Operations Strategy & Productivity PDF

CHAPTER TWO: OPERATIONS STRATEGY & PRODUCTIVITY 1. INTRODUCTION All business organizations are concerned with how they will survive and prosper in the future. A business strategy is often thought of as a plan or set of intentions that will set the long-term direction of the actions that are needed t...

CHAPTER TWO: OPERATIONS STRATEGY & PRODUCTIVITY 1. INTRODUCTION All business organizations are concerned with how they will survive and prosper in the future. A business strategy is often thought of as a plan or set of intentions that will set the long-term direction of the actions that are needed to ensure future organizational success. An organization’s strategy can only become a meaningful reality, in practice, if it is operationally enacted. An organization’s operations are strategically important precisely because most organizational activity comprises the day-to-day activities within the operations function. It is the countless of daily actions of operations, when considered in their totality that constitute the organization’s long-term strategic direction. Many people think that operations management is only concerned with short-term, day-to-day, tactical issues. This represents a short sight for conducting business. Accordingly, this chapter will seek to correct that view by considering the strategic importance of operations within any organization. It will develop the theme of how operations management must be seen in terms of strategic importance and how strategies have to be in place if the organization wants to be able to compete in the modern business world. 2. WHY DO SOME ORGANIZATIONS FAIL? Organizations may fail, or perform poorly, for a variety of reasons. Being aware of those reasons can help managers avoid making similar mistakes. Among the chief reasons are the following: 1- Neglecting operations strategy. 2- Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive threats. 3- Putting too much emphasis on short-term financial performance at the expense of research and development. 4- Placing too much emphasis on product and service design and not enough on process design and improvement. 5- Neglecting investments in capital and human resources. 6- Failing to establish good internal communications and cooperation among different functional areas. 7- Failing to consider customer wants and needs. In order to successfully compete, organizations must determine what customers want and then direct efforts toward meeting (or even exceeding) customer expectations. Two basic issues must be addressed; First: What do the customers want? (Which items on the preceding list of the ways business organizations compete are important to customers?) Second: What is the best way to satisfy those wants? The operations function lies at the heart of any organization and interacts with all the other functions. As such, achieving agreement about what decision areas lie within the remit of operations, and what should be the basis of decision-making within operations is an essential part of ensuring the consistency of action over time necessary for a successful organizational strategy. Therefore, operations must work in align with marketing and other functions to obtain information on the relative importance of the various items to each major customer or target market. (Press to learn more) 3. COMPETITIVENESS Organizations must be competitive to sell their goods and services in the marketplace. Competitiveness is an important factor in determining whether an organization prospers, barely gets by, or fails. Business organizations compete through some combination of price, delivery time, and product or service differentiation. Marketing influences competitiveness in several ways, including identifying consumer wants and needs, pricing, and advertising and promotion. - Identifying consumer wants and/or needs is a basic input in an organization’s decision- making process, and central to competitiveness. The ideal is to achieve a per fect match between those wants and needs and the organization’s goods and/or services. - Price and quality are key factors in consumer buying decisions. It is important to understand the trade-off decision consumers make between price and quality. - Advertising and promotion are ways organizations can inform potential customers about features of their products or services and attract buyers. Operations, on the other hand, has a major influence on competitiveness through product and service design, cost, location, quality, response time, flexibility, inventory and supply chain management, and service. Many of these are interrelated. - Product and service design should reflect joint efforts of many areas of the firm to achieve a match between financial resources, operations capabilities, supply chain capabilities, and consumer wants and needs. Special characteristics or features of a product or service can be a key factor in consumer buying decisions. Other key factors include innovation and the time-to-market for new products and services. - Cost of an organization’s output is a key variable that affects pricing decisions and prof its. Cost- reduction efforts are generally ongoing in business organizations. Productivity (discussed later in the chapter) is an important determinant of cost. Organizations with higher productivity rates than their competitors have a competitive cost advantage. A company may outsource a portion of its operation to achieve lower costs, higher productivity, or better quality. - Location can be important in terms of cost and convenience for customers. Location near inputs can result in lower input costs. Location near markets can result in lower transportation costs and quicker delivery times. Convenient location is particularly important in the retail sector. - Quality refers to materials, workmanship, design, and service. Consumers judge qual ity in terms of how well they think a product or service will satisfy its intended purpose. Customers are generally willing to pay more for a product or service if they perceive the product or service has a higher quality than that of a competitor. - Quick response can be a competitive advantage. One way is quickly bringing new or improved products or services to the market. Another is being able to quickly deliver existing products and services to a customer after they are ordered, and still another is quickly handling customer complaints. - Flexibility is the ability to respond to changes. Changes might relate to alterations in design features of a product or service, or to the volume demanded by customers, or the mix of products or services offered by an organization. High flexibility can be a competitive advantage in a changeable environment. - Inventory management can be a competitive advantage by effectively matching supplies of goods with demand. - Supply chain management involves coordinating internal and external operations (buyers and suppliers) to achieve timely and cost-effective delivery of goods throughout the system. - Service might involve after-sale activities customers perceive as value added, such as delivery, setup, warranty work, and technical support. Or it might involve extra attention while work is in progress, such as courtesy, keeping the customer informed, and attention to details. Service quality can be a key differentiator; and it is one that is often sustainable. Moreover, businesses rated highly by their customers for service quality tend to be more profitable, and grow faster, than businesses that are not rated highly. (Press to learn more) 4. THE NATURE OF STRATEGY Strategy can be defined as “the direction and scope of an organization over the long-term, which achieves advantage in a changing environment through its configuration of resources with the aim of fulfilling stakeholder expectations”. In its determination of the long-term direction of an organization, strategy involves the interplay of three elements: (1) the organization’s external environment, (2) its resources and (3) its objectives (in meeting the expectations of its stakeholders). Operations management is principally concerned with the organizational resources. However, the way that the operations function manages resources will impact both the way that the organization interacts with its external environment and its ability to meet the needs of its stakeholders. Thus, operations management is an integral part of an organization’s strategy. Strategy can be considered to exist at three levels in an organization: 1- Corporate level strategy: Corporate level strategy is the highest level of strategy. It sets the long-term direction and scope for the whole organization. If the organization comprises more than one business unit, corporate level strategy will be concerned with what those businesses should be, how resources (e.g. cash) will be allocated between them, and how relationships between the various business units and between the corporate center and the business units should be managed. Organizations often express their strategy in the form of a corporate mission or vision statement. 2- Business level strategy: Business level strategy is primarily concerned with how a particular business unit should compete within its industry, and what its strategic aims and objectives should be. Depending upon the organization’s corporate strategy and the relationship between the corporate center and its business units, a business unit’s strategy may be constrained by a lack of resources or strategic limitations placed upon it by the center. In single business organizations, business level strategy is synonymous with corporate level strategy. 3- Functional level strategy: The bottom level of strategy is that of the individual function. These strategies are concerned with how each function contributes to the business strategy, what their strategic objectives should be and how they should manage their resources in pursuit of those objectives. 5. MISSION AND STRATEGIES An organization’s mission is the reason for its existence. It is expressed in its mission statement. For a business organization, the mission statement should answer the question “What business are we in?” Missions vary from organization to organization, depending on the nature of their business. A mission statement serves as the basis for organizational goals, which provide more detail and describe the scope of the mission. The mission and goals often relate to how an organization wants to be perceived by the general public, and by its employees, suppliers, and customers. Goals serve as a foundation for the development of organizational strategies. These, in turn, provide the basis for strategies and tactics of the functional units of the organization. (Press to learn more) Organizational strategy is important because it guides the organization by providing direction for, and alignment of, the goals and strategies of the functional units. Moreover, strategies can be the main reason for the success or failure of an organization. There are three basic business strategies: (Press to learn more) Low cost. Responsiveness. Differentiation from competitors. Responsiveness relates to ability to respond to changing demands. Differentiation can relate to product or service features, quality, reputation, or customer service. Some organizations focus on a single strategy while others employ a combination of strategies. One company that has multiple strategies is Amazon.com. Not only does it offer low cost and quick, reliable deliveries, it also excels in customer service. 6. STRATEGIC MANAGEMENT FRAMEWORK The basic framework of strategic management involves five stages: Stage 1: In this stage, organizations conduct analysis of their present situation in terms of their Strengths, Weaknesses, Opportunities and Threats (SWOT). Stage 2: In this stage, organizations setup their missions, goals and objectives by analyzing where they want to go bin future. Stage 3: In this stage organizations examine various strategic alternatives to achieve their goals and objectives. The alternatives are analyzed in terms of what business portfolio/product mix to adopt, expansion, merger, acquisition and divestment options etc. are analyzed to achieve the goals. Stage 4: In this organizations select the best suitable alternatives in line with their SWOT analysis Stage 5: This is implementation stage in which organizations implement and execute the selected alternatives to achieve their strategic goals and objectives.(Press to learn more) 6.1. The Strategic Management Process: An Example The Higher Institute for Tourism & Hotels as an example: Mission: - Broad à contributing to the development of education and tourism. - Narrow à qualifying graduates for jobs in hotels and tour guiding. Objectives: - Obtaining 15% Return on Investment (ROI) by the end of 2023. Strategies: - Increase the number of admissions. - Increase tuitions by 10%. - Reduce costs. 6.2. Strategy Formulation Strategy formulation is almost always critical to the success of a strategy. To formulate an effective strategy, senior managers must take into account the core competencies of the organizations, and they must scan the environment. They must determine what competitors are doing, or planning to do, and take that into account. They must critically examine other factors that could have either positive or negative effects. This is sometimes referred to as the SWOT approach (strengths, weaknesses, opportunities, and threats). Strengths and weaknesses have an internal focus and are typically evaluated by operations people. Threats and opportunities have an external focus and are typically evaluated by marketing people. SWOT is often regarded as the link between organizational strategy and operations strategy. Important factors may be internal or external. The following are key external factors: - Economic conditions. These include the general health and direction of the economy, inflation and deflation, interest rates, tax laws, and tariffs. - Political conditions. These include favorable or unfavorable attitudes toward business, political stability or instability, and wars. - Legal environment. This includes antitrust laws, government regulations, trade restrictions, minimum wage laws, product liability laws and recent court experience, labor laws, and patents. - Technology. This can include the rate at which product innovations are occurring, current and future process technology (equipment, materials handling), and design technology. - Competition. This includes the number and strength of competitors, the basis of competition (price, quality, special features), and the ease of market entry. - Markets. This includes size, location, brand loyalties, ease of entry, potential for growth, long-term stability, and demographics. The organization also must take into account various internal factors that relate to possible strengths or weaknesses. Among the key internal factors are the following: - Human resources. These include the skills and abilities of managers and workers, special talents (creativity, designing, problem solving), loyalty to the organization, expertise, dedication, and experience. - Facilities and equipment. Capacities, location, age, and cost to maintain or replace can have a significant impact on operations. - Financial resources. Cash flow, access to additional funding, existing debt burden, and cost of capital are important considerations. - Customers. Loyalty, existing relationships, and understanding of wants and needs are important. - Products and services. These include existing products and services, and the potential for new products and services. - Technology. This includes existing technology, the ability to integrate new technology, and the probable impact of technology on current and future operations. - Suppliers. Supplier relationships, dependability of suppliers, quality, f lexibility, and service are typical considerations. - Other. Other factors include patents, labor relations, company or product image, distribution channels, relationships with distributors, maintenance of facilities and equipment, access to resources, and access to markets. (Press to learn more) In formulating a successful strategy, organizations must take into account both order qualifiers and order winners. Order qualifiers are those characteristics that potential customers perceive as minimum standards of acceptability for a product to be considered low purchase. However, that may not be sufficient to get a potential customer to purchase from the organization. Order winners are those characteristics of an organization’s goods or services that cause them to be perceived as better than the competition. Characteristics such as price, delivery reliability, delivery speed, and quality can be order qualifiers or order winners. Thus, quality may be an order winner in some situations, but in others only an order qualifier. Over time, a characteristic that was once an order winner may become an order qualifier, and vice versa. Obviously, it is important to determine the set of order qualifier characteristics and the set of order winner characteristics. It is also necessary to decide on the relative importance of each characteristic so that appropriate attention can be given to the various characteristics. Marketing must make that determination and communicate it to operations. Another key factor to consider when developing strategies is technological change, which can present real opportunities and threats to an organization. Technological changes occur in products (high-definition TV, improved computer chips, improved cellular telephone systems, and improved designs for earthquake-proof structures); in services (faster order processing, faster delivery); and in processes (robotics, automation, computer-assisted processing, point-of-sale scanners, and flexible manufacturing systems). The obvious benefit is a competitive edge; while the risk is that incorrect choices, poor execution, and higher-than expected operating costs will create competitive disadvantages. 7. OPERATIONS STRATEGY The organization strategy provides the overall direction for the organization. It is broad in scope, covering the entire organization. Operations strategy is narrower in scope, deal ing primarily with the operations aspect of the organization. Operations strategy relates to products, processes, methods, operating resources, quality, costs, lead times, and scheduling. In order for operations strategy to be truly effective, it is important to link it to organization strategy; that is, the two should not be formulated independently. Rather, formulation of organization strategy should take into account the realities of operations’ strengths and weaknesses, capitalizing on strengths and dealing with weaknesses. Similarly, operations strategy must be consistent with the overall strategy of the organization, and with the other functional units of the organization. In other words, operations strategy has a vertical relationship in the corporate hierarchy with business and corporate strategies, and horizontally with the other functional strategies (e.g. marketing, finance, human resources, etc.). This requires that senior managers work with functional units to formulate strategies that will support, rather than conflict with, each other and the overall strategy of the organization. As obvious as this may seem, it doesn’t always happen in practice. Instead, we may find power struggles between various functional units. These struggles are detrimental to the organization because they pit functional units against each other rather than focusing their energy on making the organization more competitive and better able to serve the customer. Some of the latest approaches in organizations, involving teams of managers and workers, may reflect a growing awareness of the synergistic effects of working together rather than competing internally. 7.1. Strategic Operations Management Decision Areas Operations management people play a strategic role in many strategic decisions in a business organization. Table 2.1 highlights some key decision areas. Notice that most of the decision areas have cost implications. Table 2.1. Key Decision Areas 7.2. Quality and Time Strategies Two factors that tend to have universal strategic operations importance relate to quality and time. The following section discusses quality and time strategies. Traditional strategies of business organizations have tended to emphasize cost minimization or product differentiation. While not abandoning those strategies, many organizations have embraced strategies based on quality and/or time. Quality-based strategies focus on maintaining or improving the quality of an organization’s products or services. Quality is generally a factor in both attracting and retaining customers. Quality- based strategies may be motivated by a variety of factors. They may reflect an effort to overcome an image of poor quality, a desire to cattish up with the competition, a desire to maintain an existing image of high quality, or some combination of these and other factors. Interestingly enough, quality-based strategies can be part of another strategy such as cost reduction, increased productivity, or time, all of which benefit from higher quality. Time- based strategies focus on reducing the time required to accomplish various activi ties (e.g., develop new products or services and market them, respond to a change in customer demand, or deliver a product or perform a service). By doing so, organizations seek to improve service to the customer and to gain a competitive advantage over rivals who take more time to accomplish the same tasks. The rationale is that by reducing time, costs are generally less, productivity is higher, quality tends to be higher, product innovations appear on the market sooner, and customer service is improved. Organizations have achieved time reduction in some of the following: - Planning time: The time needed to react to a competitive threat, to develop strategies and select tactics, to approve proposed changes to facilities, to adopt new technologies, and so on. - Product/service design time: The time needed to develop and market new or redesigned products or services. - Processing time: The time needed to produce goods or provide services. This can involve scheduling, repairing equipment, methods used, inventories, quality, training, and the like. - Changeover time: The time needed to change from producing one type of product or service together. This may involve equipment settings and attachments, different methods, equipment, schedules, or materials. - Delivery time: The time needed to fill orders. - Response time for complaints: These might be customer complaints about quality, timing of deliveries, and incorrect shipments. These might also be complaints from employees about working conditions (e.g., safety, lighting, heat or cold), equipment problems, or quality problems. 8. IMPLICATIONS OF ORGANIZATION STRATEGY FOR OPERATIONS MANAGEMENT Organization strategy has a major impact on operations and supply chain management strategies. For example, organizations that use a low-cost, high-volume strategy limit the amount of variety offered to customers. As a result, variations for operations and the supply chain are minimal, so they are easier to deal with. Conversely, a strategy to offer a wide variety of products or services, or to perform customized work, creates substantial operational and supply chain variations and, hence, more challenges in achieving a smooth flow of goods and services throughout the supply chain, thus making, the matching of supply, to demand more difficult. Similarly, increasing service reduces the ability to compete on price. Table 2.2 provides a brief overview of variety and some other key implications. Table 2.2. Overview of variety & other key implications On Operations Management 9. PRODUCTIVITY One of the primary responsibilities of a manager is to achieve productive use of an organization’s resources. The term productivity is used to describe this. Productivity is an index that measures output (goods and services) relative to the input (labor, materials, energy, and other resources) used to produce it. It is usually expressed as the ratio of output to input: Productivity = Output / Input Although productivity-is important for all business organizations, it is particularly important for organizations that use a strategy of low cost, because the higher the productivity, the lower the cost of the output. A productivity ratio can be computed for a single operation, a department, an organization, or an entire country. In business organizations, productivity ratios are used for planning workforce requirements, scheduling equipment, financial analysis, and other important tasks. Productivity has important implications for business organizations and for entire nations. For nonprofit organizations, higher productivity means lower costs; for profit-based organizations, productivity is an important factor in determining how competitive a company is. For a nation, the rate of productivity growth is of great importance. Productivity growth is the increase in productivity from one period to the next relative to the productivity in the preceding period. Thus: Productivity growth = [ (Current productivity - Previous productivity) / Previous productivity] × 100 For example, if productivity increased from 80 to 84, the growth rate would be: [(84 - 80) / 80 ] × 100 = 5%. Productivity growth is a key factor in a country’s rate of inflation and the standard of living of its people. Productivity increases add value to the economy while keeping inflation in check. Productivity growth was a major factor in the long period of sustained economic growth in the United States in the 1990s. (Press to learn more) 9.1. Computing Productivity Productivity measures can be based on a single input (partial productivity;, on more than one input (multifactor productivity), or on all inputs (total productivity). Some examples of productivity measures are listed below. The choice of productivity measure depends primarily on the purpose of the measurement. If the purpose is to track improvements in labor productivity, then labor becomes the obvious input measure. Examples of Productivity Measures: Partial measures are often of greatest use in operations management. The following table provides some examples of partial productivity measures. Table 2.3. Examples of Partial Productivity Meassures. The units of output used in productivity measures depend on the type of job performed. The following are examples of labor productivity: Similar examples can be listed for machine productivity (e.g., the number of pieces per hour turned out by a machine). Example 1: Determine the productivity for these cases: 1. Four workers installed 720 square yards of carpeting in eight hours. 2. A machine produced 70 pieces in two hours. However, two pieces were unusable. The answer Productivity = (720 square yard) / (4 workers × 8 hours per worker) = 22.5 yard per hour Productivity = 68 usable pieces / 2 hours production time = 34 pieces per hour 9.2 Factors That Affect Productivity There are several factors affect productivity. Generally, they are methods, capital, quality, technology, and management. Factors that affect productivity may include the following: - Standardizing processes and procedures wherever possible to reduce variability can have a significant benefit for both productivity and quality. - Quality differences may distort productivity measurements. One way this can happen is when comparisons are made over time, such as comparing the productivity of a factory now with one 30 years ago. Quality is now much higher than it was then, but there is no simple way to incorporate quality improvements into productivity measurements. - Use of the Internet can lower costs of a wide range of transactions, thereby increasing productivity. It is likely that this effect will continue to increase productivity in the foreseeable future. - Computer viruses can have an immense negative impact on productivity. - Searching for lost or misplaced items wastes time, hence negatively affecting productivity. - Scrap rates have an adverse effect on productivity, signaling inefficient use of resources. - New workers tend to have lower productivity than seasoned workers. Thus, growing companies may experience a productivity lag. - Safety should be addressed. Accidents can take a toll on productivity. - A shortage of technology-savvy workers hampers the ability of companies to update computing resources, generate and sustain growth, and take advantage of new opportunities. - Layoffs often affect productivity. The effect can be positive and negative. Initially, productivity may increase after a layoff, because the workload remains the same but fewer workers do the work— although they have to work harder and longer to do it. However, as time goes by, the remaining workers may experience an increased risk of burnout, and they may fear additional job cuts. The most capable workers may decide to leave. - Labor turnover has a negative effect on productivity; replacements need time to get up to speed. - Design of the workspace can impact productivity. For example, having tools and other work items within easy reach can positively impact productivity. - Incentive plans that reward productivity increases can boost productivity. Moreover, there are still other factors that affect productivity, such as equipment breakdowns and shortages of parts or materials. The education level and training of workers and their health can greatly affect productivity. The opportunity to obtain lower costs due to higher productivity elsewhere is a key reason many organizations turn to outsourcing. Hence, an alternative to outsourcing can be improved productivity. Moreover, as a part of their strategy for quality, the best organizations strive for continuous improvement. Productivity improvements can be an important aspect of that approach. 9.3. Improving Productivity A company or a department can take a number of key steps toward improving productivity: - Develop productivity measures for all operations. Measurement is the f irst step in managing and controlling an operation. - Look at the system as a whole in deciding which operations are most critical. It is overall productivity that is important. Develop methods for achieving productivity improvements, such as soliciting ideas from workers (perhaps organizing teams of workers, engineers, and managers), studying how other firms have increased productivity, and reexamining the way work is done. - Establish reasonable goals for improvement. - Make it clear that management supports productivity improvement. Consider incentives to reward workers for contributions. - Measure improvements and publicize them. (Press to learn more)