Merged Strategy Lectures PDF

Circular Business Models and Business Model Innovation Lecture 6 Agenda ❑ Business Model Innovation ❑ Servitization and digital servitization ❑ Circular economy and circular business models ❑ John Deer Case Study ❑ Mural – Business Model Canvas ❑ The Business Model Transformation Board...

Circular Business Models and Business Model Innovation Lecture 6 Agenda ❑ Business Model Innovation ❑ Servitization and digital servitization ❑ Circular economy and circular business models ❑ John Deer Case Study ❑ Mural – Business Model Canvas ❑ The Business Model Transformation Board 2 Business Model Innovation Business conducted over Internet or e-business is unlike Porter’s Generic Strategies (Amit and Zott, 2001) 3 Business Model Configurational Approach External drivers Internal Business Model Configuration Value Value creation Capture Digital business environment Value Delivery Value Delivery – Products and services Value Creation – Resources and capabilities Value Capture – Profit formula 4 Servitization of manufacturing Increase competitiveness Firms started to favor outsourcing / externalization Increasingly global economy – pressure from lower cost economies; Focus on core competences Installed base argument: Trains 1/22; Customers are less competent to self- escalators 1/19; X-Ray equipment 1/44 service complex products Long-lasting product lifecycle CAPEX to OPEX Higher margins (e.g. spare parts) and Customers try to reduce the supplier stable revenue inflows base – one-stop-shop Philips provides Light as a Service to Schiphol Airport …to 5 The Myth about Rolls-Royce Stable revenues long-term revenues Airlines Lower servicing costs (optimize and control, capacity sharing across multiple contracts) Opportunity for innovation (improve efficiency and effectiveness on day-to-day basis) Improved customer acquisition and customer loyalty Cost savings (turning fixed costs into variable costs) Predictable costs (aligning the cost of engine servicing to the customer’s operational and revenue generating activities) Rolls-Royce Reduced investments costs (reduce capital tie-up in equipment) IoT 6 Rolls-Royce senior exclusive's quotes “We realized the potential of that service business and also we were getting lots of positive feedback from the shareholders and the stock-brokers were all saying: ”We like this”, because it’s a guaranteed long-term revenue stream that came to balance our long business cycles for a, because airlines plan their new aircraft and the acquisition of their engines many, many years in advance.“ “The first thing customer will say is ”Availability. Availability is everything.” “All value is instrumental for something else, you can only really analyze it within something else, a specific decision context” 7  Servitization as a transition servitization in terms of repositioning process along a product-service continuum (1) from product towards process- oriented services (2) from standardized towards customized services (3) from transactional towards relational services 8 Oliva and Kallenberg, 2003, Tukker, 2004  Outcome-based contracting OBC compensates the supplier based on the same outcome that the customer cares about (i.e., product utilization), and hence the supplier is motivated to increase product performance, associated with metrics such as product reliability and availability. OBC as a new business model The supplier no longer specify the individual components of a solution (e.g. machine and related services) but rather the desired outcome Value proposition Outcome The suppliers’ compensation / pricing is tied to successfully achieving this Business outcome Model Value capture Very often providing an outcome-based contract will extend beyond the resources and capabilities of the focal firms, they do not specify how the provider will orchestrate activities to delivery that value and they do not specify which resources and capabilities to use Value creation 9 Visnjic et al., 2017 Opening up the business model Internal activities are likely to emerge with extension of the scope of services, supplier activities are likely to materialize with time-frame and partner activities are likely to appear with more complex performance guarantees. In line with the market strategy shift/service portfolio extension, business model shift/activity system expansion begins with new internal activities and then increasingly ‘opens’ the activity system by including supplier and partner activities. 10 Visnjic et al., 2018 Digitalization of manufacturing Digitalization as an additional layer on top of servitization. Digitalization is the use of digital technology and applications to improve existing business processes and workforce efficiency, enhance customer experience, and launch new products or business models. Platform architecture is a collection of information technologies and systems that allows multiple stakeholders to orchestrate data collection, data flow and data commercialization. Platform sponsors owns or sponsors the platform. The core functionality of platform architecture is provided through modular architecture that consist of digital modules and interfaces through which they interoperate. 11 Product + Service + Digital 12 Example: ABB 13  We need an ecosystem perspective to make sense of competitive, relationship, and longer-term operations issues. Firm as a unit of analysis is NOT sufficient! 14  A Strategy Perspective on Adapting in the Age of Digital Ecosystems Digital business Business Model environment reconfiguration Balzano, Ciacci, Marzi, Jovanovic, Vlacic, & Dabic (2023) Digital Business Models: 15 A Strategy Perspective on Adapting in the Age of Digital Ecosystems Ericsson’s Corporate ecosystem 16 Digital Servitization https://www.emerald.com/insight/content/doi/10.1108/IJOPM-08-2020-0525/full/html 17 Digital Servitization Business Models in Ecosystems 18 https://www.sciencedirect.com/science/article/pii/S014829631930387X Circular Supply Chain The circular economy and circular supply chain refer to a transition from raw material to manufacturing center to distribution center to consumer to trash process. These are reverse processes Example: 19 Food Waste is breaking the planet’s boundaries https://www.youtube.com/watch?v=KGkeRpXNHSA 20 Circular Business Model Key strategies: - Retain Product Ownership (RPO) - Product Life Extension (PLE) - Design To Recycling (DTR) - Examples? 21 The Circularity Matrix The right strategy can be determined by how easily the manufacturer can get the product back and how easily value can be recovered from it. The challenges each company faces along each dimension will depend on its capabilities and competitive context and may change in response to innovations it and its competitors make. 22 Circular Business Models 23 https://onlinelibrary.wiley.com/doi/epdf/10.1002/bse.2891 Circular Business Model Transformation 24 Closed-loop supply chains 25 Business Model Canvas 26 1. Customer Segments For whom are we creating value? Who are our most important constituents? Variations: Business-to-Consumer; Bus.-to-Bus.; Bus.-to-Gov’t Mass Market / Niche Market Segmented; Diversified Multiple Decision-Makers: Economic Buyers, Gatekeepers, Actual Users Multi-Sided Platforms 27 2. Value Propositions What value do we deliver to our customers? Which of our customer’s problems are we helping to solve? What bundles of products and services are we offering to each customer? Which customer needs are we satisfying? Characteristics: Newness Performance Customization “Getting the Job Done” Design Value Propositions Brand/Status Price Cost Reduction Risk Reduction Accessibility Convenience / Usability 28 3. Customer Relationships What type of relationship does each of our Customer Segments expect us to establish and maintain with them? Which ones have we established? How are they integrated with the rest of our business model? How costly are they? Examples: Communities Automated Services Self-Service Co-creation 29 4. Channels Through which Channels do our Customers want to be reached? How are we reaching them now? How are our Channels integrated? Which ones work best? Which are most cost-efficient? How are we integrating them with our customer’s routines? Example: Online Retail App 30 5. Revenue Streams For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues? Types: Meeting fees, Usage fee, Subscription fees, Licensing Lending/Renting/Leasing, Brokerage fees, Advertising Fixed Pricing: List Price, Volume dependent, Product feature dependent, Customer segment dependent Dynamic Pricing: Negotiation (bargaining) Yield Management Real-time-Market 31 6. Key Activities What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams? Categories: Production Problem Solving Platform / Network 32 7. Key Resources What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams? Types of Resources: Physical Intellectual (brand patents, copyrights, data) Human Financial 33 8. Key Partners Who are our Key Partners? Who are our key suppliers? What Key Resources are we acquiring from them? What Key Activities do partners perform? Partner Candidates: Established Medical Firms Established Health Systems Ecosystem Service Providers Motivations for Partnerships: Promoting the Ecosystem Optimization and economy Reduction of risk and uncertainty Acquisition of particular resources and activities 34 9. Cost Structures What are the most important costs inherent in our business model? Which Key Resources are most expensive? Which Key Activities are most expensive? Is our business more: Cost-Driven (leanest cost structure, low-price value proposition) Value Driven (focused on value creation, premium value proposition) Sample Characteristics: Fixed Costs (salaries, rents, utilities) Variable costs Economies of scale Economies of scope 35 Business Model Innovation 36 SHORT BREAK 37 John Deer case study 38  The business transformation board Inclusiveness N Platform Solution BM Meridian business business model model W BM equator E Product Project business business model model S Customization Carsten Linz, Alexander Zimmermann, Günter Müller-Stewens (2017) Radical Business Model 39 Transformation, Kogan Product Business Model A product BM is characterized by standard products or services offered on a large scale and sold to many (often anonymous) customers in a stand-alone transaction. It follows the logic of ‘build a great product and win’. In the lower parts of the product BM box in figure a transaction ends immediately after the purchase of a product or service. Hence, vendors develop all kinds of strategies in order to make their offerings the customer’s favorite choice in the next transaction In order to increase inclusiveness while still following the logic of a product BM (upper half of the box) some vendors develop offerings with a built-in system logic (e.g. interlocking Lego) 40 Platform Business Model Standardization and large scale also characterize a platform BM. In contrast to the product system, where different components can be seamlessly connected to each other, a platform additionally serves as a foundation that architecturally integrates a comprehensive set of products and services, defines the rules and conditions for interactions – for example governance, workflows and processes – and enables the users by offering shared functions and tools rules and enables the users. The owners The providers The complementors The users 41 Project Business Model A project BM relies on highly customized products or services. These are typically developed by closely involving the customer during development and production. Engineering projects or an advisory group’s consulting project, which has no tangible product at all. Since the customer is usually free to change providers for subsequent transactions, service companies naturally target the development of close relationships with a client during a project and the cross-selling of other or future services. The advantages include the provider’s accumulation of customer- relevant knowledge through the collaboration during development and implementation (economies of scope), and the highly flexible cost structure with limited upfront investments. Disadvantages are the lack of scalability and leverage of the customer- specific service and the typically volatile revenues. 42 Solution Business Model A solution BM is characterized by the combination of a highly customized individual offering and a comprehensive scope of integrated products and services. These holistic solutions solve a customer’s problem holistically and include the project management along the entire life cycle (‘one-stop shop’). They tend to be co-created with the customer, which requires some upfront investments by the solution provider. At the same time, the fact that the provider often takes over entire value chain functions leads to a lock-in of the customer. This bi-directional dependency between a vendor and a customer creates significant stickiness and can lead to mutual long-term partnerships 43  The business transformation board West-east crossing - Come up with a broad, flexible and integrated service-centric offering Inclusiveness - Improve capability to process and implement customer requirements - Refocus attention to variable, engagement-related costs N North-south crossing Platform Solution BM Meridian South-north crossing business business - Find new business - Provide customer with model model opportunities for the superior end-to-end process firm’s products and by orchestrating and services integrating a holistic solution - Develop novel - Gain control over a leading W BM equator E competences that platform and architectural allow for a standard competitive edge in - Create continuous each individual consumption and revenue Product Project product or service streams from small recurring business business offering fees model model - Establish simpler, more cost- transparent pricing models S Customization East-west crossing Carsten Linz, Alexander Zimmermann, Günter - Come up with a new and better standard offering Müller-Stewens (2017) Radical Business Model 44 Transformation, Kogan - Transform services and content into reusable elements - Actively manage the fixed costs  Lecture 2, September 11, 2024 CSCAO1001U SUPPLY CHAIN OPERATIONS AND STRATEGY Juliana Hsuan Professor of Operations Management & Supply Chain Management Dept. of Operations Management Email: [email protected] Tel: 3815 2441 1 Today’s Topics  Homework 1  Business strategy & customer orientation  Operations strategy  Innovation management  SCM structure and process CSCAO1001U_Supply Chain Operations & Strategy 2 Juliana Hsuan 2 1 10 September 2024  Homework 1 1. Analyze the products/services identified in class or other products/services (with 2 or 3 representative companies) with the Four V’s. 2. Compare these products/services in terms of five performance objectives for competitiveness (i.e., quality, speed, dependability, flexibility, and cost effectiveness). You can also compare the products/services with those from countries you have traveled or lived. 3. Find a business‐to‐consumer website, formally list the ‘marketing’ promises which the website makes. What are operations and supply chain management implications of these promises? What will the company have to do in terms of inventory management, supply and demand management, warehouse locations, relationships with the suppliers, transportation, capacity management, services, and so on in order to fulfill its promises? CSCAO1001U_Supply Chain Operations & Strategy 3 Juliana Hsuan 3 CSCAO1001U_Supply Chain Operations & Strategy 4 Juliana Hsuan 4 2 10 September 2024  Strategic Decision Making  Time horizon  Scale of consequence  Scope of activity  Level of complexity  Level of certainty (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 5 Juliana Hsuan 5 What is Strategy? Strategy has been defined by Johnson et al. (2005) as: ‘the direction and scope of an organization over the long term which achieves advantage in a changing environment through its configuration of resources and competencies with the aim of fulfilling stakeholder expectations.’ Therefore decisions are made with the aim of:  providing a product or service that the customer wants in preference to all competitor products  guiding the organization throughout its lifetime by defining its scope of activity  configuring resources to carry out the required activity and so achieve greater market share and profits to satisfy those with a stake in the business (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 6 Juliana Hsuan 6 3 10 September 2024  Strategic Organizational Levels (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 7 Juliana Hsuan 7 Resources & Competitive Advantage For a resource to have the potential to result in some sort of competitive advantage it needs to have four attributes. These attributes were originally expressed by Barney (1991) as: Valuable Rare Imperfectly imitable Non‐substitutable (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 8 Juliana Hsuan 8 4 10 September 2024  Dynamic Processes Ambrosini and Bowman (2009) state that dynamic capabilities comprise four main processes: 1. Reconfiguration – the transformation and recombination of assets and resources. This may occur after a merger or acquisition, where the new shape will realize new synergies that previously didn’t exist 2. Leveraging – the replication of processes or systems across operational units 3. Learning – the increase in effectiveness and efficiency that is the outcome of reflection on failure and success 4. Integration – the pulling together of resources to create new competencies (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 9 Juliana Hsuan 9 The contribution of operations (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 10 Juliana Hsuan 10 5 10 September 2024  Performance Prioritizing (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 11 Juliana Hsuan 11 Performance criteria Performance against competition Importance to customer 1 Considerably better Provides a crucial advantage 2 Clearly better than Provides an important advantage 3 Marginally better than Provides a useful advantage 4 Sometimes better Needs to be above industry standards 5 Same Needs to meet industry standards 6 Slightly worse than some Needs to be on par with competition 7 Worse than most Not important but may become so in future 8 Worse than all Rarely considered by customers 9 Considerably worse than all Never considered by customers (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 12 Juliana Hsuan 12 6 10 September 2024  Trade-offs Operations systems are designed to do some things well but at the expense of others, i.e. one element of performance must be ‘traded‐off’ against another. Example trade‐offs might be:  Low price against available variety:  Systems that have to operate at low cost will normally be setup to produce a small number of configurations  Personalized attention against volume of customers:  A call center may set time limit targets for its operators specifying a maximum call length, which may force the operator to be dismissive with the customer, reducing the quality of the service experience (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 13 Juliana Hsuan 13 Customer Value Proposition A customer requires certain things from a product or service offering, and s/he might prioritize value in terms of: 1. Goals that the product or service may help them achieve 2. Desired consequences in use situations that will have an impact on goal achievement 3. Desired product and service attributes that will contribute to the desired consequence. (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 14 Juliana Hsuan 14 7 10 September 2024  Customer Value Elements (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 15 Juliana Hsuan 15 Value Disciplines Product Leadership  The focus here is on the ability to make products and deliver services that customers recognize as superior. Innovation is the key process, which relies on the talents and creativity of employees. Therefore research and development is the operational focus in the pursuit of the next breakthrough Operational Excellence  The focus here is on the lowest overall cost to the customer. The key point is that the overall cost to the customer does not consist only of the price paid. The concept of operational excellence is based upon the principles of efficiency Customer Intimacy  The focus here is to offer a total solution service to the customer. The value is therefore primarily in the overall service offered. Customer‐intimate organizations form strong relationships with their customers. They focus on learning as much as possible about the business of their customers so ensuring they can serve them in the most effective way (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 16 Juliana Hsuan 16 8 10 September 2024  Value Matrix (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 17 Juliana Hsuan 17 How can innovation be created and/or destroyed? How are markets created around innovation? How can competitive advantage be sustained? CSCAO1001U_Supply Chain Operations & Strategy 18 Juliana Hsuan 18 9 10 September 2024  CSCAO1001U_Supply Chain Operations & Strategy 19 Juliana Hsuan 19 CSCAO1001U_Supply Chain Operations & Strategy 20 Juliana Hsuan 20 10 10 September 2024  21 21 22 22 11 10 September 2024  CSCAO1001U_Supply Chain Operations & Strategy 23 Juliana Hsuan 23 CSCAO1001U_Supply Chain Operations & Strategy 24 Juliana Hsuan 24 12 10 September 2024  House made from recyclable materials CSCAO1001U_Supply Chain Operations & Strategy 25 Juliana Hsuan 25 CSCAO1001U_Supply Chain Operations & Strategy 26 Juliana Hsuan 26 13 10 September 2024  Outcomes of Innovation: The 4 Ps Product Innovations  These are changes in the things that the organization offers for sale. Such innovations enhance the utility of the physical product or the service offering, making the customer more likely to buy them Process Innovations  These are changes in the processes that create the product that is sold Position innovations  These are changes in the way the product or service offering is targeted. Put another way, it is the targeting of a product or service at a different use or customer base Paradigm Innovations (Paton et al. 2021)  These are changes in how companies might frame what they do CSCAO1001U_Supply Chain Operations & Strategy 27 Juliana Hsuan 27 The Innovation Lifecycle (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 28 Juliana Hsuan 28 14 10 September 2024  Stage 1: The Fluid Phase Initially, as a new technology emerges or a new idea for a product begins to take shape, there is a lot of uncertainty and this uncertainty can be categorized into:  the target – what the application of the technology will be  the technical – how the technology can be harnessed to meet this application This phase will be characterized by extensive experimentation and learning, and will end when the dominant design emerges. At the end of this stage the target will be defined, and the technical issues in relation to reaching that target should have been mostly overcome. The focus of innovation in this stage is very much on the technology and its application. (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 29 Juliana Hsuan 29 Stage 2: The Transitional Phase Here activity becomes less random and more planned with the product configuration becoming ready for sale. The focus of activity is on maturing the product platform by finalising functionality, and improving quality and reliability. Innovation in product and technology is becoming more incremental, aimed at squeezing in as much functionality as possible, and achieving the greatest degree of differentiation in the market. Innovation in process begins to become important as the ideas will partly define the operations and production processes. (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 30 Juliana Hsuan 30 15 10 September 2024  Stage 3: The Specific Phase The focus is now on cost, with innovative behaviour squarely aimed at the production process, realizing economies of scales and improving efficiency. The product is considered mature in the market hanging on to its position due to customer loyalty, low price and high quality. Despite continuing strong sales, at this stage the product will be ripe for replacement by a newer product. From a product development point of view, as time progresses, innovation will move from the radical to the incremental, with each successive innovation becoming less and less impactful as the ‘well of innovation’ dries up. From a process point of view, as the product becomes more mature the innovations that squeeze the final few drops of efficiency out of the manufacturing process may become more incremental. (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 31 Juliana Hsuan 31 VAG inter-firm product platform development High Audi TT Audi A3 Product price VW Golf Seat Leon Skoda Oktavia Low (Muffatto & Roveda 2000) Overall cost Generic Differentiation leadership strategy CSCAO1001U_Supply Chain Operations & Strategy 32 Juliana Hsuan 32 16 10 September 2024  Advantages of Platform Strategy  reduced development and manufacturing costs  reduced incremental costs of addressing the specific needs of a market segment  reduced fixed costs of developing individual product variants  reduced development time  reduced systemic complexity  improved ability to upgrade products  lowered investment risks  greater degree of component and subsystems reuse  increased responsiveness of partners and suppliers  higher product variety offered to customers (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 33 Juliana Hsuan 33 Key Decisions on Platform Configuration  how to make sure that the platform is compatible with complementary products  how to create technology competences that prevent imitation  how to share components and designs effectively  how to maintain platform leadership, that is, how to maintain its market leadership in its core technical area (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 34 Juliana Hsuan 34 17 10 September 2024  Platform management in SCM Platform FOCAL SUPPLIER SF interface FC interface CUSTOMER COMPANY Early Supplier Involvement Customization Mikkola, J.H. and Skjøtt‐Larsen, T. (2006) “Platform management: Implication for new product development and supply chain management,” European Business Review, Vol. 18 No. 3, pp. 214‐230. CSCAO1001U_Supply Chain Operations & Strategy 35 Juliana Hsuan 35 Firm-Supplier Interface  Early supplier involvement – Reduce development lead time – Improve performance – Access to supplier’s technical expertise & capabilities – Information sharing (Mikkola and Skjøtt‐Larsen 2006) CSCAO1001U_Supply Chain Operations & Strategy 36 Juliana Hsuan 36 18 10 September 2024  Firm-Customer Interface  Customization – Modularization – Degree of standardization – Postponement strategies (Mikkola and Skjøtt‐Larsen 2006) CSCAO1001U_Supply Chain Operations & Strategy 37 Juliana Hsuan 37 Supplier involvement in NPD impacts....  Supplier‐buyer relationships  Outsourcing  Supply chain performance  Supply chain design  Product architecture designs (Mikkola and Skjøtt‐Larsen 2006) CSCAO1001U_Supply Chain Operations & Strategy 38 Juliana Hsuan 38 19 10 September 2024  Supplier & Customer Involvement Points PLANNING DESIGN PRODUCTION DE Builds tests tests FUNCTIONAL DETAILED ENGINEERING SPECIFICATION Platform/architecture Product design design specifications Concurrent engineering Outsourcing decisions Sourcing and procurement decisions Design for manufacturability Supplier qualification (Mikkola and Skjøtt‐Larsen 2006) CSCAO1001U_Supply Chain Operations & Strategy 39 Juliana Hsuan 39 Designing services  Services as a system or an isolated function?  Front‐ and back‐office activities  Interactions between activities and processes  Value adding elements (Paton et al. 2021) CSCAO1001U_Supply Chain Operations & Strategy 40 Juliana Hsuan 40 20 10 September 2024  From component manufacturer to solution provider Type of Servitization Characteristics Examples The business model is still mainly Product related services geared towards sales of products, Advice and consultancy Product Oriented but some extra services are added The product stays in ownership Product lease with the provider, and is made Product renting or sharing Use Oriented available in a different form, and Product pooling sometimes shared by a number of users The client and provider in principle Activity Management/Outsourcing agree on a result, and there is no Pay per service unit Result Oriented pre‐determined product involved (Avlonitis et al. 2014) CSCAO1001U_Supply Chain Operations & Strategy 41 Juliana Hsuan 41 Value propositions and customer expectations Type of value Customer expectations Example proposition Selling an asset Quality and performance of Offer customized product equipment Providing recovery of Minimum disruption in case of Repair of equipment after an asset equipment failure notification Maximizing the Fault free equipment Provide remote and preventive availability of an asset maintenance Offering outcomes for Assisting customers to achieve their Take over customer the customer goals functions/activities A product goes into to the processes of the customer (Avlonitis et al. 2014) CSCAO1001U_Supply Chain Operations & Strategy 42 Juliana Hsuan 42 21 10 September 2024  Extending the value proposition through servitization (Avlonitis et al. 2014) CSCAO1001U_Supply Chain Operations & Strategy 43 Juliana Hsuan 43 PRODUCT SERVICE VW MQB Platform 44 Hsuan 2023 44 22 10 September 2024  PRODUCT SERVICE Ferrari SF71H 2018 45 Hsuan 2023 45 PRODUCT SERVICE DATA VW MQB Platform PRODUCT SERVICE Ferrari SF71H 2018 46 Hsuan 2023 46 23 10 September 2024  PRODUCT SERVICE DATA VW MQB Platform PRODUCT SERVICE Ferrari SF71H 2018 SUSTAINABILITY 47 Hsuan 2023 47 Activities and organizations in the supply chain (Hsuan et al. 2015) CSCAO1001U_Supply Chain Operations & Strategy 48 Juliana Hsuan 48 24 10 September 2024  Activity Flow and Supply Chain Structure (Hsuan et al. 2015) CSCAO1001U_Supply Chain Operations & Strategy 49 Juliana Hsuan 49 Building Structure To develop supply chain structure involves a series of steps: 1. Determine activity requirements to match the objectives of the supply chain. 2. Analyze the cost structures of these activities to establish potential economies of scale, scope and specialization. 3. Determine the optimal configuration of these activities in sequences and possible combinations in terms of market response and cost. 4. Define the core competencies of the firm in terms of their ability to achieve competitive advantage. 5. Identify and select organizations and their subcontractor organizations with the capability to manage these activities. 6. Negotiate with candidate firms to manage activities in logical groups to serve the supply chain as a whole. 7. Determine organizational requirements for coordination, measurement and control. 8. Determine forms of coordination that participating organizations will use, including management teams and information technology. (Hsuan et al. 2015) CSCAO1001U_Supply Chain Operations & Strategy 50 Juliana Hsuan 50 25 10 September 2024  In what ways do you think that servitization changes the supply chain management, in structure and process? Does IoT facilitate or hamper coordination of activities and organization? CSCAO1001U_Supply Chain Operations & Strategy 51 Juliana Hsuan 51 CSCAO1001U_Supply Chain Operations & Strategy 52 Juliana Hsuan 52 26 10 September 2024 Supply Chain Operations and Strategy 2024 Associate Professor Marin Jovanovic Managing Capacity, Project Management, and Sourcing Strategies Lecture 4 Agenda ❑ What is capacity management? ❑ What are capacity, demand and forecasting? ❑ How should the operation’s base capacity be set? ❑ What are the ways of coping with mismatches between demand and capacity? ❑ What is yield management? ❑ Lead times, work in progress, cycle time, takt time ❑ Project management ❑ Sourcing strategies and outsourcing ❑ Kraljic Matrix 2 Why worry about capacity management? “shooting flies with a cannon” 3 Capacity Management There are 3 main factors to consider when capacity planning for goods and services: Capacity is the ability to deliver/produce goods and services The maximum amount of units your factory can produce Demand for goods and services are determined by the market Forecast is match vs mismatch between capacity and demand Goal: You want to reach the equilibrium point. To achieve a match between the long-term supply of capacity of an organization and the predicted level of long-run demand. 4 Capacity planning Key questions: What kind of capacity is needed? How much capacity in needed to match the demand? When is it needed? Related question: How much will it cost? What are the potential benefits and risks? Are there sustainability issues? Should capacity be changed all the once, or though several smaller changes? Can the supply chain handle the necessary changes? 5 Capacity management framework Supply side Demand side Measure capacity to Measure demand to deliver product and deliver product and services services Understand the consequences of different capacity management decisions Manage the supply side Manage the demand side 6 What kind of capacity? I: Square feet of land I: Rooms available O: # of attendees I: Machine capacity O: # of gests/week O: Cars produced/month I: Machine hours available I: Number of seats available I: Consultants available O: Bottles filled/day O: Students on course O: Weddings per season 7 Capacity decision are strategic Capacity decision impact the ability of the organization to meet the future demands affect operating costs major determinants of initial cost and long-term commitment affect competitiveness affect financial and other resources 8 Capacity decision are strategic Measure aggregate demand and capacity Understand changes to demand and capacity Determine the operation’s base level of capacity Identify and select methods of coping with mismatches between demand and capacity Understand the consequences of different capacity decisions Forecast demand Aggregated output Estimate of current capacity 9 Time Examples Operation Input measure of capacity Output measure of capacity Air-conditioner Machine hours available Number of units per week plant Hospital Beds available Number of patients treated per week Theatre Number of seats Number of customers entertained per week University Number of students Students graduated per year Retail store Sales floor area Number of items sold per day Airline Number of seats available on Number of passengers per week the sector Electricity Generator size Megawatts of electricity company generated Brewery Volume of fermentation tanks Litres per week 10 Defining and measuring capacity Measure capacity in units that do not require updating Example: amount of iPhones you can manufacture per hour Two useful definition of capacity Design capacity The maximum output rate or service capacity an operation, process, or facility is designed for (engineering design) Effective capacity (real world) Design capacity minus allowances such as maintenance and other waste 11 Efficiency and utilization Actual output - The rate of output actually achieved - It cannot exceed effective capacity Efficiency is Actual output / Effective capacity X 100 (measured as percentage) Utilization is Actual output / Design capacity X 100 (measured as percentage) 12 Efficiency and utilization Actual output Efficiency = Effective capacity Planned loss Design of 59 hours capacity Avoidable loss – Effective 58 hours per capacity week 168 hours 109 hours Actual output – per week per week 51 hours per week Actual output Utilization= Design capacity 13 14 Capacity management vs inventory management 15 Zara example (1/3) Responsiveness slows rapidly at higher levels of capacity utilization slow Speed of Response fast 0.0 0.2 0.4 0.6 0.8 1.0 Capacity Utilization 16 Zara example (2/3) More SKUs, new products, uncertainty (i.e., more variability) aggravate this phenomenon Long Waiting Time Short 0.0 0.2 0.4 0.6 0.8 1.0 Capacity Utilization Maximizing capacity utilization of a system does NOT always increase output, service, and ultimately financial performance 17 Zara example (2/3) Long Lead Time Slow (or queues or inventories) Speed of Response Fast 0.0 0.2 0.4 0.6 0.8 1.0 Capacity Utilization 18 Factors driving increase and decrease of base level capacity 19 3 capacity strategies Surplus capacity leads demand capacity + ready to satisfy demand - risk of unused capacity (cost) capacity matches demand (tracking) + cost-benefit - relies heavily on forecasting capacity lags demand (following) + less risky (operational) - lost opportunities (inability to Lost revenue meet demand) 20 Ways of reconciling capacity and demand When an operation is planning how much capacity it needs, it must think about how it plans to react to the demand it faces. The operation must be aware of the options available to satisfy demand. There are three general strategies that can be used in the medium term: 21 Ways of reconciling capacity and demand How do you cope with fluctuations in demand? Absorb Adjust output Change Demand to match demand demand Level Demand capacity management Chase demand 22 1. Absorb demand Absorb demand Have excess capacity Keep output level Make Make to customer stock wait Part finished Queues Finished goods, or Backlogs Customer inventory 23 2. Adjust output to match demand Adjust output to match demand Hire Fire Temporary labour Lay-off Overtime Short time Subcontract Third-party work 24 3. Change demand Change demand Change pattern of demand. Develop alternative products and/or services. 25 Short term vs long term capacity 26 Yield management is a group of methods that assist an operation with fixed capacity to maximize its operational revenue and utility (e.g. hotels, with a fixed number of rooms, or airlines, with their fixed number of seats) Certain conditions enable companies to use yield management: Fixed capacity in the short and medium term ability to sell the service at different times to different customers, and in advance of the service being delivered A market that has diverse customer requirements A service that has some unique characteristics to avoid a homogeneous market (e.g. the destination or timing of an airline flight, or the facilities or location of a hotel) The three key strategies for maximizing revenue through yield management are: Overbooking - presumption that there will be some ‘no-shows’ (e.g. overbooking flights) Price discounting - aimed at optimizing the capacity at non-peak times (e.g. cheap flights) Varying the service type, and trying to ‘up-sell’ (e.g. stalls seat) 27 Capacity is crucial for the performance of transformation process Feedback Transforming resources Facilities Staff Processes of conversion Capital Manufacturing Services Input Output Transformed resources Products Materials Goods Information Services People Capacity determines the rate at which the operation can transform inputs into outputs and the quantity of a product or service that can be delivered within a given time period 28 We are interested in transformation processes Lead Time (is the time between the initiation and delivery of a work item) Takt time Transformation (working time available) (customer demand) (Work In Progress WIP) the number of work items in the system; Arrival rate Inputs work that has been started, but not yet Outputs completed Cycle time CT is the time between two successive deliveries (production net time available) (units produced) The takt/cycle times is important if you want to know if you can produce enough (to meet the customer’s demand). The lead time is important if you want to know if you can deliver on time. Takt time vs Cycle time Tak time, Cycle time and Lead time 31 Project management What is a project? A project is a set of activities with a defined start point and a defined end state, which a defined goal and uses a defined set of resources. Project strategy The project Project Phase 1 Phase 3 scope Project Phase 4 objectives Phase 2 Milestones 33 The Business of Projects 34 Differentiating projects using their volume and variety characteristics Repetitive 35 Differentiating projects by scale, complexity and uncertainty 36 Why are project started Market demand Electric cars Strategic opportunity or Training course business need Customer request Energy substation Technological advancement Foldable screens Legal Toxic materials requirement or GDPR 37 Project ends? Objectives are achieves Objective will not or cannot be met Need for project no longer exists Client wishes to terminate projects 38 Project management Project management Knowledge Skills Tools Techniques Project activities To achieve specific goals and specific success criteria To deliver on time and on budget results 39 3 objectives/ constrains ❑ Three most important project objectives (+ scope): Quality / Performance New aircraft project Music festival Fixed grant research project Cost Time 40 Six constrains: An enhanced model 41 The project environment The project environment consists of all the factors that can affect the project Geo-social Econo-political environment environment Geography Economy National culture Government The project Business Internal environment environment Customers Company strategy Competitors Resources Suppliers/sub- Other projects contractors 42 Two perspectives Internal Project Funding External Stakeholder Goals Individuals 43 The stakeholder power–interest grid 44 Three core componence of project success People Processes Technology + + The soft skills of Methods for Tools of project managing projects managing a project management, (e.g. steps) scheduling, cost, risks, reporting graphics 45 People: Belbin’s Team Roles 46 Project based organization 47 Matrix management Matrix management structures often result in staff reporting to more than one project manager as well as their own department… Full-time equivalent Department Department Department resource 1 2 3 Reporting relationship Project A Project B 48 WBS Work Breakdown Structure 49 Gant Charts A Gantt chart for the project to design an information interface for a new sales knowledge management system in an insurance company Activity a Form and train user group b Install systems c Specify sales training d Design initial screen interface e Test interface in pilot area f Modify interface 0 10 20 30 40 50 60 50 Time (days) Critical Path Method 51 Outsourcing Procurement: three decision areas 1. Make or buy decision 2. Customer supplier relationship 3. Supply-base structure Global trends: - Increased outsourcing - Global sourcing - JIT purchasing - Green supply chain (circular economy) and reverse logistics - Digitalization 53 Outsourcing Outsourcing: transfer of certain activities (often the management and delivery of a process the company used to do itself) to ‘third parties’ due to cost reasons increased flexibility focus on own core competencies advances in technology sharing risk providing better service to customers Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company's own employees and staff. 54 Outsourcing process A simple decision logic of outsourcing process 55 Outsourcing: How does it work? Service level agreement: contract containing performance metrics Order qualifiers: minimum requirements for the supplier Order winners: criteria why the supplier is in the end selected The supplier selection process: 56 Outsourcing: Supplier selection in detail 57 More to it 58 Outsourcing – a risky business 59 Customer relationship management (CRM) 60 Outsource vs Offshore Offshoring: transfer of specific processes to lower cost locations abroad due to lower cost in offshore regions differences in regulations in offshore regions improving capabilities in offshore regions lower communication and IT cost deregulation of trade time-zones 61 Outsourcing vs offshoring 62 Sourcing strategy Sourcing strategy concerns deciding how to configure the supply network. A) Multiple sourcing B) Single sourcing C) Delegated sourcing D) Parallel sourcing A) B) C) D) 63  Supply Base Structure - Rationalization Trend from 1990s onwards Reducing number of suppliers Increase supply chain integration – working more with fewer suppliers Think: Strategy-wise risky as we have a few suppliers we are depended on. Indirect Think: Strategy-wise easier but costly as we have a massive cost supplier base Strategic Strategic Tactical Tactical Operational Operational Think: Operations-wise we only a few connections to manage. Direct Think: Operations-wise we cost 64 have many connections to manage. Making the sourcing strategy decision What is the risk in the supply market? 65 Kraljic Matrix 66  Purchasing portfolio analysis High Leverage products Strategic products alternative sources of critical for product’s cost price supply available dependence on supplier substitution possible Purchasing’s Performance based impact on partnership Competitive bidding financial results Routine products Bottleneck products large product variety monopolistic market high logistics complexity large entry barriers labor intensive Systems contracting + Secure supply + search E-Procurement solutions for alternatives Low Low Supply risk High 67 Partnership Objective create mutual commitment in long-term relationship Suitable for strategic products (gearboxes, axles, optics, engines) Activities: ◼ accurate forecast of future requirements ◼ supply risk analysis ◼ careful supplier selection ◼ ‘should cost’ analysis ◼ rolling materials schedules ◼ effective change order procedure ◼ vendor rating Decision level ◼ board level ◼ Cross- functional approach 68 Competitive bidding Objective ◼ obtain ‘best deal’ for short term Suitable for ◼ leverage products (commodities, steel plate, wire) Activities: ◼ improve product/market development ◼ search for alternative products/suppliers ◼ reallocate purchasing volumes over suppliers ◼ optimize order quantities ◼ ‘target pricing’ Decision level ◼ board level ◼ purchasing 69 Secure supply Objective ◼ secure short- and long-term supply ◼ reduce supply risk Suitable for ◼ bottleneck products (natural flavors, vitamins, pigments) Activities: ◼ accurate forecast of future requirements ◼ supply risk analysis ◼ determine ranking in supplier’s client list ◼ develop preventative measures (buffer stock, consigned stock, transportation) ◼ search for alternative products/ suppliers Decision level ◼ purchasing ◼ cross functional approach 70 Category management and e-procurement solutions Objective ◼ reduce logistics complexity ◼ improve operational efficiency ◼ reduce number of suppliers Suitable for ◼ routine products (consumables, supplies) Activities: ◼ subcontract per product group/ product family ◼ standardize product assortment ◼ design effective internal order delivery and invoicing procedures ◼ delegate order handling to internal user Decision level ◼ purchasing ◼ cross functional approach 71 Kraljic Quiz (see Canvas) 72 Supply Chain Operations & Strategy 2024 Associate Professor Marin Jovanovic Servitization, process design, layout, and performance management Lecture 7 Agenda Essential readings ❑ PART 1: Process design ❑ PART 2: CASE ARAPU ❑ Part 3: Layouts ❑ Part 4: Performance measurement Chapter 5 and 12 2 Introduction ▪ Business process: a sequence of tasks to get things done ▪ System: a complex whole, the functioning of which depends on its parts and the interactions between those parts Holistic thinking/holism: considering a system to be more than a sum of its parts All business processes are systems … 3 Design or product/services and processes Designing the Designing the product or services processes 4 The impact of performance objectives on design Performance Typical process design objectives objective Provide appropriate resources, capable of achieving the specification of product of Quality services Error-free processing Minimum throughput time Output rate appropriate for demand Speed Dependability Provide dependable process resources Reliable process output timing and volume Provide resources with an appropriate range of capabilities Flexibility Change easily between processing states (what, how or how much is being processed?) Appropriate capacity to meet demand Eliminate process waste in terms of, excess capacity Cost excess process capability in-process delays in-process errors inappropriate process inputs Minimize energy usage Sustainability Reduce local impact on community Produce for easy assembly 5 Processes 6 Designing processes There are different process types Process types are defined by volume and variety of items they process Process types do by different names depending on whether they product products or services 7 Project processes ❑ One-off, complex, large scale, high work content ‘products’. ❑ Specifically made, ‘every one customized’. ❑ Defined start and finish: time, quality and cost objectives. ❑ Many different skills have to be coordinated. 8 Jobbing processes ❑ Very low quantities: ‘one-offs’, or only a few required. ❑ Specifically made products with high variation and low repetition. ❑ Skill requirements are usually very broad. ❑ Skilled jobber, or team, complete whole product. ❑ Example: specialist tool maker, tailor 9 Batch processes ❑ Larger volumes and lower variety than for jobbing. ❑ Products are produced in “batches”, fairly repetitive and standard. ❑ Wider range of volume and variety levels. ❑ Set-ups (changeovers) at each stage of production. ❑ Examples: Gourmet frozen food, component parts 10 Mass (Line) processes ❑ Higher volumes than batch. ❑ Narrow variety in the fundamental product design. ❑ Repetitive. ❑ Lower and often more focused competence in those adding value. ❑ Often called “line” ❑ Examples: assembly lines for automobile, television factories, frozen food production 11 Continuous processes ❑ Extremely high volumes and low variety – often only one product. ❑ Capital-intensive and fully automated. ❑ Expensive and difficult to start and stop the process. 12 Summary - Types of Processes ▪ Continuous - products or services are made continuously and highly standardized ▪ Water, electricity, oil ▪ Assembly Lines - deliver discrete products, are efficient at high volumes ▪ Cars, army induction, computers, mobile phones ▪ Batch - batches (or ‘lots’) of alike work produced together; a variety of outputs is delivered ▪ Furniture, tutorials, varieties of bread ▪ Job Shop - a very adaptable and highly skilled work cell that may deliver an entire product ▪ Machine components, specialised surgeries ▪ Project - used for large, unique products and services ▪ Large sporting events, bridges, hospitals 13 Volume and Variety 14 What about service processes? 15 New service development cycle NSD cycle: design, analysis, development and full launch 16 Service Process matrix Service industry classification developed by Schmenner (1986) 17 So what about services? 18 The natural line of fit of process to volume/variety characteristics 19 Product-process matrix 20 Processes Mapping ▪ There are many tools that can help us understand the complexities of process design and redesign. ▪ Many of these build on systems thinking, and focus on helping to develop a picture of the overall process ▪ usually to help improve delivery of service, flow of information and management of materials ▪ Questions to ask when designing and analysing processes: Is the process aligned with organizational strategy in order to achieve competitive advantage in terms of differentiation, response or low cost? Has the process got any non-value-adding steps that need to be eliminated? Does the process maximize customer value as perceived by the customer? Will the process help win orders? ▪ We shall now consider a few of these process-mapping tools, each of which has a slightly different purpose… 21 Flow Diagram ▪ Flow diagram - a drawing used to analyse the flow of people and materials 22 Swim Lane Diagram ▪ Swim Lane Diagram - most useful for process problems associated with functional divisions and waiting time 23 Process Chart ▪ Process Chart - a general-purpose table, that uses symbols, time and distance to analyse and record process activities 24 Service Blueprint ▪ Service Blueprint - focuses on the customer, the provider’s interaction with the customer, and on the activities of the provider 25 Value Stream Mapping – Current State ▪ Value stream map - requires a current state map to be produced, showing any present inefficiencies in the process, and a future state map that proposes waste reduction 1. Select a product or service family to focus on; (e.g. hotel, or a postal service). 2. Capture the customer order requirements. 3. Starting at the end of the process, define each of the separate tasks, and measure their cycle time. 4. It is also useful to collect other performance measures in the data boxes, such as: ▪ changeover time ▪ up-time ▪ number of people required for each task ▪ overall equipment effectiveness (OEE) of a machine, or the overall professi