Operations Strategies in a Global Economy. CountryMinimum Wage (per day) Approx. Value in US$ VietnamUS$ 2.40 IndiaUS$ 2.24 LuxembourgUS$ 14.24 (with

Operations Strategiesin a Global Economy

Country Minimum Wage (per day)Approx. Value in US$

Vietnam US$ 2.40

India US$ 2.24

Luxembourg US$ 14.24 (with 20% premium for skilled workers)

Mexico US$ 4.88

INTRODUCTION Operational effectiveness is the ability to

perform similar operations activities better than competitors.

It is very difficult for a company to compete successfully in the long run based just on operational effectiveness.

A firm must also determine how operational effectiveness can be used to achieve a sustainable competitive advantage.

An effective competitive strategy is critical.

FACTORS AFFECTING TODAY’S GLOBAL BUSINESS CONDITIONS

Reality of global competition Quality, customer service, and cost

challenges Rapid expansion of advanced technologies Continued growth of the service sector Scarcity of operations resources Social responsibility issues

REALITY OF GLOBAL COMPETITION Changing nature of world business International companies Strategic alliances and production

sharing Fluctuation of international financial

conditions

CHANGING NATURE OF WORLD BUSINESS

The US gross domestic product (GDP) is, at around $15 trillion, the largest in the world.

Companies all over the globe are aggressively exporting their products/services to the US

Many US companies are targeting foreign markets to shore up profits.

The global economy that interconnects the economies of all nations has been termed the global village.

One of the most important new markets is China.

INTERNATIONAL COMPANIES

International companies are those whose scope of operations spans the globe as they buy, produce, and sell.

International firms search out opportunities for profits relatively unencumbered by national boundaries.

Operations managers must coordinate geographically dispersed operations.

INTERNATIONAL COMPANIES World’s Largest Corporations (2013 data)

1. Royal Dutch Shell2. Wal-Mart 3. Exxon Mobil4. China Petrochemical (Sinopec)5. China National Petroleum6. BP7. State Grid Corporation of China8. Toyota 9. Volkswagen10. Total

STRATEGIC ALLIANCES Strategic alliances are joint ventures among

international companies to exploit global business opportunities.

Alliances are often motivated by Product or production technology Market access Production capability Pooling of capital

SUCCESSFUL STRATEGIC ALLIANCES Starbucks partnered with Barnes and Nobles

bookstores in 1993 to provide in-house coffee shops, benefiting both retailers.

In 1996, Starbucks partnered with PepsiCo to bottle, distribute and sell the popular coffee-based drink, Frappucino.

A Starbucks-United Airlines alliance has resulted in their coffee being offered on flights with the Starbucks logo on the cups

A partnership with Kraft foods has resulted in Starbucks coffee being marketed in grocery stores.

In 2006, Starbucks formed an alliance with the NAACP, the sole purpose of which was to advance the company's and the NAACP's goals of social and economic justice.

PRODUCTION SHARING An agreement to share the production or

extraction costs between two governments, a government and a corporation, or a corporation and an individual. This can be accomplished when two countries agree to allow certain raw materials to be shipped tariff free from the first country to the second country where the materials are manufactured into a finished product. That product is then shipped back, tariff free, to the original country. In oil or mineral extraction, the company doing the extraction is paid in oil or minerals as compensation for business costs as well as a share of the profit.

QUALITY, SERVICE, AND COST CHALLENGES

Quality The goal of adequate quality must be replaced

with the objective of perfect product and service quality.

The entire corporate culture must be redirected and committed to the ideal of perfect quality.

All employees must be empowered to act. A commitment to continuous improvement has

to be organization-wide.

The “Bang” mug has been redesigned many times to realize shipping cost savings. Originally, 864 mugs would fit into a pallet. After redesign a pallet held 1,280 mugs, and with a further redesign 2,024 mugs could be squeezed into a pallet, reducing shipping costs by 60%.

Even better, the cost of production at Ikea's Romanian factory has also fallen because the more compact mugs require less space in the kiln.


Customer Service Companies must quickly develop innovative

products and respond quickly to customers’ needs. Organizational structures must be made more

horizontal to quickly accommodate change. Multidisciplined teams must have decision-making

authority, responding better to the marketplace. Large, unwieldy companies are spinning off whole

business units making them autonomous businesses that can compete with small, aggressive competitors.


Cost There is continuing pressure to reduce direct costs

(of producing and selling) and overhead costs. It cost the US automakers $1,500 more per auto

for labor in 1980 than it cost the Japanese auto-makers. By the 1990s the difference was almost zero.

Giant retailers (like Wal-Mart) squeezed weaker competitors out of the market, giving the retailers the leverage to force their suppliers to streamline operations and reduce costs/prices.


Cost Cost-cutting measures being used include:

Moving production to low-labor-cost countries Negotiating lower labor rates with unions and

workers Automating processes to reduce the amount of

labor needed, particularly processes that are labor intensive.

ADVANCED TECHNOLOGIES The use of automation is one of the most

far-reaching developments to affect manufacturing and services in the past century.

The initial cost of these assets is high. The benefits go far beyond a reduction in

labor costs. Increased product/service quality Reduced scrap and material costs Faster responses to customer needs Faster introduction of new products and services

ADVANCED TECHNOLOGIES

US companies cannot use automated production technology as a long-term competitive advantage.

Automation systems are available to any company in the world today, although the price is prohibitive for some companies.

Not investing, or delaying investing in this technology could be disastrous for a company.

CONTINUED GROWTH OF SERVICE SECTOR A robust service sector helps support the

manufacturing sector. There is much opportunity for quality improvement

in US service firms. Many operations managers are being employed in

services. Planning, analyzing, and controlling approaches from

manufacturing are being adapted to service systems. The US service sector, like the manufacturing sector,

must streamline and improve operations if it is to survive.

SCARCITY OF OPERATIONS RESOURCES

Raw materials like titanium, nickel, coal, natural gas, water, and petroleum products are periodically unavailable or in short supply.

A shortage of any necessary input to a conversion subsystem, including skilled personnel, can be a challenge for an operations manager.

An important issue in the formation of business strategy is how to allocate scarce resources among business opportunities.

SOCIAL-RESPONSIBILITY ISSUES

Corporate attitudes are evolving from doing what companies have a legal right to do, to doing what is right.

Factors influencing this evolution include: Consumer attitude -- Consumers are expressing their

likes/dislikes by such means as stockholder meetings, liability suits, and buying preferences.

Regulation – The Clean Air Act, etc. Self-interests -- Companies realize that profits will be

greater if they act responsibly.


Environmental Impact Product-Safety Impact Employee Impact


Environmental ImpactConcerns about the global environment include: Landfill waste reduction Recycling Energy conservation Chemical spills Acid rain Radioactive waste disposal … and more


Environmental Impact There is a need for standardizing government

regulations of the environment. Otherwise, companies will gravitate to the

less-regulated countries. The International Organization for

Standardization has developed a set of environmental guidelines called ISO 14000.


Product-Safety ImpactHarm to people or animals that results from poor product design can: Damage a company’s reputation Require a large expense to remedy Cause governments to impose more

regulations


Employee ImpactEmployee benefits and policies include: Safety and health programs Fair hiring and promotion practices Day-care Family leave Health care Retirement benefits Educational assistance … and more


Employee ImpactEmployee benefits and policies impact long-term profitability due to their effect on: Employee morale and productivity Recruitment and retention of employees Demand for a company’s products Cost of defending against lawsuits and boycotts

DEVELOPING OPERATIONS STRATEGY

Corporate MissionCorporate MissionCorporate MissionCorporate Mission

Business StrategyBusiness StrategyBusiness StrategyBusiness Strategy

Product/Service PlansProduct/Service PlansProduct/Service PlansProduct/Service Plans

Competitive PrioritiesCompetitive PrioritiesCompetitive PrioritiesCompetitive Priorities

Operations StrategyOperations StrategyOperations StrategyOperations Strategy

AssessmentAssessmentof Globalof GlobalBusinessBusiness

ConditionsConditions

AssessmentAssessmentof Globalof GlobalBusinessBusiness

ConditionsConditions

DistinctiveDistinctiveCompetenciesCompetencies

ororWeaknessesWeaknesses

DistinctiveDistinctiveCompetenciesCompetencies

ororWeaknessesWeaknesses

CORPORATE MISSIONCORPORATE MISSION

A corporate mission is a set of long-range goals and including statements about: the kind of business the company wants to

be in who its customers are its basic beliefs about business its goals of survival, growth, and profitability

COCA-COLA COMPANY

MissionEverything we do is inspired by our enduring mission:

To Refresh the World... in body, mind, and spirit.

To Inspire Moments of Optimism... through our brands and our actions.

To Create Value and Make a Difference... everywhere we engage.

COCA-COLA COMPANY

VisionTo achieve sustainable growth, we have established a vision with clear goals.

Profit: Maximizing return to shareowners while being mindful of our overall responsibilities.

People: Being a great place to work where people are inspired to be the best they can be.

Portfolio: Bringing to the world a portfolio of beverage brands that anticipate and satisfy peoples’ desires and needs.

Partners: Nurturing a winning network of partners and building mutual loyalty.

Planet: Being a responsible global citizen that makes a difference.

BUSINESS STRATEGY

Business strategy is a long-range game plan of an organization and provides a road map of how to achieve the corporate mission.

Inputs to the business strategy are Assessment of global business conditions - social,

economic, political, technological, competitive Distinctive competencies or weaknesses - workers,

sales force, R&D, technology, management

FOUR STEPS FOR STRATEGY FORMULATION

Defining a primary task What is the firm in the business of doing?

Assessing core competencies What does the firm do better than anyone else?

Determining order winners and order qualifiers What wins the order? What qualifies an item to be considered for

purchase? Positioning the firm

How will the firm compete?

COMPETITIVE PRIORITIES

Low Production Costs Definition

Unit cost (labor, material, and overhead) of each product/service

Some Ways of Creating Redesign of product/service New technology Increase in production rates Reduction of scrap/waste Reduction of inventory

COMPETITIVE PRIORITIES: COST

Lincoln Electric

reduced costs by $10 million a year for 10 yearsskilled machine operators save the company millions that would have been spent on automated equipment

Southwest Airlines

one type of airplane facilitates crew changes, record-keeping, maintenance, and inventory costsdirect flights mean no baggage transfers$30 million annual savings in travel agent commissions by requiring customers to contact the airline directly


Delivery Performance Definition

a) Fast delivery b) On-time delivery Some Ways of Creating

a) larger finished-goods inventorya) faster production ratesa) quicker shipping methodsb) more-realistic promisesb) better control of production of ordersb) better information systems

COMPETITIVE PRIORITIES: SPEEDCiticorp

advertises a 15-minute mortgage approval

L.L. Bean ships orders the day they are received

Wal-Mart replenishes its stock twice a week

Hewlett-Packard produces electronic testing equipment in five days

Citicorp advertises a 15-minute mortgage approval

L.L. Bean ships orders the day they are received

Wal-Mart replenishes its stock twice a week

Hewlett-Packard produces electronic testing equipment in five days

General Electric reduces time to manufacture circuit-breaker boxes into three days and dishwashers into 18 hours

Dellships custom-built computers in two days

Motorola needs less than 30 minutes to build to order pagers

General Electric reduces time to manufacture circuit-breaker boxes into three days and dishwashers into 18 hours

Dellships custom-built computers in two days

Motorola needs less than 30 minutes to build to order pagers

COMPETITIVE PRIORITIES High-Quality Products/Services

Definition

Customers’ perception of degree of excellence exhibited by products/services

Some Ways of CreatingImprove product/service’s Appearance Performance and function Wear, endurance ability After-sales service

COMPETITIVE PRIORITIES: QUALITY

Ritz-Carlton - one customer at a time Every employee is empowered to satisfy a

guest’s wish Teams at all levels set objectives and devise

quality action plans Each hotel has a quality leader Quality reports tracks

guest room preventive maintenance cycles percentage of check-ins with no waiting time spent to achieve industry-best clean

room appearance Guest Preference Reports are recorded in a

database


Customer Service and Flexibility Definition

Ability to quickly change production to other products/services. Customer responsiveness.

Some Ways of Creating Change in type of processes used Use of advanced technologies Reduction in WIP through lean manufacturing Increase in capacity

COMPETITIVE PRIORITIES: FLEXIBILITY Andersen Windows

number of products offered grew from 28,000 to 86,000

number of errors are down to 1 per 200 truckloads Custom Foot Shoe Store:

customer’s feet are scanned electronically to capture measurements

custom shoes are mailed to the customer’s home in weeks

prices are comparable to off-the-shelf shoes National Bicycle Industrial Company

offers 11,231,862 variations delivers within two weeks at costs only 10% above

standard models

OPERATIONS STRATEGY

Operations strategy is a long-range game plan for the production of a company’s products/services, and provides a road map for the production function in helping to achieve the business strategy.

ELEMENTS OF OPERATIONS STRATEGY

Positioning the production system Product/service plans Outsourcing plans Process and technology plans Strategic allocation of resources Facility plans: capacity, location, and

layout

POSITIONING THE PRODUCTION SYSTEM

Select the type of product design Standard Custom

Select the type of production processing system Product focused Process focused

Select the type of finished-goods inventory policy Produce-to-stock Produce-to-order

PRODUCT/SERVICE PLANS

As a product is designed, all the detailedAs a product is designed, all the detailedcharacteristics of the product are established.characteristics of the product are established.

Each product characteristic directlyEach product characteristic directly affects how the product can be made.affects how the product can be made.

How the product is made determinesHow the product is made determines

the design of the production system.the design of the production system.

STAGES IN A PRODUCT’S LIFE CYCLE Introduction- Sales begin, production and

marketing are developing, profits are negative. Growth - sales grow dramatically, marketing

efforts intensify, capacity is expanded, profits begin.

Maturity - production focuses on high-volume, efficiency, low costs; marketing focuses on competitive sales promotion; profits are at peak.

Decline - declining sales and profit; product might be dropped or replaced.

STAGES OF A PRODUCT’S LIFE CYCLE

Introduction Growth Maturity DeclineIntroduction Growth Maturity Decline

B&W TVB&W TV

AutomobileAutomobile

Video RecorderVideo Recorder

CD PlayerCD PlayerColor CopierColor Copier

Cell PhoneCell Phone

Internet RadioInternet Radio

Fax MachineFax MachineDot-MatrixDot-Matrix PrinterPrinter

OUTSOURCING PLANS

Outsourcing refers to hiring out or subcontracting some of the work that a company needs to do.

This strategy is being used more and more as companies strive to operate more efficiently.

Outsourcing has many advantages and disadvantages. Companies try to determine the best level of out-

sourcing to achieve their operations & business goals. More outsourcing requires a company to have less

equipment, fewer employees, and a smaller facility.

OUTSOURCING PLANS

A company might outsource any of the following manufacturing related functions: Designing the product Purchasing the basic raw materials Processing the subcomponents, subassemblies,

major assemblies, and finished product Distributing the product

OUTSOURCING PLANS

Many companies even outsource some service functions such as: Payroll Billing Order processing Developing/maintaining a website Employee recruitment Facility maintenance

PROCESS AND TECHNOLOGY PLANS

An essential part of operations strategy is the determination of how products/services will be produced.

The range of technologies available to produce products/services is great and is continually changing.

STRATEGIC ALLOCATION OF RESOURCES

For most companies, the vast majority of the firm’s resources are used in production/operations.

Some or all of these resources are limited. The resources must be allocated to

products, services, projects, or profit opportunities in ways that maximize the achievement of the operations objectives.

FACILITY PLANS

How to provide the long-range capacity to produce the firm’s products/services is a critical strategic decision.

The location of a new facility may need to be decided.

The internal arrangement (layout) of workers, equipment, and functional areas within a facility affects the ability to provide the desired volume, quality, and cost of products/services.

COMPETITIVE PRIORITIES FOR SERVICES

The competitive priorities listed earlier for manufacturers apply to service firms as well Low production costs Fast and on-time delivery High-quality products/services Customer service and flexibility

Providing all the priorities simultaneously to customers is seldom possible.

POSITIONING STRATEGIES FOR SERVICES Type of Service Design

Standard or custom products Amount of customer contact Mix of physical goods and intangible services

Type of Production Process Quasi manufacturing Customer-as-participant Customer-as-product

POSITIONING STRATEGIES FOR SERVICES

Example: McDonald’s Highly standardized service design Low amount of customer contact Physical goods dominating intangible

services Quasi-manufacturing approach to back-room

production process

FORMING OPERATIONS STRATEGIESFORMING OPERATIONS STRATEGIES Support the product plans and

competitive priorities defined in the business strategy.

Adjust to the evolving positioning strategies.

Link to the marketing strategies. Look at alternative operations

strategies.

EVOLUTION OF POSITIONING STRATEGIES

The characteristics of production systems tend to evolve as products move through their product life cycles.

Operations strategies must include plan for modifying production systems to a changing set of competitive priorities as products mature.

The capital and production technology required to support these changes must be provided.

EVOLUTION OF POSITIONING STRATEGIES

VolumeVolumeVeryVeryLowLow

LowLow HighHighVeryVeryHighHigh

FocusFocus ProcessProcess ProcessProcess ProductProduct ProductProduct

Fin.Gds.Fin.Gds. To-OrderTo-Order To-OrderTo-Order To-StockTo-Stock To-StockTo-Stock

BatchBatchSizeSize

VeryVerySmallSmall

SmallSmall LargeLargeVeryVeryLargeLarge

ProductProduct CustomCustomSlightlySlightlyStandardStandard

StandardStandardHighlyHighly

StandardStandard

LifeLifeStageStage

Intro.Intro.EarlyEarly

GrowthGrowthLateLate

GrowthGrowthMaturityMaturity

LINKING OPERATIONS AND MARKETING STRATEGIES

Operations Strategy Product-focused Make-to-stock Standardized products High volume

Marketing Strategy Low production cost Fast delivery of products Quality

Example: TV sets


Operations Strategy Product-focused Make-to-order Standardized products Low volume

Marketing Strategy Low production cost Keeping delivery promises Quality

Example: School buses


Operations Strategy Process-focused Make-to-stock Custom products High volume

Marketing Strategy Flexibility Quality Fast delivery of products

Example: Medical instruments


Operations Strategy Process-focused Make-to-order Custom products Low volume

Marketing Strategy Keeping delivery promises Quality Flexibility

Example: Large supercomputers

NO SINGLE BEST STRATEGY

Start-up and Small ManufacturersUsually prefer positioning strategies with: Custom products Process-focused production Produce-to-order policiesThese systems are more flexible and require

lesscapital.


Start-up and Small ServicesSuccessfully compete with large corporations

by: Carving out a specialty niche Emphasizing close, personal customer

service Developing a loyal customer base


Technology-Intensive Business Production systems must be capable of

producing new products and services in high volume soon after introduction

Such companies must have two key strengths: Highly capable technical people Sufficient capital

Documents

Operations Strategies in a Global Economy. CountryMinimum Wage (per day) Approx. Value in US$ VietnamUS$ 2.40 IndiaUS$ 2.24 LuxembourgUS$ 14.24 (with