Operations Strategy and Competitiveness [OSAC] O Objectives S Strategies A Actions C Control Learning objectives What is Operations Strategy?

? Operations Competitive Dimensions Trade-Offs Order Winners and Qualifiers The Marketing-Operations Link The Corporate Strategy Design Process Strategic FitFitting Operational Activities to Strategy Developing a Manufacturing Strategy

Mission - Defines the fundamental purpose of an organization or an enterprise, succinctly describing why it exists Vision Where the organization wants to be in future
Strategy - how you are going to get there; an action plan

Disney - Mission : To make people happy" What is Strategy? Action plan to achieve mission Shows how mission will be achieved A company can have a business strategy Functional areas also have strategies

Strategy can be formulated on four different levels: Corporate, business unit, functional and department level Each is competitive and contributes to corporate purposes

Operational Effectiveness -Ability to perform similar activities better than the competitors Competitive Superiority - Sustainable Competitive Advantage Competitive priorities - Quality, cost, delivery, time, flexibility, service Order qualifier A threshold minimum characteristic that is necessary for the customer to even consider purchasing it. (Appearance, size, color,.) Order winner The characteristic that makes the customer choose the product over another. (Price, Service, Reliability, ..)

Steps in developing manufacturing strategy Segment the market according to the product group Identify product requirements, demand patterns, and profit margins of each group Determine order qualifiers and winners for each group Convert order winners into specific performance requirements 10 Strategic OM decisions Goods & service design Quality Process & capacity design Location selection Layout design Human resource and job design Supply-chain management Inventory Scheduling Maintenance Evolution of Operations Strategy Dealing with tradeoffs: Quality, cost, delivery and flexibility For example, if we reduce costs by reducing product quality inspections, we might reduce product quality. if we improve customer service problem solving by cross-training personnel to deal with a wider-range of problems, they may become less efficient at dealing with commonly occurring problems. Strategies for competitive advantage 1. Differentiation - Uniqueness can go beyond both the physical characteristics and service attributes to encompass everything that impacts customers perception of value 2. Cost leadership - Provide the maximum value as perceived by customer. Does not imply low value or low quality 3. Competing on response - Quick response - Flexibility, Reliability, Timeliness; Requires the ability to respond within the firm Strategy through capacity 1. Process Strategy - Capacities that transforms material or information and provide advantages on dimensions of cost and quality 2. System Strategy - Capacities that are broad-based involving the entire operating system and provide advantages of short lead times and customize on demand 3. Organization Strategy - Capacities that are difficult to replicate and provide abilities to master new technologies What is Capacity? Ability to hold, accommodate, store, or receive Capacity must also be related to the dimension of time Is a single measure good enough to describe capacity ? No. Because multiple types of outputs are possible from the same organization Take for example a hospital

Types of outputs possible are: Number of beds Number of operation theatres Ambulance facilities Outpatient treatment facilities, etc. Limitations on Capacity imposed by variety of restrictions Breakdowns Shutdown due to Maintenance Non-availability of key personnel due to absenteeism, sickness, leave,... Lack of coordination Types of capacity 1. Design capacity - Maximum obtainable output 2. Effective capacity - Maximum capacity given product mix, scheduling difficulties, and other doses of reality. 3. Actual output -Rate of output actually achieved--cannot exceed effective capacity. For example, consider: Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 trucks/day

Efficiency Utilization

Actual Output 36 trucks 90% Effective Capacity 40 trucks Actual Output 36 trucks 72 % Design Capacity 50 trucks

Consider Maruti Suzuki India Installed Capacity 600,000 Units, 2004-05 Output 536,301 Units

Capacity utilization =

536301 0.8938 or 89.38% 600000 Determinants of Effective Capacity Facilities Products or services Processes Human considerations Operations External forces
Capacity Planning Capacity is the upper limit or ceiling on the load that an operating unit can handle. The basic questions in capacity handling are: What kind of capacity is needed? How much is needed? When is it needed?

What is capacity planning? Estimating the capacities of the present facilities Forecasting the future capacity requirement Identifying and analyzing sources of capacity to meet future capacity needs Selecting among alternative sources of capacity How capacity planning helps? Establishes overall level of productive resources Determines when and how much to change capacity 1. Economies of scale - As the volume of output increases the average cost per unit of output drops. This is partially due to decline in operating cost and capital cost as they are spread over larger volumes 2. Economies of scope - This refers to the ability to produce many product models in one highly flexible production facility more cheaply than in separate production facilities. Forecast capacity = Market share X Demand (Adjusted for competitors' capacities, and stage in product life cycle) Capacity cushion - Is the additional amount of production capacity added to the expected demand To ensure extra capacity in case demand increases To absorb peak demand To lower production costs To provide volume and product flexibility To improve quality by decreasing tight schedules Capacity Expansion Volume & certainty of anticipated demand Strategic objectives for growth Costs of expansion & operation Incremental or one-step expansion Capacity expansion strategy 1) Capacity lead strategy -expand capacity in anticipation of growth 2) Capacity lag strategy - increase capacity after increase in growth 3) Average capacity strategy - expand capacity to coincide with average demand Add more Line Capacity to an existing plant. Build an entirely new plant in another country. Purchase from another firm in the industry if another firm wanted to sell off some of its capacity. New capacity can also be built from the ground up. This is the most common way to expand capacity because it puts more control in the expanders hands. Two general approaches in long range capacity planning: Invest in one large facility, which will have higher best operating level and grow with it Invest in small initial facility, and incrementally expand to match future capacity demands Capacity Planning Decisions - Analytical Techniques Breakeven Analysis, Decision Tree Analysis, Queuing Models, Simulation Linear Programming