Learning outcomes

At the end of the session students should be able to:

Define operations management
Introduction to Explain the differences between goods and services
Define mission and strategy
Operations Management Define an operations strategy and its role as a source of
competitive advantage in a global marketplace
Identify and explain four global operations strategy options

What is operations management? Organising to produce goods and

services
Production is the creation of
goods and services To create goods and services all organisations
perform 3 essential functions:
Marketing – generates demand
– Takes order for product or service
Operations management
– Nothing happens until there is a sale
(OM) is the set of activities
Production/operations – creates the product
that creates value in the form
Finance/accounting – tracks how well the
of goods and services by
organisation is doing, pays bills, collects the
transforming inputs into
money
outputs

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 Why study OM?
OM is one of three major functions (marketing,
finance, and operations) of any organization
We want (and need) to know how goods and
services are produced
We want to understand what operations managers
do
OM is such a costly part of an organisation
Critical decisions of OM
Design of goods and services
– What good or service should we offer?
– How should we design these products and services?
Managing quality
– How do we define quality?
– Who is responsible for quality?
Process and capacity design
– What process and what capacity will these products require?
– What equipment and technology is necessary for these
processes?
Location strategy
– Where should we put the facility?
– On what criteria should we base the location decision?
Layout strategy
– How should we arrange the facility?
– How large must the facility be to meet our plan?

The critical decisions

Human resources and job design

– How do we provide a reasonable work environment?
– How much can we expect our employees to produce?
Supply chain management Significant events in
– Should we make or buy this component?
– Who are our suppliers and who can integrate into our e- Operations Management
commerce program?
Inventory, material requirements planning, and JIT
– How much inventory of each item should we have?
– When do we re-order?

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 Significant events in OM The heritage of OM

Division of labor (Adam Smith 1776; Charles Babbage

1852)
Standardised parts (Whitney 1800)
Scientific Management (Taylor 1881)
Coordinated assembly line (Ford/ Sorenson 1913)
Gantt charts (Gantt 1916)
Motion study (Frank and Lillian Gilbreth 1922)
Quality control (Shewhart 1924; Deming 1950)

The heritage of OM Eli Whitney

Born 1765; died 1825

Computer (Atanasoff 1938) In 1798, received government contract to make 10,000
CPM/PERT (DuPont 1957) muskets
Showed that machine tools could make standardized parts
Material requirements planning (Orlicky 1960)
to exact specifications
Computer aided design (CAD 1970) Musket parts could be used in any musket
Flexible manufacturing system (FMS 1975)
Baldrige Quality Awards (1980)
Computer integrated manufacturing (1990)
Globalization (1992)
Internet (1995)

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 Frederick W. Taylor
Born 1856; died 1915
Known as ‘father of scientific management’
In 1881, as chief engineer for Midvale Steel, studied how
tasks were done
Began first motion and time studies
Created efficiency principles
Henry Ford
Born 1863; died 1947
In 1903, created Ford Motor Company
In 1913, first used moving assembly line to make
Model T
– Unfinished product moved by conveyor past
work station
– Men stood still and material moved
Assembly line made possible the mass production
of complex consumer products
Frank & Lillian Gilbreth
Frank (1868-1924); Lillian (1878-1972)
Husband-and-wife engineering team
‘Father of motion study’ – Frank
– Principle that there is one best method to
perform task
Further developed work measurement methods
Applied efficiency methods to their home and 12
children!
Book & Movie: “Cheaper by the Dozen,” book:
“Bells on Their Toes”
W. Edwards Deming
Born 1900; died 1993
Engineer and physicist
Credited with teaching Japan quality control methods in
post-WW2
Used statistics to analyse process
His methods involve workers in decisions
Key is to practice continual improvement and think of
manufacturing as a system, not as bits and pieces
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 Characteristics of goods

Tangible product
Consistent product definition
Production usually separate from
consumption
Goods and Services Can be inventoried
Low customer interaction
Some aspects of quality are
measurable
Product is transportable
Often easy to automate

Characteristics of services Goods and services

Intangible product
Produced and consumed simultaneously Automobile
Often unique Computer
High customer interaction Installed carpeting
Fast-food meal
Inconsistent product definition
Restaurant meal/auto repair
Often knowledge-based so difficult to automate Hospital care
Frequently dispersed Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

% of product that is a good % of product that is a service

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 New trends in OM New trends in OM

Past Causes Future

From To
Local or national Local or Reliable worldwide Global focus,
Global focus national communication and moving
focus
Just-in-time focus transportation networks production
Batch (large) Supply chain offshore
shipments partnering Batch Short product life cycles Just-in-time
Low bid purchasing Rapid product (large) and cost of capital put performance
shipments pressure on reducing
Lengthy product development
inventory
development Mass customization
Low-bid Supply chain competition Supply chain
Standard products Empowered purchasing requires that suppliers be partners,
employees, teams engaged in a focus on the collaboration,
Job specialisation
end customer alliances,
outsourcing

New trends in OM New trends in OM

Past Causes Future Past Causes Future

Lengthy Shorter life cycles, Rapid product Low-cost Environmental issues, ISO Environmentally
product Internet, rapid international development, focus 14000, increasing disposal sensitive
development communication, computer- alliances, costs production, green
aided design, and collaborative manufacturing,
international collaboration designs recycled
Standardized Affluence and worldwide Mass materials,
products markets; increasingly customization remanufacturing
flexible production with added Ethics not Businesses operate more High ethical
processes emphasis on at forefront openly; public and global standards and
quality review of ethics; social
Job Changing socioculture; Empowered opposition to child labor, responsibility
specialization increasingly a knowledge employees, bribery, pollution expected
and information society teams, and lean
production

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 Global view of operations
Operations managers today must have a global view of
operations strategy
Advance in technology, reliable shipping and cheaper
communications – growth in world trade and global capital
markets – organizations are quickly extending their
Operations Strategy operations globally with innovative strategies
Globalization means that domestic (local) production and
exporting may no longer be a viable business model

Reasons to globalize 1. Reduce cost

Foreign locations with lower wage rates - lower direct and
6 main reasons domestic business operations decide to
indirect costs
change to some form of international operation, ranging
from tangible to intangible Less stringent regulations on wide variety of operations
practices - reduce costs
Cut cost of taxes and tariffs
Tangible Reasons to Globalise
Shifting low-skilled jobs to another country has several
Reasons 1. Reduce costs (labor, taxes, tariffs, etc.) potential advantages
2. Improve supply chain Trade agreements also helped to reduce tariffs thus reducing
3. Provide better goods and services cost of operating facilities in foreign countries
Intangible 4. Understand markets
Reasons 5. Learn to improve operations
6. Attract and retain global talent

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 2. Improve the supply chain
Supply chain can be improved by locating facilities
closer to where unique resources are available
– Auto design to California
– Perfume manufacturing in France
4. Understand markets
Interacting with foreign customers and suppliers can
lead to new opportunities
Knowledge of market helps firms understand where
market is going and also helps to diversify customer
base, production flexibility
Extend the product life cycle
3. Provide better goods and services
Characteristics of goods can be objective and measurable
(e.g. no of on-time deliverables) can also be subjective
and less measurable (e.g. sensitivity to culture)
– On-time deliveries
– Cultural variables
– Improved customer service
5. Learn to improve operations
Remain open to free flow of ideas
– General Motors partnered with a Japanese auto
manufacturer to learn – built auto assembly plant in
California
– Strategy allows GM to contribute capital and
knowledge of US labour laws – Japanese contributed
production and inventory ideas
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 6. Attract and retain global talent Cultural and ethical issues

Offer better employment opportunities

– Better growth opportunities and insulation Cultures can be quite different
against unemployment Attitudes can be quite different towards:
– Relocate unneeded personnel to more – Punctuality
prosperous locations – Lunch breaks
– Environment
– Intellectual property
– Thievery
– Bribery
– Child labour

Companies may wish to consider

National literacy rate Work ethic

Rate of innovation Tax rates
Rate of technology Inflation
change Availability of raw
Number of skilled materials Mission and strategy
workers Interest rates
Political stability Population
Product liability laws Number of miles of
Export restrictions highway
Variations in language Phone system

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 Developing mission and strategy Mission
Mission - where are you going?
Organization’s purpose for being
Mission statements tell an Answers ‘What do we provide society?’
organization where it is going Provides boundaries and focus

The Strategy tells the organization

how to get there

Example mission: FedEx Factors affecting mission

FedEx is committed to our People-Service-Profit philosophy. We will

produce outstanding financial returns by providing total reliable,
Philosophy
competitively superior, global air-ground transportation of high priority goods
and Values
and documents that require rapid, time-certain delivery. Equally important,
positive control of each package will be maintained using real time
electronic tracking and tracing systems. A complete record of each Profitability
shipment and delivery will be presented with our request for payment. We Environment and Growth
will be helpful, courteous, and professional to each other and the public.
We will strive to have a completely satisfied customer at the end of each Mission
transaction.

Customers Public Image

Benefit to
Society

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 Strategy Strategy in an organization
After mission is established – strategy implementation can
Corporate
begin strategy
Action plan to achieve mission
Functional areas have strategies
Strategies exploit opportunities and strengths, neutralize Business
strategy
threats, and avoid weaknesses

Functional
strategy

Marketing Operations
Financial

Strategies for competitive advantage 1. Competing on differentiation

Differentiation – concerned with providing uniqueness
Differentiation – better, or at least different
Distinguishing the offerings of an organisation in such a way
Cost leadership – cheaper that the customer perceives as adding value
Response – rapid response Uniqueness can go beyond both the physical characteristics
and service attributes to encompass everything that impacts
customer’s perception of value
– Service sector – one option for extending product
differentiation is through an experience
Experience differentiation – engaging customer with a
product through imaginative use of the 5 senses, so the
customer ‘experiences’ the product
– Walt Disney Magic Kingdom – experience differentiation

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 2. Competing on cost
Low-cost leadership – achieving maximum value as perceived
by customer
Does not imply low value or quality
One driver of low-cost strategy – facility that is effectively
utilised
Example:
Wal-Mart
– Superstores, open 24 hours a day
– Small overheads, shrinkage, distribution costs
– Rapid transportation of goods, reduced warehousing costs
and direct shipment from suppliers – high inventory
turnover – low cost-leader
Competitive dimensions
Cost or price – ‘Make the product or deliver the service
cheap’
Quality – ‘Make a great product or deliver a great service’
Delivery speed – ‘Make product or deliver the service
quickly’
Delivery reliability – ‘Deliver it when promised’
Coping with changes in demand – ‘Change its volume’
Flexibility and speed of new product introduction –
‘Change it’
3. Competing on response
Response – a set of value related to rapid, flexible, and
reliable performance
– Include entire range of values related to timely product
development and delivery, as well as reliable
scheduling and flexible performance
Flexibility is matching market changes in design innovation
and volumes
Reliability is meeting schedules
Timeliness is quickness in design, production, and delivery
Notion of trade-offs
Central to concept of operations strategy is the notion of
operations focus and trade-offs
Underlying logic – operations cannot excel simultaneously
on all competitive dimensions
So management has to decide which parameters of
performance are critical to firm’s success and then
concentrate resources on these
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 Order winners and order qualifiers Strategy development and
These are marketing-oriented dimensions that are key to implementation
competitive success
Order winner – criterion that differentiates
products/services of one firm from another Mission
– What gets you to win the business Internal External
Order qualifier – screening criterion that permits a firm’s Strengths Opportunities
products to even be considered as possible candidates for Analysis
purchase
Internal External
Weaknesses Threats
Strategy

Key success factors and core

Strategy development process
Environmental Analysis
Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.
Determine Corporate Mission
State the reason for the firm’s existence and identify the
value it wishes to create.
Form a Strategy
Build a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability,
after-sale service, broad product lines.
From this process the key success factors (KSFs) are identified
competencies
No firm can do everything exceptionally well so successful
strategy requires determining firm’s critical success factors
and core competencies
KSFs – activities or factors that are necessary for a firm to
achieve its goals and competitive advantage
Core competencies – the set of unique skills, talents, and
capabilities that a firm does at a world-class standard
Idea is to build KSFs and core competencies that provide a
competitive advantage and support a successful strategy
and mission
For the course we will look at the 10 OM decisions that
typically include the KSFs (not much focus on KSFs for
finance and marketing)

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 Global operations strategy options
Many operations strategies now require an international
dimension
Firm with international dimension is called international
business or a multinational corporation (MNC)
4 Global/International International business – any firm that engages in
Operations Strategy international trade or investment, cross-border transactions
MNC – firm with extensive international business involvement
Options Op managers of international and MNCs approach global
opportunities with1of 4 operations strategies:
– International
– Multi-domestic
– Global
– Transnational

Global operations strategy options 1. International strategy

High Global Transnational A strategy in which global markets are penetrated using
Strategy Strategy
• Move material, people or
exports and licenses
• Standardised product ideas across national borders Least advantageous - little local responsiveness and little
• Economies of scale • Economies of scale
• Cross-cultural learning • Cross-cultural learning cost advantage
Cost Reduction

E.g. Otis Elevator, E.g. Coca-Cola, Nestle Often the easiest as exports require little change in existing
Caterpillar
operations
Multidomestic
International Strategy Licensing agreements often leave much of the risk to the
Strategy licensee
• Use existing domestic model
• Import/export or license globally, decentralised control
existing product • Franchise, joint ventures,
subsidiaries
E.g. Harley-Davidson E.g. McDonald’s
Hard Rock Cafe
Low
Low High
Local Responsiveness
(Quick Response and/or Differentiation necessary for local market)

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 2. Multidomestic strategy 3. Global strategy
A strategy in which operating decisions are decentralised to A strategy in which operating decisions are centralised and
each country to enhance local responsiveness headquarters coordinates the standardisation and learning
Organisations are typically franchises or joint ventures with between facilities
substantial independence Appropriate when strategic focus is cost reduction, but not
Advantage – maximising competitive response for the local good to use if the demand for local responsiveness is high
market
Little or no cost advantage

4. Transnational strategy
A strategy that combines the benefits of global-scale
efficiencies with the benefits of local responsiveness
Transnational – condition in which material, people, and ideas
cross national boundaries
‘world companies’ whose country identity is not as important
as its interdependent network of worldwide operations
Resources and activities are dispersed but specialised
National identities of transnational companies continue to
fade

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