Operations Management
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Transcript of Operations Management
OPSM 901: Operations Management
Session 1:The Process ViewProcess PositioningStrategic Fit
Koç University Graduate School of BusinessEMBA Program
Zeynep [email protected]
Key Principle of course:1. The Strategic Role of Ops
“A company’s operations function is
either a competitive weapon
or
a corporate millstone.
It is seldom neutral.” [Skinner ‘69]
Operations as a Competitive Weapon
Dell Computers
Innovative Supply Chain Strategy (direct model) Southwest Airlines
Leader in lowfare flights, by elimination of all waste Zara
More on this later today.. Vestel Durable Goods
Distribution optimization leads to increased customer satisfaction as well as lower costs
Key Principle of Course:2. The Process View of Ops
UL
Sup. WH
WH
Sub. WH
KA Ind. Markets
Groceries Markets
.
.
.
Sana KA: 64 daysGroceries:132 daysShelf life: 120 days!
76 days collection time
Sales cost: 4%Trade rebate: 12%Logistics: complex
1997: 35000/76000 tons Sana and Aymar collected
Consumer centric-efficient SC
UL
Distributors
Groceries Market KA
Consumer
Sana KA: 2 weeks
36 days collection time
Warehouse stock level12% - 8%
Sales cost: 6%Trade rebate: 5.2%Logistics: simple
120000-140000/180000 outlets
Make-to-order
Operations & the Process View:What is a Process?
Inputs OutputsGoods
Services
Labor & Capital
Informationstructure
Network ofActivities and Buffers
Flow units(customers, data, material, cash, etc.)
Resources
ProcessManagement
Organization Chart
Process
customer customer
suppliers
Life is a process..
Projects: one time processes Eating lunch at the cafeteria EMBA program Your career Your life
What is Operations Management?
Management of business processes
How to structure the processes and manage resources to develop the appropriate capabilities to convert inputs to outputs.– What is appropriate?
All Managers are Operations Managers
All managers must transform inputs into outputs
Example: Accounting Manager– Inputs: data, information, labor– Transformation: application of accounting principles
and knowledge– Outputs: accounting reports, knowledge of
performance, ...
All managers have an “operation” to run
What defines a “good process”?Performance: Financial Measures
Absolute measures: – revenues, costs, operating income, net income– Net Present Value (NPV) =
Relative measures:– ROI, ROE– ROA =
Survival measure:– cash flow
Assets Total Average
TaxEBIT
T
tt
t
r
C
0 1
Performance Measurement
Basing performance measurement only on financial ratios may be deceiving in that it does not capture continuous improvement and innovation
The Balanced Score Card (BSC) system was developed by R. Kaplan ve D. Norton in 1992 (HBS 1,1992.)
The objective is to give managers measurements that reflect both financial and operational performance in a balanced way
Balanced Score Card (BSC)
BSC, complements financial measures with– Customer satisfaction– Process
• Throughput times• Defect rates, etc.
– Learning and development
related measures that help to reflect future financial success
BSC
Visionand
Strategy
Financial
Customer Processes
Learning and Development
Obj
ecti
ve
Mea
sure
men
ts
Tar
gets
Init
iati
ves
How should our shareholders view us so that we can claim financial success
Which processes should we perfect to be seen as successful by our customers and shareholders
How can we sustain learning and development to adhere to our vision
How should customers view us so that we attain our vision
Firms compete on product attributes.This requires process capabilities.
Price (Cost) P Quality Q
– Customer service– Product quality
Time T– Rapid, reliable delivery– New product development
Variety V– Degree of customization
“order winners”
To deliver we need “capabilities”
Performance Measures
Performance
Objective Some typical Measures
Cost Minimum delivery time/average delivery time, utilization of resources, labor productivity, added value, efficiency, cost per operation hour
Quality Number of defects per unit, level of customer complaints, scrap level, mean time between failures, customer satisfaction scores
Speed Customer query time, Order lead time, frequency of delivery, actual versus theoretical throughput time, cycle time
Flexibility Time needed to develop new products/services, range of products/services, machine change-over time, average batch size, time to increase activity rate, average capacity/maximum capacity, time to change schedules
Process Capabilities are affected by Process Structure and Management
Process structure or architecture:– (1) inputs and outputs– (2) flow unit (“jobs”)– (3) network of activities & buffers
• quantity & location• precedence relationships
– (4) resource allocation• capacity & throughput
– (5) information structure
Operations Planning & Control Organization
Fit between Strategy and Processes
Processes must fit the operations strategy of the firm:Competing on
-Cost (Southwest Airlines)-Quality (Toyota)-Flexibility (HP)-Speed (McDonalds)
all require different process designs and different measures to focus on.
Corporate StrategyKey Performance Indicators Operations StrategyProcess Design& Improvement
Linking the strategic role & process view:Strategic Operational Audit
DesiredBusiness Strategy
Operations Strategy
DesiredCapabilities
Marketing, …, Financial Strategy
Desired Oper’l Structure:
Processes & Infrastructure
Product Attributes
P, T, Q, V
Process Attributes
C, T, Q, Flex
Existing Capabilities
Operational Structure:
Processes & Infrastructure
Existing Desired
FeasibleBusiness Strategies
Strategy Gap?
Measures
Capability Gap?
Process Gap?
Strategy vs. Operational Effectiveness: The Operations Frontier as the minimal curve containing all current
positions in an industry
Value/ Responsiveness
operations frontier
A
B
C
CostHigh Low
Low
High
Increasing Customer Value
Value
A
B
C
CostHigh Low
High
Low
Operations Frontier
Değer Artırımı
Lowering Costs
Value
A
B
C
CostHigh Low
HIgh
Low
Operations Frontier
Lowering Costs
Some process classifications and terminology…
Low complexity, high divergence
High complexity, low divergence
High complexity, high divergence
Classifying by degree of judgement
complexity vs. divergence
what is done? how is it done?
Classification of Processesby process architecture
Project
Job Shop
Batch
Line Flow
Continuous Flow
Job Shop
Flow Shop
The Job Shop Process
Process Layout One of a Kind Build
– (To Customer Order)
Absence of Rigid Flow Pattern Usually High Product Mix
Process Layout
Lathe#Lathe#11
Lathe#Lathe#22
Lathe#Lathe#33
LatheLathe#4#4
Product #1735B: Start of Production
Drill Drill Press Press #1#1
Drill Drill Press Press #2#2
Paint Paint MachineMachine
Packaging Packaging Machine #1Machine #1
Packaging Packaging Machine #2Machine #2
Finish
Production
The Flow Line Process
Product Layout Discrete Parts Rigid Flow Pattern Product Mix of Standard Products
Product Layout
Product #1735B
LatheLatheStart
Production
Drill Drill Press #2Press #2 Paint MachinePaint Machine
Drill Drill Press #1Press #1
Packaging Machine #2Packaging Machine #2
Finish Production
Classification of Processes:by Positioning Strategy
Functional Focus:
Product Focus:
A B
C D
Product 1
Product 2
A D B
C B A
Product 1
Product 2
= resource pool (e.g., X-ray dept, billing)
Classification of Processes:by Customer Interface
SU
PP
LIE
R
CL
IEN
T
Make-to-Stock
Assemble-to-Order
Make-to-Order
Engineer-to-Order
Raw Material Components Semifinished Finished
Forecast Order
Shouldice HospitalVideo Case
Shouldice Business Model
Medical– Simple hernias– Optimized process– Check-ups and follow-up
Social– Club Med like experience– Co-production at individual
and cohort level– A network for life
Shouldice Patient Experience
COST
QUALITY
SPEED
FLEXIBILITY
Low, both real and opportunity
Low recurrence, satisfaction with experience
Fast operation and recovery
The process rules; only simple hernias
Comparison to General Hospital
Hernia complexity
Shouldice: preparesfor the simplest
General Hospital: prepares for the most complex
A product/process matrix
General Hospital:
Variety & flexibility
High cost
Low margins
Low Cost
High margins
Shouldice Hospital:
Standardization
Cost, speed, quality
Process
Flexible job
Rigid line flow
ProductHigh customization
Low volumeHigh unit margin
High standardizationHigh volume
Low unit margin
Industrialization
Shouldice as a lean enterprise
Shouldice General Hospital
Focus on low risk cases No focus, multiple goals
Clear single value prop. Confusion of value prop.
Predictable process Unpredictable process
Strive for perfection Strive for threshold perf.
Eliminate waste Tolerate some excess
Manage patient flows View patients as functional tasks
Pull patients into process Push patients through process
Womack and Jones (2000) From Lean Production to Lean Enterprise, HBR March-April 1994
Shouldice Process Life Cycle
Birth of the Shouldice formula Process selection, design,
and improvement Innovation at the interfaces Process overtaken (when?)
Focus at Shouldice: the results
Breakthrough service High customer and employee satisfaction Industrial approach
ProcessFlexibility
Jumbled Flow.Process segmentsloosely linked.
Disconnected LineFlow/Jumbled Flowbut a dominant flowexists.
JOB SHOP
(Commercial Printer,Architecture firm)
BATCH
(Heavy Equipment,Auto Repari)
LINE FLOWS
(Auto Assembly,Car lubrication shop)
CONTINUOUSFLOW
(Oil Refinery)
ProductVariety
LowLow Standardization
One of a kindLow Volume
Many ProductsFew Major Products
High volume
High StandardizationCommodity Products
Connected LineFlow (assembly line)
Continuous, automated,rigid line flow.Process segments tightlylinked.
Oppor
tunity
Costs
Out-of
-poc
ket
Costs
High
Low
High
Matching Process Choice with Strategy:Product-Process Matrix
Marks & Spencer vs. Zara
Why is profitability in textile so low, when margins are so high?
Expected demand Actual demand
Perfect forecast
Excess demandExcess stock
Zara Business Concept
Low Cost Focus on getting it
approximately correct Define a fast process Solve the material
constraint Constrain designers Optimize the offer Offer follow-up (next batch)
and create customer flows
Fashion Store experience Copy fashion Involve the customers and
his group Create a network/brand
Integrated fashion delivery: Fashion at low cost
Zara Customer Offer: Product/Process Attributes Quality:
– Raw Material: poor/OK
– Knit: poor
– Look: grand
– Customer satisfaction: fashion at low price
Cost:– Low monetary cost
– Low time cost “The Zara experience”
Time:– Fast copying of leading
styles
– Fast delivery in own stores
– Limited editions
Variety/Flexibility:– Limited product variety:
only what is on display
– Every customer is participating in the process
– Customer defines the next batch
Classical textile business process:12 month lead time
DesignPurchase
RMMfg Dist Sell Discount
Zara Business Process: 5 day lead time
1.Scan fashion shows
2.Simplify hits&
Library of designs
Purchase RM
2.Shoppers and store mgrs.PULL next designDesigners adapt
ShoppingExperience
3.Final design ofNext batch
.
Mfg Dist
The design process
Creative designPreliminary
designsFinal product
design
Final product design
Preliminary designs
Creative design
OutsourceAnd scan
Copy andsimplify
Adapt andoptimize
Traditional
Zara
Accurate Response
Improving Forecasts
0
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3500
4000
0 500 1000 1500 2000
Initial Forecast
Tot
al S
ales
Accurate Response
Improving Forecasts
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1000
1500
2000
2500
3000
3500
4000
4500
0 500 1000 1500 2000 2500 3000 3500 4000
Updated Forecast, Incorporating 20% of Sales Data
Tot
al S
ales
Accurate Response
Improving Forecasts
0
500
1000
1500
2000
2500
3000
3500
4000
4500
0 500 1000 1500 2000 2500 3000 3500 4000
Updated Forecast, Incorporating 80% of Sales Data
Tot
al S
ales
Zara’a Approach to Newsboy Losses
Expected demand Actual demand
Small batches
Excess stock and unmet demand are avoided by stopping production when market saturates
Disruptive Technological Change
Time
Performance
Zara QualityFreshness
M&S Zara
Zara as a lean enterprise
Zara M&S
Clear focus on one customer type and one process
No focus, multiple and simultaneous goals
Unique and clear value prop. Confusion of implicit value proposition
Predictable process Unpredictable and fuzzy process
Strive for perfection Satisfied with threshold performance
Eliminate waste Tolerate some excess
Manage customer flows View customers as a sequence of tasks
Pull customers into process Pushes customers through the system
Industrialization 1: Standardizing
High Fashion
Marks &Spencer
Mass Merchants
Process
Product
Flexible Job Shop
Batch Flow
Rigid Line Flow
High Customization
Some Customization
High Stardardization
Industrialization 2: Flexibility
High Fashion
Zara Marks &Spencer
Mass Merchants
Process
Product
Flexible Job Shop
Batch Flow
Rigid Line Flow
High Customization
Some Customization
High Stardardization
Strategic Value Gained
High Fashion
Out of price!
Zara
Marks &Spencer
Out of Fashion!
Mass Merchants
Process
Product
Flexible Job Shop
Batch Flow
Rigid Line Flow
High Customization
Some Customization
High Stardardization
Textile Apparel Industry: history
1920s M&S: Investment in technical part of the design; high quality products
After World War II: Les Nouvelles Galeries offered novelty at low prices
Mid-70s Benetton: process reversal and color flexibility; outsourcing of design, manufacturing, retail
Gap Inc. and C&A: position between low-end mass merchandisers and higher-end department stores
Mid-80s Zara: brand consistency and very fast product cycles Mango : shopping experience H&M: Zara fashion at C&A price
For next time
Read the case TEMSA Think through the questions at the end of the
case (in the section “What to do next?)