Operations Strategy and Control
SIOM Nashik 1
Recap
• OSC-1-Aligning the resources with the strategic
plan
• OSC-2-Strategic Issues-The need for company
strategy, the strategic planning model, the need
for distinctive competencies
• OSC-3-Choices affecting operations structure-
Operations Strategy
• OSC-4- Choices affecting operations structure-
Product and Process decisions, product life cycle,
structural decisions
SIOM Nashik 2
Today-OSC-5/6
• Choices affecting operations Infrastructure-
Infrastructure choices and productivity
SIOM Nashik 3
Note: Up to Slide no. 43- OSC-4
Choices affecting operations structure
Case – Dresding Medical
• What is in doubt though is whether Dresding will
want to continue to market the older products in
the long term.
• However, we have no information on this, or even
information that would allow us to make a as to
whether it would be wise. The assumption must
be that the company will serve both markets, at
least in the short to medium terms.
• Given this, the question seems to be, ‘How do we
make the changes to the operations which the
new product will require?
Options
• Option A – design, manufacture and sell both
ranges of products using the same processes.
• Option B – design, manufacture and sell the
two ranges using entirely separate processes
(by setting up a separate operation, site or
even company).
• Option C – design, manufacture and sell both
ranges of products with some processes
shared and some separate.
Dresding Medical - Polar diagram illustrating the relative
importance of the performance objectives for the current and
new products
Quality
(specification)
Cost Quality
X X (conformance)
X
Delivery X Speed
X
flexibility
X
X X
Volume Dependability
flexibility
Customization
Current products
New products
Resource Usage
Market Competitiveness
*** Quality (spec)
Performance objectives
** * ***
**Quality (conform) * * **
Speed
Dependability * **
**
Delivery flex * *
*
Volume flex
*** Customization ** * ***
* Cost * *
Capacity Supply Process Development
Network Technology and
Organization
*** very important Lab style 50% of Low R&D, Mfg. and
** medium importance manufacture activities in- process Sales all share
* some importance easy to house technology common
change (but high knowledge
capacity product base.
incrementally technology) Incremental
new product
development
Decision areas
Dresding Medical - Current product range Slide 2.17
Resource Usage
Market Competitiveness
** Quality (spec)
Performance objectives
* ***
* Quality (conform)
** *** ***
Speed * **
**
* * Dependability **
Delivery flex *
*
Volume flex *** *
**
Customization
*** Cost *** ** *
Capacity Supply Process Development
Network Technology and
Organization
*** very important May need to New Needs R&D, Mfg. and
** medium importance adjust quickly supplies will investment Sales less
* some importance depending on be needed / in volume interdependent.
demand developed processes Faster time-to-
market needed
Decision areas
Dresding Medical - New product range
Slide 2.18
‘Fit’ is concerned with ensuring comprehensiveness,
correspondence, coherence and criticality
Resource Usage
Performance objectives
Quality Coherence Critical
Competitiveness
Correspondence
Speed
Market
Dependability Critical
Flexibility Critical
Cost Critical Critical
Supply Process Development
Capacity Technology and
Network
Organization
Decision areas
Comprehensive?
ORGANIZATIONAL STRUCTURE DESIGN
Organizational design focuses on the decision by
operations
Management about the features and linkages of
the organization. It has two aspects:
• Mechanisms that define the features
• Mechanism that link parts
64
Types of Organizational Structures
• Simple Structure
• Functional Structure
• Divisional Structure
• Conglomerate
Structure
• Hybrid Structure
• Matrix Structure 65
• Team-Based Structure
• Network Structure
• Centralized Vs
Decentralized
Simple Structure
Owner
Administrative
Assistant
There is only one hierarchical level of management
beneath the owner
Characteristics of Simple Design
• Small in size
• Less than four levels
• Little formalization
• Low complexity
• Centralized authority
67
Functional Structure
President
Vice President, Vice President, Vice President, Vice President,
Marketing Finance Production Human
Resources
68
Characteristics of Functional Design
• Used in large organizations
• Define staff function and one organization
• Requires functional specialties
• Less centralization
• Higher formality of functional design
69
Divisional Structure
Function Product
Divisions Customer Divisions
group activities around
group activities are common customers or
arranged around similar clients
products or services
Geographic Divisions 70
group activities around
defined regional
locations
Product Divisional Structure
President
Motion Magazine & Internet
Pictures & TV Music Division Products
Book Division
Division Division
71
Customer Divisional Structure
President
Consumer Mortgage Business Agriculture
Loans Loans Loans Loans
Geographic Divisional Structure
President
Western Northern Southern Eastern
Region Region Region Region
73
Characteristics of Divisional Design
• Great horizontal differentiation
• Made up of self-contained business unit
• Different product and services
• Differing level of process
• Different locations
• Decentralized authority
• Possibly redundant technical and administrative 74
functions
Conglomerate Structures
President
Lighting Appliances Aircraft Plastics Financial Broad-
Products Engines Services casting
75
Characteristics of Conglomerate Design
• Little task or output dependency
• Receives resources from conglomerate
• Return revenue to conglomerate
• independently functioning groups
• Distribution of risk over several business units
• High complexity
76
Hybrid Structures
Product
Divisional President
Structure
President President President President
Cadillac Buick Pontiac Chevrolet
Vice- Vice- Vice- Vice- Functional
President, President, President, President, divisional
Production Marketing Finance Human structure
Resources
Geographical 77
Manager Manager Manager Manager
Region I Region II Region III Region IV divisional structure
Characteristics of Hybrid Design
• Integrated functional design
• Duality of responsibility
• Decentralization
• Very low level of formality
• Highly complex
78
Matrix Structure
Project Functional
President Structure
structure
Vice Vice Vice Vice
President, President, President, President.
Project Engineering Finance Production Marketing
Manager, Subordin
Taurus ate
Project
reports to
Manager, both Vice
Mustang of
Project
Manager, marketing
Explorer & to
project
Project
Manager, Manager
Expedition
Characterstics of Matrix Organization
• Efficient use or resources
• Flexibility in conditions of change and uncertainty
• Technical excellence
• Freeing top management for long-run planning
• Improving motivation and commitment
• Providing opportunities for personal development
80
Team-Based Structures
Functional
President
structure
Vice Vice Vice Vice
President, R President, President, President,
&D Design Engineering Marketing
Project Product Team Product Team Product Team
teams Manager, Manager, Manager,
Manufacturing Manufacturing Manufacturing
Light Trucks Sedans Sport Cars
81
Project
team members
Network Structure
Design Components
Studio Assembly
Sweden Mexico, Asia
Core of
personal
computer
company
USA Distribution
Engineering
Company Company
Japan Canada
Accounting 82
& Finance
USA
Capacity strategy
• Capacity strategy is the process of identifying ,
measuring, and adjusting the limits of the
transformation process to support competitive
priorities such as
• Cost
• Quality
• Delivery
• Flexibility
There are three type of capacity strategies
• Lead strategy
• Lag strategy
• Tracking strategy
83
Lead strategy
Lead strategy: firms tries to add capacity in anticipation of increased
demand. This ensure that There will be almost always be excess
capacity
• Advantages
• Excess capacity used to handle emergency orders or recover from
unexpected interruption in production
• Excess capacity can also be used to seize market share in an
expending market
84
• Disadvantages
• Larger cost than the firms operating with capacity close to needs
• If market demand not expend firm need to downsize more
quickly then the other firms
• Constant pressure to manage extra capacity to reduce financial
burden
Lag strategy
Lag strategy : it advocates the adding capacity only when demand
patterns are obvious this means using every bit of capacity until
the firm is running 100% capacity regularly
• Advantages
• This strategy minimize the cost
• Minimize the possibility to be caught with excess capacity in
downturn or in the market that does not expend as expected
• Disadvantages
85
• As firm is operating at full capacity there is no room for error
• In case of any unexpected shut down or break down recovery to
meet schedule is almost impossible
• No capacity to cushion the shock to the internal environment
Tracking strategy
Tracking strategy : in the tracking strategy the firm tries to add
capacity in small increments to follow demand pattern closely.
Small increment imply decision such as adding overtime or
subcontracting work.
• Advantages
• in short run it provides the best of above mention two
strategies the firm can often add sufficient capacity to
accomplish the market expansion and still minimize costs
86
• Disadvantages
• It is not effective in long turn
• The need to add the bigger chunk as market grows make
this strategy ineffective
Facilities decision
Size
The four
major
decision
associated Location Focus
with
facilities
are Layout 87
Facility size
• The optimum size of facility depends on the
tradeoffs among three dimensions of volume
• Scope: the no. of items
• Scale: the total annual volume
• Vertical integration: the average no. of processing
steps carried out in the facility
• Facility size is motivated primarily by vertical 88
integration economics rather than by economies of
scale or scope
Facility Location
Competitive Imperatives Impacting Location
• The need to produce close to the customer due to
time-
based competition, trade agreements, and shipping
costs.
• The need to locate near the appropriate labor pool to
89
take advantage of low wage costs and/or high
technical skills
Issues in Facility Location
Cost factors
• Facility cost
• Taxes
• Local labor rates
• Utility cost
• Transportation cost
90
Issues in Facility Location cont.
• Qualitative factors
• Free Trade Zones
• Proximity to Customers
• Business Climate
• Political Risk
• Government Barriers
• Trading Blocs
• Environmental Regulation
• Host Community 91
• Competitive Advantage
• Infrastructure
• Quality of Labor
• Suppliers
Characteristics of Location Decisions
• Long-term decisions
• Very difficult to reverse
• Affect fixed & variable costs
• Transportation cost : As much as 25% of product
price
• Other costs: Taxes, wages, rent etc.
• Objective: Maximize benefit of location to firm 92
Location Decision Sequence
Country
Region
Site 93
Factors Affecting Country Decision
• Government
• Culture & economy
• Market location & size
• Labor
• Productivity
• Cost
• Skills
• Infrastructure
• Exchange rate
• Incentives
Factors Affecting Region/Community
Decision
• Corporate desires
• Attractiveness
• Labor
• Utility costs
• Local government incentives
• Proximity to customers & suppliers
• Land/construction
Factors Affecting Site Decision
• Site size
• Site cost
• Transportation in/out
• Proximity of services
• Environmental impact
Infrastructure Choices
• Organizational Design
• Quality management systems
• Information systems
• Operations Planning and Control Systems
Organizational Design
1. Centralized or decentralized organizational
structure choices
2. Hierarchical or horizontal management
structure choices
Centralized Vs Decentralized Structure
Attribute Centralized Decentralized
Strategic Corporate wide Autonomous and
Decisions semiautonomous;
division level
Profit and Loss Corporate Plant or division level
responsibility
Types of Products Mature; Various life cycle
and companies commodities; phases; discrete
process products and shorter
industry lead times
Plant Operations Planned Plant Management
Certainly
Centralized Vs Decentralized Structure
Attribute Centralized Decentralized
Performance Cost- Low Cost Flexibility and
objectives and Provider Delivery reliability
competitive strategy
(ies)
Issues Slow to Resource duplication
respond to among decentralized
market operations; low-cost
changes producer not likely
Hierarchical or Horizontal Structure
Decision Making and Hierarchical Horizontal
related attributes
Strategic decision Top Top Management
making and long- Management
range planning
Chain of authority Top- down Collaboration;
matrix leadership;
teams
Supply chain Functional Cross-functional
Management and focus and work
decisions Departmental teams
orientation
Hierarchical or Horizontal Structure
Decision Making and Hierarchical Horizontal
related attributes
Job definitions Stratified; Allow flexible job
highly and decision making
structured responsibilities
Employee decision Low or none Encouraged; norm at
making operational level
(empowerment)
Organizational Low High
Flexibility
Both Structures
• The centralized Vs decentralized choices involves
difference in areas ranging from decision- making
authority to profit and loss responsibility and
alignment with competitive advantages
• The hierarchal Vs horizontal choice elates mainly
to the decision making structure:
- Who makes decision at different levels of the
organizations- Strategic, tactical and operational?
- Who is most capable of making the best decision
for the organization?
Question to You
• In a hierarchical or horizontal structure more
conducive to the lean philosophy? Why?
Question to You
• In a hierarchical or horizontal structure more
conducive to the employee job commitment
that is necessary to meet operations
performance objectives? Why?
Performance Measurement Systems
• Integrated performance measurement
• Balanced Scorecard concept
Integrated Measurement Model
Integrated Measurement Model
Case-Performance Measurement
The objective of this short problem is to identify the most
important detailed performance measures for the
company described below using the generic list of
measures provided.
Company Snapshot: Scipa beverages is branded beverage
company with a relatively large national market share. Its
revenue are growing slightly faster than most of its rivals in
a mature and slow- growing market. Like most of its major
rivals, it has a very large marketing program, regional
bottling operations and equally diverse distribution
channels.
Case-Performance Measurement
Briefly asses the competitive environment for the company
based on the Industry growth rate and market life cycle of
its products, then answer the questions below:
Case-Performance Measurement
1. What are Scipa’s likely competitive strategies?
2. What are the two most significant performance
measures that relates to Scipa’s competitive strategies.
Why are they significant?
Case-Performance Measurement
Briefly asses the competitive environment for the company
based on the Industry growth rate and market life cycle of
its products, then answer the questions below:
Performance Typical measures
Objective
Speed Customer Query time
Order Lead Time
• Frequency of delivery
• Actual versus theoretical throughput time
• Cycle time
Case-Performance Measurement
Performance Typical measures
Objective
Dependability Percent of order delivered late
• Average lateness of orders
• Proportion of products in stock
• Mean deviation from promised arrival
• Schedule adherence
Flexibility Time needed to develop new products and
services
• Range of products and services
• Machine changeover time
• Average batch size
• Time to increase activity rate
• Average and maximum capacity
• Time to change schedules
Case-Performance Measurement
Performance Typical measures
Objective
Quality • Number of defects per unit
• Level of customer complainants
• Scrap Level and Warranty claims
• Mean time between failures
• Customer satisfaction score
• Specification quality
Cost • Efficiency
• Minimum and average delivery time
• Variance against the budget
• Use of resources
• Labor productivity
• Added value and Cost per operation hour
The Balanced Scorecard Concept
• The balanced score card approach was
devloped by Kaplan and Nortan, 1993 (HBR)-
Putting Balanced Scorecard to Work.
• Its premise is that there are factors beyond
financial performance that need to be
measured so that an organization can answer
four basic questions:
The Balanced Scorecard Concept
1. How should we be viewed by our shareholders
(Financial performance measure)?
2. What aspects of performance should business
process excel at (Internal process performance
measures)?
3. How should we be viewed by our customers
(Customer performance measures)?
4. How will be build capabilities over time
(learning and growth performance measures)?
The Balanced Scorecard approach
The Balanced Scorecard approach
To succeed financially how should we FINANCIAL
appear to our shareholders?
Objective Measures Targets Initiatives
To satisfy our shareholders and INTERNAL BUSINESS PROCESS
customers, what business processes
must we excel at? Objective Measures Targets Initiatives
To achieve our vision, how will we LEARNING AND GWORTH
sustain our ability to change and
improve? Objective Measures Targets Initiatives
To achieve our vision, how should we CUSTOMER
appear to our customers?
Objective Measures Targets Initiatives
Mission and Profit Driven organizations
Profit Driven Mission Driven
• What must we do to satisfy our Financial • What must we do to satisfy
shareholders? Perspective our financial contributors?
• What are our fiscal
obligations?
• What do our customers expect Customer Who is our customer?
from us? Perspective What do our customers expect
from us?
• What internal processes must Internal What internal processes must
we excel at to satisfy our Perspective we excel at to satisfy our fiscal
shareholder and customer? obligations, our customers and
the requirements of our
mission?
• How must our people learn and Learning and How must our people learn
develop skills to respond to Growth and develop skills to respond
these and future challenges? Perspective to these and future
challenges?
Barriers in Strategic Implementation
Ingredients of successful BSC programs
Ingredients of successful BSC programs
• Every measure is part of a chain of cause and effect
linkages
• A balance exists between outcome measures and
the performance drivers or desired outcome
Pioneer BSC
STRATEGIC OBJECTIVE STRATEGIC MEASURE
CUSTOM FINAN
• Financially strong • Return on capital employed
CIAL
• Mystery shopper rating
• Delight the customer
• Dealer/Pioneer gross profit
• Win-win relationship
split
ER
• Manufacturing Reliability
Index and Days away from
• Safe and Reliable
work rate
• Competitive Supplier
• Laid down cost vs best
•
INTERNAL
Good Neighbor Community
competitive reliable supply
• Quality
• Environmental Index
• Quality index
• Strategic competency
• Motivated and Prepared
availability
L&G
Manufacturing Example
Upward Airlines
Bank- Example
BSC- View
Key Principles
Performance measurements should be broadened
beyond financial measurements to operational
measurements that affect financial performance
such as
- Product and service quality measures
- Product and service development times
- Customer complaints
- Labor productivity
Key Principles of the Balanced Scorecard
• Measurements should be broadened beyond
financial measurements to operational
measurements
• Performance reporting should be selective-
focus on a few measures
• The total picture of a company’s performance
should be presented in one report
• Design of measures should fit a company’s
various organizational units
• Avoid selecting conflicting performance
measures
Summary
