities

Analysis of

performance

Ability to

supply

External

factors

What

capabilities

must we

have?

Operations

capabilities

What

technologies

need to be

in place?

Process

technologies

Strategic

choice for

Operations

At what cost

will we be

able to

supply our

markets?

Volumes

Costs

What will we

be able to

deliver? And

where?

What must

be true

about our

supply

network?

Supply

network

Capacity

What

capacities

must we

have and

where?

What must

we know

about our

customers?

What must

we believe

about our

partner and

supply

network?

Customers

Partner/supply

network

13

Content





14

The customer is king – so how do you prosper in their kingdom?

Depending on which of the performance objectives the customers value, the operations resources must be aligned

and conform or else the organisation loses ground. Top performers will therefore split their value chains to perfectly

match the customer requirements, as exemplified by the four generic value chains presented below.

The five performance objectives within each strategic decision area: Quality, Speed, Dependability, Flexibility & Cost.

Capacity

Strategy

Supply Network

Strategy

Process Technology

Strategy

Development &

Organisation

Fully flexible Unplanned and unplannable demand.

Focus on: Quality, Speed, and Flexibility.

Agile Usually unplanned, at least until the last possible moment.

Focus on: Quality, Speed, and Flexibility.

Lean Regular pattern of demand, quite predictable and forecastable.

Focus on: Quality, Dependability, and Cost.

Continuous

replenishment Very predictable demand from known customers.

Focus on: Dependability and Cost.

15

Capacity Strategy – David or Goliath?

Definition

• The capacity strategy of an operation defines its overall scale.

• That is, the number and size of different sites between which its capacity is distributed, the specific

activities allocated to each site and the location of each site.

Why a Strategy?

• Capacity is a fundamental

decision that affects a large

part of the business and its

opportunities in the industry

• For the business to fulfil its full

potential, there must be a

correlation between capacity

decisions and overall corporate

strategy

• Many smaller factories spread

around the world can give

more flexibility and speed,

where fewer larger factories

can achieve economies of

scale to ensure dependability

and low cost

Key strategic questions

• How much capacity is needed

to satisfy the market?

• How should the capacity be

distributed?

• Where should the capacity be

located?

• How should we govern our

different sites?

• What level of capability should

the different sites have?

ICG viewpoint

• We emphasise that capacity

and capability must go hand in

hand while designing your

Supply Chain footprint

• Agility is king to most

organisations – this requires

additional capacity in your

Supply Chain

• When it comes to sourcing and

manufacturing, we see a

tendency towards “Move on or

move home” to stay

competitive

• Complexity grows by itself – all

structural changes must be

towards simplification with the

right balance of cost and

complexity

16

Supply Network Strategy – arm’s length or collaboration?

Definition

Supply network strategy is the strategic direction of an organisation’s relationships with suppliers, customers,

suppliers’ suppliers and customers’ customers

Why a Strategy?

• No operation, or part of an

operation, can be seen

insulation. All are part of an

interconnected network of their

own customers and suppliers

and their customers’

customers and suppliers’

suppliers

• Should you have close

cooperation with few turnkey

suppliers, or keep the suppliers

at arm’s length?

• Each set-up will grant different

performance for the supply

chain, but it must match the

overall strategic goal of the

entire value chain


• What we should do ourselves

and what to subcontract?

• How and why develop

‘partnership’ supply?

• Number of and depth of

relationships

• Reducing supply chain

instability

• When to use market-based

purchasing?

• How supply networks fluctuate

over time?

ICG viewpoint

• We believe in upstream as well

as downstream integration in

the supply chain

• Non-core, complex production

should not be outsourced – it

should be eliminated

• Always be in close dialogue

with your strategic suppliers

and create common solutions

with common goals

• The best examples are when

you succeed in integrating

business processes,

competences and information

systems based on openness

and confidence with an

ambition to share the risk and

profit

Supplier collaboration

Market segments &

sales/distribution channels

Product portfolio

Ord

er p

roc

es

sin

g &

pla

nn

ing

Pip

elin

e &

ca

pa

city

ma

na

ge

me

nt

Need

creation,

price &

terms of

delivery

Product

structure

Production &

distribution

flow

17

Process Technology Strategy – low cost or high flexibility?

Definition

The set of decisions that define the strategic role that direct and indirect process technologies can play in the

overall operations strategy of the organisation and sets out the general characteristics that help to evaluate

alternative technologies.

Why a Strategy?

• The choice of how to design

your process flows is important

to gain the sufficient speed and

agility needed for each

customer-driven chain

• The design of process-cells

can significantly increase the

impact of customer service

levels and cost to serve and

are dependent on the

material-, information-, and

customer processing

technologies


• What are the process criteria

for each customer segments?

• Which process capabilities do

we need for each segment?

• How should the new

leadership style look like for

each segment?

• How should the DNA look like

in each process cluster and

how do we manage them day

to day?

ICG viewpoint

• The level of automation goes

hand in hand with your supply

chain footprint and level of

labour wages - one size does

not fit all

• Products and process

technologies are closely

related. We often see that a

wide product portfolio is setting

the boundaries for achieving

the benefits from automation -

even though we see an

increase in the possibilities for

flexibility in automation

technologies

18

Development & Organisation – change or die

Definition

• Set of broad- and long-term decisions governing how the operation is run on a continuing basis.

• Operations development is the ability of manage large “breakthroughs” and continuous improvements, and

applies to both the organisation and its products and services.

Why a Strategy?

• Continuous change is

necessary just to keep up with

competitors

• If you aspire to beat them you

must identify the next step,

and move there before anyone

else realises the change


• Big radical improvement

projects, or small, continuous

improvements?

• Benchmarking against other

operators?

• Understanding how customer

value is created and how this

can be increased through

service and product

development

• Combining product and

process development, on the

hunt for higher customer value

ICG viewpoint

• The speed of change and level

of Operational Excellence are

correlated to the number of

people decoupled from direct

operational work

• Companies must be aware not

to eliminate the resources

required to maintain their

ability to continuously improve

and stay agile

• We believe that every level in

the organisation is responsible

for continuous improvements.

The best solution and

knowledge must come from

the people who are actually

doing the work

• We often see a great need for

killing complexity in the product

portfolio

Continuous

improvement

19

Content





20

Selected references

New global Operations Strategy

with lead time reduction of +40 %

European supply chain

structure with COGS

reduction of + €13m per year

Redefinition of Operations

Strategy leading to reduced

working capital of +25 %

http://www.disagroup.com/

http://www.nktcables.com/

http://www.dovista.dk/

http://www.ambu.fr/Files/Billeder/FR/ambu/ambu_logo.png

http://www.manbw.com/

22

Implement Consulting Group

Jan Lythcke-Jørgensen, Partner

Email: [email protected]

Mobile: +45 2338 0017

Jacob Bønnelycke, Partner


Mobile: +45 4138 0064

Thomas Graugaard, Managing Consultant


Mobile: +45 5138 7423

Martin Trier Hartz, Managing Consultant


Mobile: +45 2338 0033

Learn more about how we work with Operations Strategy

Go to Implement Consulting Group's main website

mailto:[email protected]




http://www.implementconsultinggroup.com/knowledge/toolbox/operations-development-and-organisation/

http://www.implementconsultinggroup.com/

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Operations Strategy Handbook