Sample Chap 02

8/2/2019 Sample Chap 02

http://slidepdf.com/reader/full/sample-chap-02 1/27

24

2 Operations and SupplyChain Strategy

CHAPTER OUTLINE

Levels of Strategic Planning 00

Corporate Strategic Planning 00

Business Unit Strategic Planning 00

Functional Strategic Planning 00

Developing Operations Strategy: Creating Value through Strategic

Choices 00

Critical Customers 00

Get Real: Huffy Bikes Targets It’s Critical Customer 00

Assessing Customer Wants and Needs 00

Get Real: Bosch CS20: Finding a New Order Winner by Changing the

Way Customers Cut Straight Lines 00

Value Propositions and Competitive Priorities 00

Product-Related Competitive Priorities 00

Process-Related Competitive Priorities 00

Get Real: IKEA: Growth through Supply Chain Innovation 00

Get Real: Seven Cycles: Building a Bicycle Your Way 00

Capabilities: Strengths and Limitations of Supply Chain Operations 00

Maintaining the Fit between Customer Outcomes, Value Propositions,

and Capabilities 00

Get Real: Apple Does Not Build a Low-Cost Netbook 00

Deploying Operations Strategy: Creating Value through Execution 00

Feedback/Measurement: Communicating and Assessing Operations

Strategy 00

The Strategic Profit Model 00

The Balanced Scorecard 00

The Supply Chain Operational Reference Model 00

Chapter Summary 00

Key Terms 00

Discussion Questions 00Solved Problem 00

Problems 00

Case: Otis Toy Trains Explores the Supply Chain 00

Case: Steinway & Sons Piano 00

Case: Trail Frames Chassis 00

Selected Readings and Internet Sites 00

LEARNING

OBJECTIVES

After studying this chapter,

you should be able to:

1. Describe how opera-tions strategy fits withina firm’s overall strategicplanning process.

2. Describe the need for“fit” between the criticalcustomers, value propo-sitions, and operationscapabilities—the essentialelements that define anoperations strategy.

3. Describe customer-desired outcomes interms of order winners,order qualifiers, and orderlosers.

4. Explain what product-related and process-related operationalcompetitive priorities are,and how they are relatedto competitive advantage.

5. Explain how strategicperformance can beassessed both operation-ally and financially byusing the strategic profitmodel, the balancedscorecard, and the supplychain operational refer-ence model.

swi03318_ch02_024-050.indd 24swi03318_ch02_024-050.indd 24 9/18/09 4:46:59/18/09 4:46:

We are yet to receive the

chapter tab image.



IBM ReinventsItself for a Global

Economy

Many of the things that made IBM so suc-

cessful in the past are now gone. The IBM

PC desktop personal computer no longer

exists. The IBM Thinkpad—the Cadillac of note-

book computers—now belongs to Lenovo. Though

both product lines once produced great profits

for IBM, they had become com-modities in low-growth markets.

Product standardization and com-

petition from low-cost suppliers

made IBM’s old value proposition

of leading edge design and quality

production of personal computers

no longer desirable or profitable.

In several bold moves over

the last decade, IBM changed

both its business strategy and its

operations strategy. It shifted its focus to business

customers who want a different value proposition:

complete information technology solutions deliv-

ered quickly and globally. To meet these demands,

IBM has developed diverse operational resources,

including technical problem-solving specialists

located in Colorado, research scientists working in

IBM’s New York labs, a software installation factory

located in Ontario, server computer manufactur-

ing located in Shanghai, and low-cost customer

support centers located in Indiaand Ireland. IBM brings these

resources together in unique ways

to meet the needs of customers

located anywhere in the world.

A global network of resources

gives IBM capabilities to perform

work where it can be done most

competitively, by quickly assem-

bling teams of people located

around the world who have the

right skills at the right cost needed to meet a new

customer’s specific needs. This set of operational

capabilities enables IBM to deliver value in ways

that its business customers need.




First PagesFirst Pages

Environment

Corporate Strategy

Business Strategies

SBU SBU SBU

Operations Strategy

Finance, Marketing, etc. Strategies

Corporate Culture

Strategic Questions

What business(s) should we be in?

How do we compete?

How do we best support the SBU

strategy? - Structure - Infrastructure

FIGURE 2-1Strategic PlanningHierarchy

Prepare What are the different levels of strategicplanning for businesses, and how are theyinterrelated?

OrganizeLevels of Strategic Planning

Corporate Strategic Planning

Business Unit Strategic Planning

Functional Strategic Planning

26 chapter 2 Operations and Supply Chain Strategy

The IBM story illustrates how a company can change both its business and operations strat-

egies to create advantages in the ways that it serves its customers. Such strategic change is

the focus of this chapter. The method that IBM used to change its business and operations

strategies is most important. It developed a new strategy that effectively integrated three

important elements: the critical customer, the value proposition, and the system capabili-

ties. In doing so, IBM created a new business model that is today able to deliver more value

to its critical customers with a greater degree of predictability.

This chapter describes the decision processes and choices that make up an operations

strategy, which is a set of competitive priorities coupled with supply chain structural and

infrastructural design choices intended to create capabilities that support a set of value

propositions targeted to address the needs of critical customers. Strategic decisions define

the competitive objectives of an organization, establishing both the specific performance

targets and the means by which the targets will be achieved.

In order to explain the process of strategic planning, this chapter will clarify the mean-

ings of the terms, competitive priorities, capabilities, value propositions, and critical cus-

tomers. We begin by providing a brief overview of different levels of strategic planning in

firms, and by describing how operations strategic choices create value. Then we describe

a process of strategy development and deployment. The chapter concludes with a discus-

sion of ways to communicate operations strategic choices and measure the performance of

operational resources within the firm and across the supply chain.

LEVELS OF STRATEGIC PLANNING

Within most firms, planning processes take place at several different levels.

Internally, there is a hierarchy of strategic plans consisting of (1) corporate

planning, (2) strategic business unit (SBU) planning, and (3) functional plan-

ning. These three levels should be closely linked and interdependent (as

shown in Figure 2-1). What happens at one level, under the appropriate set

of conditions, should influence the planning at the other two levels. Strategic

plans at all three levels must be consistent with and supportive of each other.

Strategic plans made at all levels need to take into account the business

environment, including economic conditions, competitor actions, market

opportunities, regulatory changes, and so on. At the same time the firm typi-

cally has a culture that influences the objectives it sets and the decisions it

makes in strategic planning. For example, one firm might be more aggressiveor risk averse than another firm.

operations strategy A set ofcompetitive priorities coupledwith supply chain structural andinfrastructural design choicesintended to create capabili-

ties that support a set of value

propositions targeted toaddress the needs of critical

customers.

operations strategy A set ofcompetitive priorities coupledwith supply chain structural andinfrastructural design choicesintended to create capabili-

ties that support a set of value

propositions targeted toaddress the needs of critical

customers.





chapter 2 Operations and Supply Chain Strategy 27

In this section, we examine the objectives and interactions of strategic planning at the

three levels. The remainder of the chapter focuses on operations strategy, one of the areas

of functional strategy development.

Corporate Strategic PlanningMany firms are involved in more than one business. For example, General Electric oper-

ates businesses in more than 20 primary areas from aircraft engines to vendor financial

services. Corporate strategic planning addresses the portfolio of businesses owned by a

firm. Of the three levels of strategic planning, corporate strategic planning is broadest in

scope and the least constrained. Decisions made at this level limit the choices that can be

made at lower strategic planning levels.

Essentially, a corporate strategy communicates the overall mission of the firm, and

identifies the types of businesses that the firm wants to be in. For a large, multidivisional

firm, key decisions in corporate strategy address what businesses to acquire and what busi-

nesses to divest. Corporate strategy typically covers a long time horizon, setting the overall

values, direction, and goals of the firm as a whole. It also establishes how business perfor-

mance will be measured and how risks will be managed.

Business Unit Strategic Planning

Because products and markets differ across business divisions, a separate management

team (usually headed by a president or vice president) is usually need to run each of these

semi-independent organizations, or strategic business units (SBUs). An SBU can be orga-

nized along product, market, or geographic dimensions.

Business unit strategy essentially deals with the question, “How should our business

unit compete?” To answer this question to managers make choices regarding what custom-

ers and market segments they will deem critical, what products to offer, and specifically

how they will create advantages over the business units’ competitors. These choices col-

lectively form the business model that the unit will pursue (Chapter 17 discusses busi-

ness models in more detail). Business unit strategy is shaped by the corporate strategy, the

specific requirements of the SBU’s products and markets, and the SBU’s operating capa-

bilities. Business unit strategic planning differs from corporate planning in several ways.

First, it is constrained by decisions made at the corporate level. Second, it tends to be more

detailed, with a shorter time horizon (the number of time periods covered by the plan).

Finally, the SBU plan tends to be more action oriented in that it contains specific productand market-based initiatives and goals.

Functional Strategic Planning

Every SBU consists of many functional groups, such as internal operations, marketing,

accounting, engineering, supply management, logistics, and finance (to name a few). Each

function has to generate a strategic plan—one that is coordinated with and supportive of the

SBU plan. To that extent, the functional strategy must address certain critical questions:

• What specifically do we have to do to support the corporate and SBU strategies?

• What are the critical resources that we have to manage carefully if we are to achieve

the corporate/SBU objectives?

• What metrics should we have in place to ensure we are making progress on these plans?

• What capabilities found in our function should be considered or recognized by the

two higher stages of strategy?

• How should we coordinate our activities with those of the other functional areaswithin the firm to reduce friction and to enhance the ability of the firm/SBU to attain

its overall objectives?

Of the three levels of strategic planning, the functional strategy is the most detailed,

as well as the most constrained, as it must operate within a set of decisions made in the

corporate and SBU strategic plans.

corporate strategyDetermines the overall missionof the firm and the types of busi-nesses that the firm wants tobe in.

corporate strategyDetermines the overall missionof the firm and the types of busi-nesses that the firm wants tobe in.

strategic business unit(SBU) The semi-independentorganizations used to managedifferent product and marketsegments.

strategic business unit(SBU) The semi-independentorganizations used to managedifferent product and marketsegments.

business unit strategyDetermines how a strategic busi-ness unit will compete.

business unit strategyDetermines how a strategic busi-ness unit will compete.

functional strategyDetermines how the function willsupport the overall business unitstrategy.

functional strategyDetermines how the function willsupport the overall business unitstrategy.





PrepareHow do managers develop an operationsstrategy?

Organize Developing Operations Strategy: CreatingValue through Strategic Choices

Critical Customers: The Starting Point forOperations Strategy

Assessing Customer Wants and Needs

Value Propositions and CompetitivePriorities

Product-Related Competitive Priorities

Process-Related Competitive Priorities

Capabilities: Strengths and Limitations ofSupply Chain Operations

Maintaining the Fit between Customer

Outcomes, Value Propositions, andCapabilities

Value

Proposition

Critical

CustomerCapabilities

FIGURE 2-2 The ThreeCritical Elements ofOperations Strategy


DEVELOPING OPERATIONS STRATEGY:CREATING VALUE THROUGHSTRATEGIC CHOICES

At the heart of operations strategy are choices made in three primary areas(see Figure 2-2):

• The critical customer is the customer or customer segment receiving the

firm’s focus because it is critical to the firm’s future success.

• The value proposition is all of the tangible and intangible “benefits” that

customers can expect to obtain by using the products offered by the firm.

• Capabilities are operational activities that the firm can perform well;

these define the types of problems and solutions that operations can

address proficiently.

An operations strategy combines choices about which customers to

target, what products to offer (and how to offer them), and what capabili-

ties to develop. Decision making regarding customers and products is often

led by marketing managers. However, decisions in all three areas need to

be jointly agreed upon by executives in marketing, operations, and financial

functions of the firm. This is because the decisions are so interdependent.For example, the type of customers chosen limits the value propositions they

will be attracted by, which in turn determines the types of capabilities that

will be required. As Figure 2-2 indicates, the objective of operations strategy development

is to maximize the overlap among choices in these areas. The internal consistency of these

choices is what ultimately creates value for the firm and for the marketplace.

To ensure that a high level of consistency is achieved, operations managers must

develop a deep understanding of their critical customers. First this means understanding

what these customers value in products. Second, the critical features of the value proposi-

tion need to be communicated in terms that make sense to operations managers. Third,

strategic initiatives must be launched. If the required operational capabilities do not exist,

then they must be developed, or different customers and value propositions should be tar-

geted. In the following sections we will discuss these decisions in more detail.

Critical Customers

The starting and ending point for effective and efficient supply chain operations is the cus-

tomer. As defined in Chapter 1, a customers are parties that use or consume the products

of operations management processes. A customer is not necessarily the end user; it could

be the store manager or the purchasing agent (as noted in the Get Real box about Huffy

Bikes below). Almost all firms deal with multiple customers having varied desires and

needs that change over time. This creates the dual challenge of keeping track of changing

customers Parties that use orconsume the products of opera-tions management processes

customers Parties that use orconsume the products of opera-tions management processes





Huffy Bikes Targets It’s Critical Customer

GETREAL

Huffy Bikes markets a line of inexpensive, durable bicycles

sold through mass merchandising channels (e.g., Toys R Us,

Meijers, Wal-Mart) to a wide range of customers (parents, stu-

dents, young children). To succeed in this very crowded and

competitive market, Huffy recognized that its critical customer

was not the end user—the person who bought the bike. Buy-

ers of Huffy bikes are not particularly concerned with the Huffy

brand; what they buy is determined more by availability and

price. Two groups of managers determine availability—the

store manager (who determines what products are stocked),

and the purchasing manager (who determines what product

lines will be bought). Consequently, Huffy has targeted these

two groups as their critical customers. They have tried to

make the purchasing manager’s job easier by reducing the

transactions and effort required to buy from Huffy. In addition,they have focused on communicating to the store manager the

financial benefits of selling Huffy bikes, including improved

sales and profits, and fewer returns because of the ease with

which Huffy bikes are assembled. By focusing on these criti-

cal customers, Huffy has strengthened its market position in a

very competitive field.


needs and identifying which customers’ needs should be addressed and which should be

ignored. Each firm has to identify its critical customers.

Firms deem certain customers to be critical for a number of reasons. For example, a

critical customer may be responsible for the largest current or future sales of the firm, or it

may be the one with the highest prestige. In the automotive industry, Toyota is often such

a customer because of its very high quality and performance standards; a supplier working

with Toyota is often viewed as a top rate supplier. This chapter’s opening story chronicles

IBM’s changing focus from one set of critical customers to another. The Get Real box dis-

cusses Huffy’s focus on its critical customers, big box retail managers.

Assessing Customer Wants and Needs

It is important for operations managers to know what product features and delivery terms

critical customers consider important, what they are willing to pay, and what they consider

acceptable. These product-specific traits can be classified into one of three categories1:

• Order winners. These product traits cause customers to choose a product over a

competitor’s offering; for example, better performance or lower price. These are traits

on which the operations management system must excel.

• Order qualifiers. These are product traits such as availability, price, or conformance

quality that must meet a certain level in order for the product to even be considered

by customers. The firm must perform acceptably on these traits (i.e., the products

must meet certain threshold values of performance), usually at least as well as com-

petitors’ offerings. In many cases, the customer may not be aware of any level of

performance in excess of those minimum levels that they have established.

• Order losers. Poor performance on these product traits can cause the loss of either

current or future business.

critical customer A customerthat the firm has targeted asbeing important to its futuresuccess.

critical customer A customerthat the firm has targeted asbeing important to its futuresuccess.

order winners Product traits thatcause a customer to select oneproduct over its competitors.

order winners Product traits thatcause a customer to select oneproduct over its competitors.

order qualifiers Product traitsthat must be met at a certainlevel for the product to be con-sidered by the customer.

order qualifiers Product traitsthat must be met at a certainlevel for the product to be con-sidered by the customer.

order losers Product traits that,if not satisfied, cause the loss ofeither the current order or futureorders.

order losers Product traits that,if not satisfied, cause the loss ofeither the current order or futureorders.

1 Terry Hill, Manufacturing Strategy: Text and Cases (New York: McGraw-Hill/Irwin, 2000).


We

Imag




Bosch CS20: Finding a New Order Winner by Changingthe Way Customers Cut Straight Lines

GETREAL

Managers at Bosch Power Tools faced a challenging problem

—how to design and deliver a better circular saw. Such saws

are found in nearly every handyman’s workshop, and over

the years their designs had become fairly common. Conse-

quently, there were few features except price to differentiate

competing products. Bosch managers looked at circular saws

from an outcome perspective. They saw that many of the

circular saws on the market did a poor job of helping users

attain a simple but critical outcome—cutting straight lines.

Customers were frustrated because the lines were inevitably

covered up by either sawdust or by the footplate of the saw

itself. Bosch’s solution? First, they installed a powerful fan to

blow dust off of the cut line. Second, they replaced the steel

footplate with an acrylic one that allowed the user to see the

line as they cut. The result: an award-winning product that

customers want to buy.2

Think about a recent purchase you made. What were the order-winning

traits that influenced your decision? What traits were necessary for you to

even consider buying one product over another?

activity

s t u

d e n t


In reviewing these categories,

there are several factors to remem-

ber. First, order winners and order

qualifiers form the basis for cus-

tomers’ expectations. Order losers,

in contrast, result from customers’

actual experiences with the firm

and its operations management processes. They represent the gap between what the firm

delivers and what customers expect. Second, order winners, order qualifiers, and order

losers vary by customer. An order winner to one customer may be an order qualifier to

another. Third, these traits vary over time. An order winner at one time may become an

order qualifier at another point in time. As can be seen from the accompanying Get Real

story about Bosch and the Bosch CS20 circular saw, being able to identify and act on order

winners offers the firm a critical strategic advantage.

Value Propositions and Competitive Priorities

To attract these critical customers, the firm must formulate and implement a value

proposition, a statement of what the firm offers the customer that is viewed as attrac-

tive to the customer and different from what is offered by its competitors. For example,

Wal-Mart’s value proposition has been to offer everyday low prices of a wide varietyof products. The value proposition is critical because it not only defines how the firm

competes but it also determines and shapes the types of products that the firm will (and

will not) offer.

A well-designed value proposition possesses four characteristics: (1) it offers a com-

bination of product features that customers find attractive and are willing to pay for; (2) it

differentiates the firm from its competition in a way that is difficult to imitate; (3) it satis-

fies the financial and strategic objectives of the firm; and (4) it can be reliably delivered

given the operational capabilities of the firm and its supporting supply chain.

value proposition A statement ofwhat the firm offers the customerthat is viewed as attractive to the

customer and different from whatis offered by its competitors.

value proposition A statement ofwhat the firm offers the customerthat is viewed as attractive to the

customer and different from whatis offered by its competitors.

2For more information about this innovative product, see www.

newwoodworker.com/reviews/bcs20rvu.html


ease confirm this settings

r footnote as well as for the

age.




TABLE 2-1 Dimensions of Product-Related Competitive Priorities

Quality Timeliness Cost

Performance (superior attributes) Reliability (on-time) Purchase (price)

Features (unique attr ibutes) Speed (lead t ime) Transaction (acquisition costs)

Conformance (no defects) Availabi lity (alwayson or in-stock)

Maintenance/repair

Reliability (long time to failure) Operating (cost ofconsumables)

Durability (long useful life) Salvage/disposal

Aesthetics (appeal)

Service/support(ancillaries/intangibles)

Perceived quality (image)


The value proposition reflects the order winners, order qualifiers, and order losers for

a critical customer segment. Thus, the combination of traits contained in the value proposi-

tion greatly influences the competitive priorities for all the related operations across the

supply chain. In order for operations managers to reliably deliver a given value proposition,

they must establish appropriately aligned these product outcomes into operational compet-

itive priorities. They need to clearly specify what the operations management system must

do better than its rivals, what it must do at least as well as its rivals, and what it must avoid

doing (because it will jeopardize customer satisfaction and orders). Competitive priorities,

along with associated performance measures and targeted objectives, provide a language

for managers to communicate the value proposition in operational terms.

Typically, competitive priorities address both product-related outcomes as well as

process-related issues. Once these priorities are established, they form the basis for perfor-

mance measurement; they also form the basis for developing appropriate capabilities (the

third element of the value delivery process as depicted in Figure 2-2).

Product-Related Competitive Priorities

Product-related priorities deal with the customer’s problem to be “solved”, communicated

in terms of the quality, timeliness, and cost of the product “solution.” As Table 2-1 shows,

each of these three product-related competitive priorities involve various dimensions. There

are many different aspects of quality that may be important to customers, for example.Each of these dimensions adds its spin to the value proposition; each dimension potentially

appeals to different types of customers; each also may require different capabilities of sup-

ply chain operations. Because it is difficult, if not impossible, to simultaneously deliver the

highest levels of all of these product attributes, operations mangers need to communicate

which attributes are of highest priority and lowest priority, respectively, in accordance with

the order winners and qualifiers of the targeted critical customers. These priorities form

the basis on which performance measures can be formulated and implemented.

Quality

A product’s quality is its fitness for consumption by the customer who bought it. It is an

assessment of how well the customer’s expectations are met. Some dimensions of qual-

ity are often viewed by customers as minimum requirements (order qualifiers) for most

products. For example, poor conformance quality (many defects) is not tolerated in most

markets. At the same time, superiority in other dimensions of quality can significantly

quality A product’s fitness forconsumption in terms of meetingcustomers’ needs and desires.

quality A product’s fitness forconsumption in terms of meetingcustomers’ needs and desires.






differentiate a product and a company. For example, a consulting firm such as McKinsey

has a widely known reputation as being one of the best in the business. Firms that produce

high-quality products have many advantages including improved company reputation and

easier selling, the elimination of time-consuming activities and costly resources required to

correct quality-related problems, and employees who are motivated by the knowledge that

they produce great products. These companies have turned quality into an order winner;

they have designed and implemented transformation systems designed to ensure that the

firms are always able to deliver superior quality relative to their competition.

Timeliness

Dimensions of product timeliness, the degree to which the product is delivered or avail-

able when the customer wants it, can serve as order winners or qualifiers, depending on

the situation. On-time delivery of a product is in many cases an order qualifier (or order

loser, if the product is late). Similarly, availability of a good or service is usually a quali-

fier. For example, customers at a grocery store are not likely to buy a product if the shelf is

empty. On the other hand, lead time, the amount of time that passes between the beginning

and ending of a set of activities, is often an order winner, especially for nonstandardized

products. There are two types of lead time that are typically important. The first, time to

market, is the total time that a firm takes to conceive, design, test, produce, and deliver a

new or revised product for the marketplace. This lead time is a once-in-product-life-cycleevent. That is, a firm may spend 18 months designing a car and getting the supply chain

ready for production, but once production has been ramped up and the cars begin rolling

off the assembly line, there is no significant design product lead time needed to make sub-

sequent copies of that car. Time to market can be an order winner if the new product offers

features or performance that is not available in other products. The other type of lead time is order-to-delivery lead time for an existing product. This

encompasses the time interval starting at the moment that the customer places an order for

a product, including the time required to place an order, fulfill an order, and ending at the

moment that the customer takes delivery of the product. In services, customers often judge

the value of a service largely on the operation’s order-to-delivery performance. For example,

a dining experience is marred by slow service, or it is irritating when a salesperson seems to

have gotten lost in the back room. Order-to-delivery lead time is also important for highly

customized, made-to-order products; a piece of customized jewelry, for example.

Cost

In marketing, it is well known that people like to get things cheaply but they do not like cheap

things. This statement describes both the major attraction and the problem of emphasizing

cost as the firm’s major source of value. Customers typically want at least the same perfor-

mance for a lower cost, not simply less for less. A competitive priority placed on cost usually

treats certain dimensions of quality and timeliness as givens and focuses on reducing cost.

Different types of costs may be more or less important to customers, depending on the

product type. Purchase cost (price) is usually most important for consumer goods. However,

maintenance and operating costs is often much more important for customers buying long

life items such as industrial machinery. Disposal costs are becoming more important con-

siderations for durable goods (cars, washing machines) due to environmental concerns.

Because supply chain costs directly affect profitability, almost all operations manag-

ers place a priority on reducing the costs of materials, labor, overhead, and so on. The

fundamental means for reducing costs are to eliminate waste and to increase productivity

in operational activities. Waste includes product features that customers do not really want,

as well as unnecessary or inefficient processes. Chapter 8, “Managing Lean Systems,”focuses on ways to identify waste and improve productivity.

Process-Related Competitive Priorities

While product-related competitive priorities focus on the outcomes that customers experi-

ence directly, process-related competitive priorities pertain to how supply chain operations

timeliness The degree to which aproduct is delivered or availablewhen the customer wants it.

lead time The amount of timethat passes between the begin-ning and ending of a set ofactivities

time to market The total timethat a firm takes to conceive,design, test, produce, and delivera new or revised product for the

marketplace.

timeliness The degree to which aproduct is delivered or availablewhen the customer wants it.

lead time The amount of timethat passes between the begin-ning and ending of a set ofactivities

time to market The total timethat a firm takes to conceive,design, test, produce, and delivera new or revised product for the

marketplace.

order to delivery lead time Thetime that passes from the instantthe customer places an orderfor a product until the instantthat the customer receives theproduct.

order to delivery lead time Thetime that passes from the instantthe customer places an orderfor a product until the instantthat the customer receives theproduct.

cost The expenses incurred inacquiring and using a product.cost The expenses incurred inacquiring and using a product.






are run over time. In addition to managing for cost, timeliness, and quality, operations

managers place priorities on longer-term initiatives affecting areas such as flexibility, inno-

vation, and sustainability. Capabilities developed in these areas contribute to supply chain

operations’ abilities to create new solutions and to respond effectively to changes in tech-

nology, competition, and the overall operating environment.

Innovation

Innovation refers to both radical and incremental changes in processes and products.

Especially in highly industrialized countries, innovation is an important way to create new

demand. Through the creation of new and improved products, firms can appeal to new

market segments, or take away business from competitors. Innovation is a response to

emerging customer needs, or it can even be a way to create new needs. For example, with

the creation of the iPod, Apple combined existing technologies in a way that created a new

business for selling online music and other content.

Traditional views of innovation tend to distinguish between product innovations and

process innovations. In reality, product and process innovation are usually interrelated.

Product innovations sometimes arise from process innovations, and process innovations

(at least incremental ones) are usually required to support any new product innovation.

Accordingly, operations managers located in various functions throughout the supply chain

typically have two sets of innovation-related priorities: support product innovation and drive process innovation. Chapter 4 discusses these roles in detail. In companies that pur-

sue a low-cost strategy, most innovation tends to be incremental in nature, whereas tech-

nology-leading companies tend to pursue more radical product and process innovations.

It is important to realize that process innovations can be technological or organiza-

tional in nature. Operations managers are always looking for new technologies to enhance

their capabilities (Chapter 17 discusses some emerging important technologies). However,

organizational innovations can be just as effective in creating new efficiencies or new mar-

ket opportunities. The iPod example mentioned earlier provides an example of a supply

chain organizational innovation that changed the product traits in order to facilitate its

movement through the supply chain. IKEA provides another good example of a company

that has developed a strong value proposition by changing the organizational relationships

in the supply chain (see the Get Real box below).

Flexibility

Flexibility is generally defined as an operations ability to respond efficiently to changesin products, processes (including supply chain relationships), and competitive environ-

ments. The words respond efficiently mean that an operation can cope with a wider range

of changes faster or with less cost than competitors can.

With decreasing product life cycles, rapidly changing technologies, and growing

pressure to meet localized, specific customer needs, flexibility has become an important

priority for many companies today. Flexibility relates aspects of quality (such as product

variety) and timeliness (lead time) to aspects of cost (e.g., non–value-added time, labor

costs, and so on). Consequently, firms that have flexible operations have many opportuni-

ties to create value for their customers in unique ways. The potential for niche marketing

is increased when operations can produce in small lots and deliver unique specifications.

Firms can command premium prices when their operations can be tailored to meet specific

needs or when they can accommodate last minute changes in demand.

There are many types of flexibility, including short term, operational flexibilities such

as labor flexibility, as well as longer term, strategic flexibilities such as the ability to intro-

duce new products quickly. Consequently, it is important for operations managers to focusin upon the types of flexibility they want to develop. In doing so, they should consider sev-

eral critical points:

1. The specific methods chosen to improve flexibility should reflect how the firm com-

petes. For example, the ability of suppliers to respond to changes in order size and

mix are important for firms offering configurable products with seasonal demand

innovation Both radical andincremental changes in processand products.

innovation Both radical andincremental changes in processand products.

flexibility An operations ability torespond efficiently to changes inproducts, processes (includingsupply chain relationships), andcompetitive environments.

flexibility An operations ability torespond efficiently to changes inproducts, processes (includingsupply chain relationships), andcompetitive environments.





IKEA: Growth through Supply Chain Innovation3

GETREAL

IKEA is a franchise-based chain of household furnishing stores

that does business in 31 countries. At the heart o f IKEA’s suc-

cess is a simple but powerful value proposition: “We shall

offer a wide range of well-designed, functional home furnish-

ing products at prices so low that as many as possible will

be able to afford them.” To achieve this proposition, IKEA’s

designers have focused on delivering products that can be

assembled by the customer; this is done by selling the prod-

ucts in “knocked-down” form, which is cheaper to store and

ship. For example, an unassembled, knocked-down bookcase

is more compact and cheaper to ship than a preassembled

bookcase. In addition, by using flat-pack distribution methods,

the products can be easily transported by either car or public

transport (e.g., bus) from the store to the consumer’s home.

This innovation required changes in product designs, but italso required changes in suppliers, transportation modes, and

scopes of responsibilities. Some of the supply chain responsi-

bility has been shifted to the customer, for example.


(Seven Cycles, for example, discussed in the Get Real box below). On the other hand,

some service operations such as repair shops need the ability to handle wide ranges

of unpredictable tasks.

2. Flexibility is a means for coping with uncertainty. Uncertainty can exist in demand,

in processing, or in supply. Flexibility development efforts should be concentrated on

those areas where uncertainty cannot be reduced and where buffering (inventory) isnot an effective option.

3. Enhancing flexibility requires cooperation both inside and outside the firm. Flex-

ibility is affected by many factors including product and process designs, organiza-

tional structures, information systems, and supply chain relationships. For example,

modularly designed products are needed to build product modification flexibility.

Response flexibility is often limited by information availability or by supplier

capabilities. Most types of flexibility require efforts to integrate operations across

functions and organizational boundaries.

Sustainability and Risk Management

In recent years, operations managers have begun to address sustainabil-

ity 4 and risk-related issues more explicitly as a part of their competitive

priorities. There are many issues that could be included under this area.

With sustainability, the focus is on maintaining operations that are both profitable and nondamaging to society or the environment. A primary

focus of risk management is to build operations that anticipate and deal

sustainability Maintaining opera-tions that are both profitable andnondamaging to society or theenvironment.

risk management Developingoperations that anticipate anddeal with problems resultingfrom natural events, socialfactors, economic issues,or technological issues.

sustainability Maintaining opera-tions that are both profitable andnondamaging to society or theenvironment.

risk management Developingoperations that anticipate anddeal with problems resultingfrom natural events, socialfactors, economic issues,or technological issues.

3 For more information, see www.ikea.com

For Seven Cycles, identify and dis-

cuss the order qualifiers, order los-

ers, and order winners.

s t u d e n tactivity

4Sustainability, which deals with how the firm and its operations management system performs on balancing per-

formance across the three dimensions of people, profit, and the planet, is discussed in greater detail in Chapter 17.


Please conf

setting.

e have reduced

e box size to fix

e text. please

nfirm this setting.




Seven Cycles: Building a Bicycle Your Way

GETREAL

“One bike. Yours.” This isn’t simply a slogan. It represents the

heart of Seven Cycles’ philosophy about who they are and what

they do. And nowhere is this philosophy more apparent than

in their manufacturing processes. At Seven, each craftsperson

focuses on only one bike at a time. Unlike most bikes, which

are produced on an assembly line or in batches—destined for

a warehouse or a shop’s inventory—a Seven is created spe-

cifically for a given customer: one machinist; one welder; one

finisher; one bike.

Frame building at Seven is both an art and a science,

requiring a special harmony between creative enthusiasm

and manufacturing discipline. However, there’s no room

for interpretation when it comes to quality. Each stage in

manufacturing—from materials selection to the application of

the frame’s finish—employs standards for precision unparal-

leled in the industry.

Seven Cycles owns several proprietary technologies that

allow them to hold tolerances at much stricter levels than

their competition. In addition, they have extremely rigorous

quality inspection routines and supporting technologies. By

developing these capabilities, Seven is aiming at delivering

a riding experience that is different, and unmatched by any

competitor.

Source: www.sevencycles.com/home.php.

Nancy Nord, commissioner of the U.S. Consumer

Product Safety Commission announces the Mattel

toys recall. Mattel is the world’s largest toy

company.


with problems resulting from natural events (e.g., earthquakes), social factors (e.g., strikes),

economic issues (e.g., a bankruptcy of a critical supplier), or technological issues (e.g., find-

ing a major flaw in software). In addition to these operational types of risks, safety and secu-

rity are growing key concerns, especially as supply chain operations become more global

and dispersed. A famous example is provided by Mattel in 2007. The company recalled

over nine million toys because of concerns over lead in the paint that was introduced by the

actions of a lower-tier supplier located in China. In addition, firms that provide food and

drugs are intensely concerned with contamination, either accidental or intentional.

Governments, social groups, and consumers are placing

increasing demands on companies to be more socially respon-

sible. Some customers place the company’s reputation for

social responsibility as an order winner, or at least a qualifier. In

response, operations managers must place priorities on prevent-ing environmental or human damage as a result of operations.

This means an increasing emphasis on reduction of biohazards,

and on using materials and processes that use less energy,

require less input, and generate less waste. Operations manag-

ers are also under pressure to ensure that workers are treated

fairly and given a safe work environment. These priorities have

serious implications for decisions affecting all aspects of opera-

tions, beginning with supplier selection and buying decisions

and ending with product disposal. Chapter 17 discusses sustain-

ability issues in depth.

Capabilities: Strengths and Limitations

of Supply Chain Operations

The third element of delivering value, as identified in Figure 2-2, is capabilities. Capabili-

ties are unique and superior operational abilities that stem from the routines, skills, and

processes that the firm develops and uses. As we stated earlier, it is very difficult for an

operations system to simultaneously deliver high levels of performance on many differ-

ent dimensions. Thus, it is important to develop capabilities in the few areas that are of

greatest strategic value for the firm.

capabilities Unique and superioroperational abilities that stemfrom the routines, skills, andprocesses that the firm developsand uses.

capabilities Unique and superioroperational abilities that stemfrom the routines, skills, andprocesses that the firm developsand uses.





Honda Airplane Powered by Honda Jet Engine

F P O


It is difficult to describe capabilities directly without describing them in terms of out-

comes such as quality, flexibility, and so on. Usually, abilities to deliver superior performance

come from investments and developmental efforts in one or more of the following areas:

• Processes —specialized routines, procedures, and performance measurement systems

that guide operational activities.• Planning systems —access and development of sources of information, and use of

proprietary decision support systems and processes.

• Technology —proprietary usage of hardware or software that enables the firm to do

things differently and/or better than competitors.

• People and culture —skills, associated training programs, and cultural norms for

the company that produce better motivation and performance. The impact of culture

must be recognized at both a corporate and at a national level.5

• Supply chain relationships —unique and exclusive relationships with customers and

suppliers that are unmatched by competitors.

The Seven Cycles example discussed earlier presents a good example of how both

company culture (philosophy) and special technologies can create unique capabilities.

Without the right capabilities, the firm cannot deliver to the critical customer the promises

made within its value proposition.

Sometimes certain capabilities become so unique and valuable to a firm that they are considered to be “core,”

that is, central to the very existence of the firm. Core

capabilities are the skills, processes, and systems that

are unique to the firm and that enable it to deliver prod-

ucts that are both valued by the customer and difficult for

competitors to imitate. These are strategically critical,

and are often the source of a stream of new products and

market opportunities. For example, over the years Honda

has developed successful products in a wide range of very

different markets—motorcycles, power generators, cars,

marine engines, lawn mowers, snow blowers, and now jet

airplanes. In each market, Honda moved from being an

outsider to become one of the major players.

Honda succeeded because its core capability is its

ability to design and build high-efficiency, low-vibrationmotors and engines. Such engines are common to each

of the markets that Honda entered. This example reveals

some of the key characteristics of a core capability:

1. It is based on factors (skills, technology, etc.) that are rare or unique to the firm.

2. It is hard to imitate, because the source factors are hard to describe and take a long

time to develop.

3. It is valuable in that it is extendable to many market opportunities.

4. There are few substitutes for it; it does not become obsolete over time.

It goes without saying that

every firm should have at least one

core capability. Furthermore, it

should be aware of what these core

capabilities are. Finally, it should seek to refine and exploit its core

capabilities.

core capabilities The skills,processes, and systems thatare unique to the firm and thatenable it to deliver products thatare both valued by the customerand difficult for the competitorsto imitate.

core capabilities The skills,processes, and systems thatare unique to the firm and thatenable it to deliver products thatare both valued by the customerand difficult for the competitorsto imitate.

Investigate recent developments such as the Honda Jet engine and the

new Honda Insight. What is common about these experiences. What is

different?

s t u d

e n tactivity

5 Chapter 17 discusses the issue of culture in greater detail.


are yet to

ive the image.

se check and

ide this image.




Apple Does Not Build a Low-Cost Netbook

GETREAL

Recently, there has been high demand for netbooks—low-cost,

low-powered portable computers that are designed to do certain

specific tasks such as write, do e-mails and browse the Inter-

net. Netbooks are not designed to play games, run statistics,

or carry out simulations. Most PC builders such as Lenovo, HP,

Dell, and Toshiba have offered such computers. One notable

exception: Apple. According to statements made by SteveJobs, the CEO of Apple, customers should not expect netbooks

from Apple any time soon. Why? The answer is that netbooks

are not consistent with the Apple business model. Apple

offers products that are highly integrated, well thought-out,

and characterized by product innovation. To produce these

products, Apple has developed operational excellence in

three areas: software engineering, hardware manufacturing,

and retail. Of these three, the “king” is software engineering

(which often drives the other two elements). In exchange for

these premium features, Apple demands and often receives a

premium price. A netbook, which is designed to compete onportability and price, is not consistent with this model. It does

not draw on Apple’s excellence in software engineering, hard-

ware manufacturing, and retail. Consequently, don’t expect to

see a netbook from Apple any time soon.

Prepare How do operations managers execute theirstrategies?

OrganizeDeploying Operations Strategy: CreatingValue through Execution

Feedback/Measurement: Communicatingand Assessing Operations Strategy

The Strategic Profit Model

The Balanced Scorecard

The Supply Chain Operations Reference

Model


Maintaining the Fit between Customer Outcomes,

Value Propositions, and Capabilities

At the heart of operations strategy is the notion of fit. Fit exists when operational capabili-

ties are consistent with and supportive of the value proposition and the outcomes desired

by critical customers.

If strategic planning processes are neglected, over time the dynamics of changing mar-

ket trends, technologies, and competition can destroy the fit between customer-desired

outcomes, value propositions, and capabilities. A company can find itself with capabili-

ties and value propositions that no customers care about, either because it made improper

investments, or because existing customers changed, or both. For example, a firm may

find itself using technologies that have become obsolete. Under such conditions, man-

agement has three options: (1) live with the mismatch (which means reduced profits and

potential opportunities for the competition); (2) change the critical customers to those who

value the solutions provided by the firm; or (3) change the operational capabilities. Each

option requires top management involvement, resources, and time. Most often, changing

operational capabilities is the hardest of the changes to make because the development of

capabilities typically takes heavy investments made over long periods of time. Option (2),

changing critical customers, is sometimes not possible, as appropriate customers may no

longer exist. Given that option (1) is not sustainable over the long term, it should be clear

that developing effective strategic planning processes that maintain fit areimperative for a firm’s survival over time.

A Get Real box provides an excellent example of how Apple has main-

tained the fit between its capabilities, customers, and value proposition by

refusing to offer products that are inconsistent with its core capabilities.

DEPLOYING OPERATIONS STRATEGY:CREATING VALUE THROUGHEXECUTION

Having established the objectives and goals of operations strategy, the next

step is to deploy the strategy—to convert strategic goals into operating

realities. Strategy deployment consists of two interrelated activities:

• Execution —to carry out plans and initiatives in order to deliver therealized value to customers.

fit The extent to which there isalignment between the firm’s

operational capabilities, its valueproposition, and the desires ofits critical customers.

fit The extent to which there isalignment between the firm’s

operational capabilities, its valueproposition, and the desires ofits critical customers.






• Feedback/measurement —to assess, communicate, and manage performance in ways

that capture lessons learned and focus attention to areas needing improvement.

Operations strategy is ultimately defined by what is done over time, not by what is

written down as plans. Managers have to assign resources to tasks, identify the relative

priorities of competing orders, and monitor the progress of orders and work as they flowthrough the system. Ideally, operations managers will make these decisions in a manner

that is consistent with the competitive priorities stated in the strategy. In addition, manag-

ers have to devise and implement strategic initiatives needed to make planned changes to

supply chain operations a reality. Such initiatives are projects aimed at making changes

or improvements that bring resources, skills, relationships, and technologies into targeted

levels. For example, an operations strategy might depend heavily on making changes such

as installing new equipment or systems, implementing a training program, adopting a new

management approach (such as Six Sigma or lean manufacturing), acquiring or divesting

facilities, or downsizing the workforce.

Given the cross-functional, integrated nature of operations management, strategic ini-

tiatives must necessarily address operations that are spread across internal functions as

well as across organizations making up the supply chain. Initiatives need to be coordinated

across internal supply management, logistics, marketing, sales, and engineering groups

in order to ensure that consistent decisions are made. Similarly, including supply chain

partners in strategic planning and execution creates opportunities to exploit the comple-mentary skills and assets of the partnerships. However, this also increases the complexity

of planning, and reduces that amount of direct visibility and control that managers have

over operational outcomes. Decisions and strategic initiatives must be formed in ways that

integrate the concerns of internal operational activities with the concerns of operations

located in supplier and customer organizations, without creating too much dependence on

external partners.

A complete operations strategy includes decisions that address both internal opera-

tions and the external supply chain. Decisions must also address the physical, structural

elements of operations as well as the intangible, infrastructural elements. Table 2-2 lists

decision areas that constitute the means by which an operations strategy is deployed. Taken

together, these decisions define the operations management system of the firm, how it is

structured, how it operates, and how it is evaluated. These decisions are discussed in more

detail in various Chapters throughout this book.

The first four decision categories presented in Table 2-2 — capacity, facilities, tech-

nology, and supply chain network —are structural in nature. They affect strategy and the physical operations management system. Once made, decisions in these areas act as con-

straints, determining what the operations management system can and cannot do well.

Altering these decisions often requires significant investments and lots of time—often

years. The remaining four decision areas— workforce, production planning and control,

process innovation, and organization —are infrastructural in nature. Decisions in these

areas determine what is done, when it is done and who does it. The decision areas are

closely interrelated. For example, decisions regarding the supply chain network also affect

the type of information technology that must be in place, how activities are scheduled, and

how people are recruited and evaluated. Because these areas are interrelated, managers

who make a decision affecting one area must consider the impacts of the decision on the

other areas. Equally important, decision makers must consider how operations decisions

affect decisions in other areas such as marketing, finance, and human resources. Table 2-2

indicates some of the other functional areas likely to be affected by each of the decisions

in operations management.

Feedback/Measurement: Communicating

and Assessing Operations Strategy

Performance measurement plays a very important role in the successful development and

deployment of operations strategy. Performance measures communicate expectations,





Decision Domain Operations Management Issues Considered Other Functional Groups Involved

Capacity Amount of capacity, timing of changes in capacity,type of capacity used

Finance, Marketing

Facilities Size of facilities, location of facilities, specializationof what the facilities do

Finance, Marketing

Technology Hardware: equipment types, automation, linkages

Information systems and software: equipment,type, purpose of packages, interfaces/linkages

Finance, Engineering, InformationTechnology, Human Resources

Supply chain network Supply network: sourcing policies, level of verticalintegration/outsourcing, network structure andassignment of responsibilities, supplier relation-ships, segmentation of supply base

Customer/distribution network: transportation modes,network structure and assignment of responsibilities,customer relationships, sales and delivery channels

Finance, Engineering,Marketing, Sales

Workforce Skill level, training, wage policies, employmentsecurity, incentives and reward systems

Human Resources

Production planningand control

Planning procedures and decision rules; controls oncost, workflow, and quality; performance measure-ment; market orientation (make-to-order,make-to-stock)

Finance, Human Resources

Product/processinnovation

Improvement programs, problem-solving procedures,knowledge management, change management, newproduct launches, management of intellectual property

Engineering, Human Resources

Organization andmanagement

Centralization, authority hierarchy, roles of staffpeople, intra-firm relationships, performance metrics

Human Resources, Marketing

TABLE 2-2 Strategic Decision Areas in Operations Management


telling workers what is important and what is not. In this way, they drive decisions and

behaviors. Consequently, performance measures must be consistent with and supportive of

corporate/SBU/functional unit objectives. Further, they should point out needed corrective

actions when actual and expected levels of performance do not align properly.

Most performance measurement systems include a mix of financial and opera-

tional metrics. In the following sections, we briefly describe three different measurement

approaches that are often applied in operations strategy.

The Strategic Profit Model

Otherwise known as the DuPont Model, the strategic profit model (SPM) shows how

income and balance sheet data are interrelated, and how operational changes affect the

overall performance of a business unit. Thus, it makes the efforts of operations manage-

ment meaningful to top management and to the financial community.

The SPM focuses on return on assets (ROA), which is then used to calculate return

On net worth (RONW). RONW is the return on the funds and resources that the own-ers or stockholders have invested in the firm. The SPM is shown in Figure 2-3. ROA is

calculated by multiplying the net profit margin (defined as a percentage) by asset turn-

over. The net profit margin measures the percentage of each dollar that is kept by the

firm as net profit. The asset turnover measures how efficient management was in using its

assets. For example, an asset turnover of 4 indicates that for every $4 of sales, management

strategic profit model (SPM)A model that shows how opera-tional changes affect the overallperformance of a business unit.

strategic profit model (SPM)A model that shows how opera-tional changes affect the overallperformance of a business unit.





Return onnet worth

net profit

net worth

Net profit

Gross margin

Sales

Total

expenses

Cost of

goods sold

Financialleverage

total assets

net worth

Return onassets

net profit

total assets

%

Sales

$

$

Variable

expenses

$

Fixed

expenses

$

$

$

×

−

−

+

+

=

×=

$

$

Net profit

margin

net profit

net sales

%

Sales

Times

Total assets

$

Current assets

$

Fixed assets

$

Inventory

$

$

+

+

Asset

turnover

net sales

total assets

Accounts

receivable

$

Other current

assets

$

+

+

FIGURE 2-3 StrategicProfit Model6


had invested only $1 in assets. The net profit margin and asset turnover capture different

aspects of performance. Net profit margin deals with issues such as sales volume, operat-

ing costs, and variable costs. Net assets deals with issues such the amount of inventory

needed (a key concern of operations managers, and one of the major assets controlled by

operations). In general, the higher the ROA, the better the level of performance.

The SPM is useful evaluating both operational and marketing-based plans and actions,

and answering “what-if” questions such as: What if we reduced fixed expenses by 10 per-

cent? What would be the overall impact on RONW? Changes in operations (such as reduc-

tions in inventory or improvements in quality) enter the SPM on the right. These changes

become converted by the SPM into financial impact (of interest to top management). The

solved problem at the end of this chapter gives an example of this type of analysis.

The SPM model is relatively simple and straightforward to use. The data required for

the model are readily available in most firms with well-developed financial and accounting

systems. The model reduces all aspects of performance into one number, RONW, making

it simple to compare performance across different time periods and different divisions. It

helps direct management’s attention to those areas that represent opportunities or problems.

Since the SPM is a system of metrics, it shows how performances in different areas of the

firm are related. This helps managers avoid decisions that might improve performance in

one area to the detriment of other areas.

6 Note that in the SPM, cost of goods sold refers to the actual costs incurred in making the product or service while

expenses refers to the costs of supporting the sale and the business.


We have r

this figure

fix the text

confirm th




Financial

To succeedfinancially, how

should weappear we

appear to ourshareholders?

The balanced scorecard supplies a framework to translate a strategy into operational terms

O

b j e c t i v e s

M

e a s u r e s

T

a r g e t s

I n i t i a t i v e s

Learning and Growth

To achieve ourvision, how will

we sustain ourability to changeand improve?

O b j e c t i v e s

M e a s u r e s

T a r g e t s


Customer

To achieve our

vision, howshould we

appear tocustomers?

O b j e c t i v e s

M e a s u r e s

T a r g e t s


Internal Business Process

To satisfy our

shareholdersand customers,

what businessprocesses mustwe excel at?

O b j e c t i v e s

M e a s u r e s

T a r g e t s


Visionand

Strategy

FIGURE 2-4 BalancedScorecardSource: Robert S. Kaplan andDavid Norton. The Balanced

Scorecard (Cambridge, MA:Harvard Business SchoolPress, 1996).

7 Robert S. Kaplan and David Norton, “The Balanced Scorecard—Measures That Drive Performance,” Harvard

Business Review, January/February 1992, pp. 71–79.


The Balanced Scorecard

Like the strategic profit model, the balanced scorecard7 is an integrative approach for

developing strategic, organizational-level metrics. Unlike the SPM, the balanced scorecard

encourages the use of a mix of financial metrics and nonfinancial, operational metrics. The

balanced scorecard seeks to integrate these various metrics into a meaningful whole, creat-ing a strategic framework for action. The balanced scorecard approach assumes that suc-

cess is based on balanced management of activities in four major areas: financial, internal

business processes, learning and growth, and the customer. In each of these areas, metrics

should address a central question (see Figure 2-4). For each question, the balanced score-

card approach requires the development of objectives, measures for each objective, target

performance levels for each measure, and planned initiatives for reaching each target.

The balanced scorecard approach can be used as both a strategic planning tool and a

strategy deployment tool. That is, it provides a mechanism by which focused short-term

plans and improvement initiatives are aligned with long-term strategic objectives. As a

framework for translating strategy into operational terms, the balanced scorecard helps to:

• Set direction and communicate specific objectives and goals.

• Define measures that indicate degree of achievement of specific objectives.

• Determine the relative importance of the targets of opportunities for improvement.

• Maintain consistency and alignment between the corporate-level objectives and theoperational initiatives, and the objectives/initiatives and strategic objectives and

annual goals.

As Figure 2-4 suggests, the balanced scorecard helps to create a cycle of planning,

action, assessment, and feedback. It also prevents management from focusing on one area

(e.g., financial performance) to the detriment of the other three areas. To succeed finan-

cially, the firm must focus on serving its critical customers through appropriate processes.

It must also invest in the future because what works today may not work in the future.

balanced scorecard An integra-tive approach for developingstrategic, organizational-levelmetrics.

balanced scorecard An integra-tive approach for developingstrategic, organizational-levelmetrics.


We have reduced

this figure sizing to

fix the text. please

confirm this setting.




FIGURE 2-5 Perfor-mance Metrics in theSCOR modelSource: Elaine Reichardt andLindsay Jackson Nichols,“SCOR Your ISO Certifica-tion.” Quality 42. no. 2(February 2003). p. 44.


The Supply Chain Operational Reference Model

With the advent of supply chain management, managers have increasingly sought to coordi-

nate activities spanning customer and supplier organizations. One of the resulting challenges

is finding new ways to communicate objectives and performance outcomes among supply

chain partners. In the late 1990s a group of industrialists from about 70 leading companiescreated an organization called the “supply chain council.” Working together they developed

the supply chain operational reference model (commonly known as the SCOR model).8

The SCOR model includes more than just metrics; it provides tools for charting and describ-

ing supply chain processes. It also describes supply chain management best practices and

technology. However, we will focus only on the metrics portion of the model.

The SCOR model identifies basic management practices at different levels of opera-

tion. For example, “level 1” processes include plan, source, make, deliver, and return. One

of the basic tenets of the SCOR model is that metrics should cascade hierarchically from

one level to the next. At each of the levels addressing the supply chain, SCOR addresses

five basic dimensions of performance. They are:

• Delivery reliability: The performance of the supply chain in delivering the correct

product, to the correct place, at the correct time, in the correct condition and packag-

ing, in the correct quantity, with the correct documentation, to the correct customer.

• Responsiveness: The velocity at which a supply chain provides products to thecustomer.

• Flexibility: The agility of a supply chain in responding to marketplace changes to

gain or maintain competitive advantage.

• Costs: The costs associated with operating the supply chain.

• Asset management efficiency: The effectiveness of an organization in managing

assets to support demand satisfaction. This includes the management of all assets:

fixed and working capital.

The SCOR model identifies performance metrics for each of these dimensions.

Figure 2-5 shows level 1 metrics along with examples of actual and desired levels of per-

formance for a given supply chain. Note that Figure 2-5 also includes metrics addressing

shareholder concerns such as profitability and return on assets.

One of the objectives of the SCOR model is to provide a framework for benchmarking

and for deploying strategy. Figure 2-5 illustrates the results of a benchmarking analysis

supply chain operationalreference model (SCOR) A model for assessing, charting,and describing supply chain pro-cesses and their performance.

supply chain operationalreference model (SCOR) A model for assessing, charting,and describing supply chain pro-cesses and their performance.

8 See www.supply-chain.org for more information on the supply chain council and the SCOR model


We have ye

receive the

please checprovide this




This chapter has introduced the operations strategic planning process within the context

of supply chain management. In discussing this process, the following points were made

within this chapter:

1. Strategic planning defines the specific types of value that the firm will deliver to its

customers. It takes place at three levels. Corporate strategy identifies the business

units to be included in the firm. Business unit strategy defines how the business

will compete. Operations strategy identifies the priorities, capabilities, and resourcedeployments needed to support the business strategy and associated value proposi-

tion. These three levels of strategic planning should be integrated, with planning tak-

ing place from the top down, while execution takes place from the bottom up.

2. The operations strategic planning process begins with the critical customer. The

demands of this customer have to be translated into meaningful terms using the con-

cepts of order winners, order qualifiers, and order losers.

3. Operations strategy brings together three critical elements: critical customers, value

propositions, and operations capabilities. The fit between these elements defines the

effectiveness of the strategy.

4. Competitive priorities address product-related issues (quality, lead time, cost) and

longer term process-related issues (innovation, flexibility, sustainability and risk

management).

5. In developing the future capabilities of the supply chain, operations managers must

know what their firm’s existing core competencies are (because these must be protected).

6. Extending strategy development to multiple functions and supply chain partners,

operations managers must make critical strategic decisions about what is to be done,

with what resources, when activities are to take place, and who is responsible.

7. Critical to strategic success is the ability of the firm to effectively integrate and main-

tain fit among the desires of critical customers, the firm’s value proposition, and its

operational capabilities.

8. Strategic assessment tools like the strategic profit model (SPM), balanced scorecard,

and supply chain operational reference model (SCOR) help link and integrate strate-

gic plans, operations strategies, operational actions, and performance.

CHAPTER SUMMARY


with the data provided in the right-hand columns. The data indicate the level of perfor-

mance necessary to be on a par with the industry middle performers, as well as levels

required to gain differential advantage. The data in the right-most column indicate the

impact of improvement in a given performance metric, either on revenues, costs, or invest-

ments. This type of analysis could help partners in a supply chain to plan and prioritize

operational improvement initiatives in accordance with an overall business strategy.

KEY TERMS

balanced scorecard 00

business unit strategy 00

capabilities 00

core capabilities 00

corporate strategy 00

cost 00

critical customer 00

customers 00

fit 00





flexibility 00

functional strategy 00

innovation 00

lead time 00

operations strategy 00

order losers 00

order qualifiers 00

order to delivery lead time

00

order winners 00

quality 00

risk management 00

strategic business unit

(SBU) 00

strategic profit model

(SPM) 00

supply chain operational

reference model (SCOR)

00

sustainability 00

timeliness 00

time to market 00

value proposition 00

DISCUSSIONQUESTIONS

44

1. Why should the firm never outsource its core capabilities? What happens if the firm is

approached by a supplier who is willing to supply goods and services based on thesecore capabilities at a significantly lower price? What should the firm do?

2. Apply the corporate/SBU/functional planning hierarchy introduced in this chapter to

your university/college or business. What would be the equivalent to corporate plan-

ning? SBU planning? Functional planning?

3. How would you define capabilities within a school or business?

4. When can a consumer be a critical consumer? In other words, when does it make sense

to focus on consumers such as retail stores, distributors, or buyers, rather than on the

end consumer?

5. A critical concept introduced in this chapter was that of the value proposition. Explore

two competing products (e.g., RIMs the BlackBerry, and Apple’s iPhone). Identify the

underlying value propositions present in these products and how this proposition is

evident in the resulting products.

6. Core competencies are critical issues in operations management. Are there any

instances in which a firm’s core competencies can be a liability rather than an asset?7. Fit is critical to the development and maintenance of a successful operations strategy.

Suppose that we are faced with a firm in which there is a lack of fit between the out-

comes desired by the critical customer, the value proposition, and the firm’s capabili-

ties. What options are available to the firm in the short term when dealing with this

lack of fit? What is the impact of the lack of fit? What are the implications of the firm

trying to improve the fit?

8. Suppose that you are the owner of pizzeria that is located near to a university or col-

lege. How could you use the concepts of order winners, order qualifiers, and order

losers to help develop and implement an attractive business model?

9. Business models can be regarded as works in process. That is, they are continuously

being reviewed and refined. Why are firms (especially good firms) continuously test-

ing and reviewing their business models? What are the implications of this testing for

operations management?

10. Why should metrics be regarded as primarily methods of communication? Think about the relationship between a metric, the strategy, and the task being carried out by

an operations person.

11. A metrics consists of three elements: the measure, the standard (what is expected), and

the reward. Why are all three elements critical? What happens to the effectiveness of a

metric when one of these three elements is missing?





12. What is the impact of sustainability on the business model? How does it affect issues

such as the order winners, order losers, and order qualifiers? How does it affect the

identification of the critical customer? When addressing this question, look up such

products as Chrome or Timbuk2 for bags or Teva or Mio or Timberlane for shoes.

13. Why is there a need for the four dimensions of the balanced scorecard?

14. As North American firms increasingly turn to product innovation, the management

and protection of intellectual property becomes an important issue. Discuss how intel-

lectual property considerations can affect such areas in supply chain strategy as:

a. Supplier relationships.

b. Supplier contracts.

c. Supplier location.

d. Attractiveness of vertical integration.

a. Elm Furniture Company, a medium-sized, publicly traded manufacturer of wood-based

office and home furniture systems, has agreed that its major goal should be to “Become

recognized as a value and social leader in the wood furniture industry.” Consistent with

this macro goal, Elm Furniture had identified the following specific objectives:

• Become recognized as a leader in the use and application of environmentally

responsible practices and systems.

• Achieve sales growth averaging 5 percent more than that of the industry average.

• Keep stock price stable relative to that of the industry average.• Reduce cost and waste at all levels of the firm.

• Be recognized as a design leader.

Using these goals and the balanced scorecard approach, what would the corresponding

goals and metrics be for the following?

a. Operations management/manufacturing.

b. Product engineering and design.

c. Sales and marketing.

d. Purchasing/supply chain management.

SOLVEDPROBLEM

Suppose you have been asked to determine the return on net worth for Great NorthwestCanoe and Kayak, a small manufacturer of kayaks and canoes, located near Seattle,

Washington. For this task, you have been given the following information:

What is the return on assets for Great Northwest Canoe and Kayak?

45

Categories Values

Sales $32,000,000

Cost of goods sold $20,000,000

Variable expenses $4,000,000

Fixed expenses $6,000,000

Inventory $8,000,000

Accounts receivable $4,000,000

Other current assets $3,000,000

Fixed assets $6,000,000

Financial leverage 1.72


Please confirm this

setting.




46

Solution:

To address this question, we must first calculate net profit margin and the asset turnover.

This can be done using the structure for the SPM found in Exhibit 2-5.

Gross Margin 32,000,000 20,000,000 12,000,000

Total Expenses 6,000,000 4,000,000 10,000,000 Net Profit Gross Margin Total Expenses 2,000,000

Net Profit Margin Net Profit Sales 6.25%

Current Assets Inventory Accounts Receivable Other Current Assets $15,000,000

Total Assets Current Assets Fixed Assets $21,000,000

Asset Turnover Sales Total Assets 1.52

Return on Assets Net Profit Margin Asset Turnover 6.25 1.52 9.5

Return on Net Worth Financial Leverage Return on Assets 1.72 9.5 16.34

With the information given, what can we say about the size of the total assets used by the

firm?

Solution:

To address this question, we must remember that financial leverage is defined as total

assets/net worth. Since we know that Total Assets = $21,000,000, we can do the followingcalculation:

1.72 21,000,000 x 1.72x 21,000,000 x (21,000,000 1.72) $12,209,300.

What areas should we as operations managers focus on if our goal is to improve RONW?

Solution:

We can see that the largest asset under our control is inventory. By reducing inventory we

can improve the RONW (It is left up to the student to prove this. One way of doing this

is to examine the impact on RONW of a $1 million reduction in inventory or a $1 million

increase in inventory.)

PROBLEMS

Categories Values

Sales $48,000,000

Cost of goods sold $24,000,000

Variable expenses $8,000,000

Fixed expenses $8,000,000

Inventory $6,000,000

Accounts receivable $3,000,000

Other current assets $4,000,000

Fixed assets $10,000,000

Financial leverage 1.625


Please confirm this

setting.




CASE

Otis Toy Trains of Minneapolis, Minnesota, was a land-

mark company in the toy business. Since the 1900s, it had been responsible for building electrical and steam-driven

toy trains. Since the 1950s, Otis trains had developed a

major presence on children’s television shows. Every per-

son (especially boys) knew about Otis toy trains and nearly

everyone wanted one. For many kids growing up in the

1960s to the 1980s, waking up on Christmas day and find-

ing an Otis toy train set under the tree was a dream come

true. However, the 1990s had not been good to Otis Toy

Trains. The preferences of many children had changed.

Instead of toys, what many children wanted was a game

playing system (like Sony’s PS2 or Microsoft Xbox or

Nintindo’s GameBoy Advanced). After a lot of investiga-

tion and assessment, the management at Otis had decided

to reorient the product and the market. Consequently,

it decided to target the adult male customer in the 30 to50 year age bracket. This market was selected for several

reasons. First, they had grown up with Otis toy trains and,

as a result, Otis had excellent brand recognition among

these buyers. Second, since Otis had decided to maintain

the bulk of its production facilities in the areas around

Minneapolis (the major production facility was located in

Rochester, Minnesota), it needed a buyer who was willing

to pay the premium now demanded by Otis Toy Trains for

its products. Adult males in the 30 to 50 year age bracket

typically had the income that supported luxury buys such

as the Otis toy trains. Finally, the new target market was

attractive because they tended to buy more than one sys-

tem and they tended to buy a large number of accessories

with their toy train purchases.

To sell to this new market, Otis introduced in 1995 theOtis Premium Trains of the Past series. This was a line of

highly detailed, highly accurate trains drawn from critical

points in North American history. The first launch con-

sisted of the De Witt Clinton Rocket (the first train oper-

ated in the United States), the Abraham Lincoln train

(a train model based on the train coaches that were used to

transport the body of the recently assassinated PresidentLincoln from Washington, DC, to Springfield, IL, for final

burial), the Zephyr (the famous streamlined train that ran

between Chicago and Denver during the 1930s), and the

Orange Blossom Special. Launched in limited numbers,

this first series was an unqualified success. Subsequent

launches were almost as successful. Over this time, the

designers at Otis Toy Trains developed and refined the

skill of identifying attractive train series and of designing

products that were detailed, attractive, accurate, and highly

evocative of past times.

By 2006, however, Otis Toy Trains found itself faced by

the challenge of dealing with increasing labor costs. It was

during this time period that the Joyous Luck Prosperity Toy

Company (JLPTC) of China approached the management

of the Otis Toy Train Company with a proposal that had already secured the support of Otis corporate accountants.

They proposed to work closely with the designers of the

Otis Toy Train Company with the goal of taking over the

bulk of production of the Otis Premium Trains of the Past

series. What JLPTC offered Otis was a landed price per

unit that was between 40 to 60 percent lower than current

manufacturing costs. This was a price that was too good to

pass up.

Questions

1. Assume that you are hired as a consultant to help Otis

Toy Trains. What recommendations would you give to

the management of Otis regarding the attractiveness of

this proposal?2. Assume that Otis decided to accept this proposal.

Identify and discuss the most appropriate relationship

that you would recommend for Otis and JLPTC? What

risks are present in this proposal? How could Otis pro-

tect itself from these risks?

Otis Toy Trains Explores the Supply Chain

47

1. Given the information above:

a. What is the net profit margin for this firm?

b. What is the asset turnover?

c. What is the return on assets?

d. What is return on net worth?

e. What is the size of the total assets used by the firm?

2. The managers of the firm described in problem 1 claim that the return on net worth for

the firm is 58.70? If this is the case, then what financial leverage is required to achieve

this return?





Steinway pianos have long been the premier brand among

serious pianists. Franz Liszt called his Steinway “a glorious

masterpiece.” Gioacchino Rossini, a 19th-century com-

poser, described the Steinway sound as “great as thunder,

sweet as the fluting of a nightingale.” In short, Steinway’s

product is the piano of choice for the vast majority of con-

cert artists.

From the beginning, Steinways were a work of art. Jose

Feghali, a classical pianist, illustrated this point when he

remarked, “With the best pianos, you can walk into a room

with 10 pianos and it’s like playing 10 different instru-

ments.” The prices of the 5,000 or so pianos that Steinway

produces each year range from $10,000 for an upright to

$62,000 for a special-order concert grand piano.

In the 1990s, Steinway & Sons encountered some prob-

lems. John and Robert Birmingham purchased the firm

in a $53.5 million leverage buyout deal. John’s previous

experience involved making plastic windows for enve-

lopes. Robert’s most recent experience was with a mail-

order business selling products with bear themes. Robert

Birmingham said that they were delighted with the pur-

chase because they viewed Steinway as a “great opportu-

nity” given the firm’s “great name and great tradition.”

Steinway’s craft-driven organization had not fared too

well under its previous owner, CBS. The turmoil result-

ing from frequent management changes had reduced the

consistency of Steinway’s cherished reputation. Dealers

complained that Steinways weren’t of the same quality any

more—they were often badly tuned and had sloppy finishes.

Finally, in 1978, CBS hired a long-time piano industry exec-

utive who helped restore much of Steinway’s reputation.

Now, a new set of outsiders owned them. That the own-

ers liked classical music did not assure Steinway’s 1,000

employees that they knew how to make classic quality

pianos. To make matters worse, the Birmingham brothers

were now talking about using their “extensive manufactur-

ing experience” to streamline operations. One commented

that the operation was “too reliant on a few craftsmen.”

Soon modern manufacturing methods crept into the

Steinway operation. A computer control system was intro-

duced to keep track of parts and inventory. Eight million

dollars was invested in new equipment to make the quality

of small parts, such as piano hammers, more consistent.

The loose-leaf binders that specified how pianos were to

be built were replaced with engineering drawings. By the

late 1980s, Steinway had entered the 20th century. John

Birmingham lamented: “The music industry is made up

largely of people enamored of music and the instruments

they make, but they don’t necessarily have great manage-

ment skills.”

As Steinway became more scientific, some stakehold-

ers began to be concerned. Many of the older craftsmen

found the new work environment not to their liking, and

they left. Equally important, some within the industry

began to be concerned that Steinway pianos were losing

their personality. Some dealers and their customers even

began to question the quality of Steinway’s latest pianos.

One classical pianist fumed that he had to use a 30-year-old

Steinway because he could not find a new one he liked.

Another dealer hired a consultant to review the quality of

the pianos he had purchased from Steinway. He claimed

that the soundboard, a key contributor to a piano’s qual-

ity, had developed cracks. The consultant reported that this

problem “indicated inadequate or improper controls over

wood moisture content during various stages of manu-

facture.” Subsequent study indicated that Steinway’s new

production quotas might have caused workers to pull wood

from the conditioning rooms before it was ready to be bent,

say, into a piano.

Questions

Assume that you are hired as a consultant to help

Steinway deal with these latest problems. How could you

use a value-driven approach to help this frm address

these problems? What would you recommend?

Steinway & Sons Piano

CASE

48





49

CASE

Trail Frames Chassis (TFC) of Elkhart Indiana is a major

manufacturer of chassis for the motor home and van mar-

kets. Since it was founded in 1976 by two unemployed

truck-manufacturing engineers, TFC has grown into one

of the major suppliers in this market. Success in the motor

home and van markets is difficult because of the constant

rate of change taking place. Increaslingly, motor homes

and vans are bought by people in their late 40s to 60s. What

these people want is a motor home that rides like a car.

They are willing to pay for innovations such as ABS (anti-

lock breaking systems), assisted steering, and computer-

balanced suspension. TFC produces a pusher type of

chassis. This is one powered by a diesel engine in whichthe engine is located in the rear. While expensive to build,

this design offers the customer a large number of advan-

tages (no tunnel for the transmission, reduced engine noise,

better handling). However, these chassis are used in motor

homes that are very expensive ($150,000 and up). TFC

builds its chassis for the large manufacturers— companies

such as Winnebago, Airstream, and Gulf Stream. In gen-

eral, these companies place orders for small quantities

(5 to 10 in a batch). Many of the units in a batch are cus-

tomized to a specific customer’s requirements.

TFC has become successful because of its ability to

develop new lines of designs in a timely fashion. These

designs build on TFC’s extensive experience with motor

home users. They also build on TFC’s knowledge of new

technological advances and its ability to incorporate theseadvances into its designs. As a result, TFC has become the

technological leader in this market. It is generally recog-

nized that no one in the industry can match TFC’s design

and marketing knowledge base.

TFC is proud of its ability to design and build highly

customized chasses. As John Stickley, its young and

aggressive chief operating officer, is proud of pointing

out, “Trail Frames has never met a customized chassis it

didn’t like.” Complimenting this focus on customization

and speed, TFC has developed a culture of doing anything

necessary to meet the needs of the customer. Changes

are often introduced on the fly with an engineer taking

a change down to the assembly line. In many cases, the

bills of materials (the recipes for what goes into a given

chassis) that were generated initially in engineering do not

agree with the components and parts actually put into the

chassis.

This approach has served TFC well for a number of

years. However, recently sales for TFC have begun to

level off. After visiting numerous customers in the field,

John Stickley identified what he thought was the reason

for this leveling off—the market for high-end, customized

motor home chassis had been effectively saturated. Therewere only just so many customized motor homes that

people wanted. Several of the major customers for TFC

had strongly hinted that there was another market that TFC

could enter that was consistent with its design strengths

and its reputation.

Many of TFC’s customers had noticed that there was

a significant gap between the high-end motor homes that

TFC served and the low-end market. The high-end con-

sisted primarily of “pushers,” and it began at $150,000;

the low-end consisted of “pullers,” and these products sold

for between $35,000 and $70,000. That is, a motor home

manufacturer would take an existing truck body (which

consisted of the front end and the cab) and mount on it a

motor home body. As can be seen, there was a significant

gap between the two markets.One of TFC’s major customers, Gulf Stream, ap-

proached TFC with an interesting proposal. It wanted TFC

to design and build a low-end pusher chassis for this mar-

ket. This chassis would go into a motor home that would

cost between $75,000 and $90,000. In contrast to the cur-

rent line of products, this chassis would not be custom-

ized. Rather, once the chassis was designed, it would not

be changed. Production runs would go up from batches of

five to batch runs of 100. Critical to success in this market

would be cost and conformance to the schedule. If TFC

Trail Frames Chassis





SELECTEDREADINGS & INTERNET SITES

Fine, C.H. Clockspeed. New York: Perseus Books, 1998.

Hayes, R.; G. Pisano; and S. Wheelwright, S. Operations,

Strategy, and Technology: Pursuing the Competitive Edge.

Hoboken, NJ: John Wiley & Sons, 2005.

Hill, T. Manufacturing Strategy: Text and Cases. New

York: McGraw-Hill/Irwin, 2000.

Mckeown, M. The Truth About Innovation. London:

Frances Pinter, 2008.

Ulwick, A.W. What Customers Want: Using Outcome-

Driven Innovation to Create Breakthrough Products and

Services. New York: McGraw-Hill, 2005.

Apple Inc.www.apple.com

General Electric Company

www.ge.com

Honda Motor Company, Inc.

www.honda.com

Honda Aircraft Company, Inc.

www.hondajet.com

Inter IKEA Systems B.V.

www.ikea.com

Seven Cycles, Inc.

www.sevencycles.com

50

could be the first to produce such a chassis, it would own

the market. The financials were very attractive. Theo-

retically, it seemed easy for TFC to enter this market. All

that had to be done was to take an existing chassis and to

take out the “costs” by using less-expensive components.

While TFC had never built such a chassis, there was no

reason why it should not work. The only danger that the

people at TFC could identify was that once it entered this

market, it would be potentially competing with such firms

as Ford, GM, and Toyota (major suppliers of the existing

chassis). However, these firms supplied pullers (a chassis

with the engine in front)—not pushers, like the proposed

TFC product. In spite of these issues, John was not sure as

to whether this was the right market for TFC.

Questions

1. Compare the order winners, order qualifiers, and order

losers for the customized chassis and for the proposed

TFC chassis. To what extent are these factors similar?

2. What type of strategic consistency would you expectto find in TFC for its existing customized chassis?

Would this be the same type of consistency that you

would find with the proposed chassis?

3. Evaluate the proposal for this new line of chassis. Is

this a business that TFC should get into? If yes, why?

If no, why not?

4. What would you recommend to John Stickley that

TFC should do to increase its sales and to stimulate

demand?

Sample Chap 02

Documents

Transcript of Sample Chap 02