Operation Management
for
Competitive Advantage
Chapter 2
Points to be Covered
Operations Strategy
Strategic Decisions in Operations
Competitive Dimensions
Operations in Service
Good or Service?
Efficiency, Effectiveness and Value
Productivity and Competitiveness
What is Operation Strategy?
Operation strategy is concerned with setting
broad polices and plans for using the resources
of firm to best support its long term competitive
strategy
It involves long term process that must foster
inevitable change
It involves decisions that relate to design of a
process and the infrastructure needed to support
the process
Operation strategy can be viewed as part of a
planning process that coordinates operational
goals with those of the larger organization
Since the goals of the larger organization change
over time, the operation strategy must be
designed to anticipate the future needs
A firm’s operation capabilities can be viewed as
a portfolio best to adapt to the changing product
and/or service needs of the firm’s customers
Operations Strategy
Customer Needs Corporate Strategy
Alignment
Operations Strategy Core
Competitors Competencies
Decisions
Processes, Infrastructure, and Capabilities
Strategy Process Example
Customer Needs More Product
Corporate Strategy Increase Org. Size
SBU Operations Strategy Increase Production Capacity
Decisions on Processes
and Infrastructure Build New Factory
Strategic Decisions in
Operations
Products and services
Make-to-order, Make-to-stock, Assemble-to-
order
Processes and Technology
Project, Batch Production, Mass Production,
Continuous Production
Capacity and Facilities
Human Resources
Quality
Sourcing
Operations Competitive
Dimensions
Cost
Quality Traditional
Competitive Priorities
Delivery Speed
Flexibility
Service
Delivery Reliability
Coping with Changes in Demand
Flexibility and New Product Introduction Speed
Cost or Price: “Make the product or deliver the
service cheap” E.g. Maruti
Quality: “Male a great product or deliver great
service” E.g. Amway
Delivery Speed: “Make the product or deliver the
service quickly” E.g. Dominos
Delivery Reliability: “Deliver it when it
promised” E.g. Federal Express
Coping with changes in demand: “Change its
volume”
Flexibility and New Product introduction
speed: “Change it” E.g. Samsung
Other Product Specific Criteria: “Support it”
1. Technical liaison and support
2. Meeting a launch date
3. Supplier after sale support
4. Other dimensions: colors available, size, weight,
location of the fabrication site, customization
available and product mix options. Mercedes, Dell
Computers
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The Notion of Trade - Offs
Operation can not excel simultaneously on all
competitive dimensions
Consequently management has to decide which
parameters of performance are critical to the firm’s
success and concentrate the resources of the firm
on these particular characteristics
Straddling
Straddling occurs when a company seeks to match
the benefits of successful position while maintaining
its existing position
It adds new features, services or technologies onto
the activities it already performs
Order Qualifiers & Order
Winners
Terry Hill argues that the criteria required in the
marketplace (and identified by marketing) can be divided
into two groups: order qualifiers and order winners.
An order qualifier is a characteristic of a product or service
that is required in order for the product/service to even be
considered by a customer. An order winner is a
characteristic that will win the bid or customer's purchase.
Therefore, firms must provide the qualifiers in order to get
into or stay in a market.
To provide qualifiers, they need only to be as good as their
competitors. Failure to do so may result in lost sales.
However, to provide order winners, firms must be better
than their competitors.
World-Class Manufacturing
World-class manufacturers [i.e. operations] no
longer view cost, quality, speed of delivery, and even
flexibility as tradeoffs.
They have become order qualifiers
What are the order winners in
today’s market?
Distinctive Competency
Distinctive Competency
“A strength that sets a business apart from its
competition”
McDonald’s-Quality
Disney World-Innovation
Intel Corporation-Product Leadership
Dell-Low Cost
UPS-Operational Excellence
Developing a Manufacturing
Strategy
1) Segment the market according to the product group
2) Identify the product requirements, demand patterns
and profit margins of each group
3) Determine the order winners and order qualifiers for
each group
4) Convert order winners into specific performance
requirements
Strategy Begins with
Priorities
Consider the case of a personal computer
manufacturer
How would we segment the market according to product
group?
Personal use
Small business
Large Corporations
How would we identify product requirements, demand
patterns, and profit margins for each group?
How do we identify order winner and order qualifiers for
each group?
quality
cost
delivery
flexibility
service
What would be the winner for each market group?
•Personal use
•Small business
•Large Corporations
Service can be an
“order winner”
Travel
Warranty Planning
Leases
Roadside Loaner
Car Dealership Assistance Vehicles
7
Key Performance Indicators
A set of measures that help managers
evaluate a company’s economic performance
and spot the need for change in operation.
KPIs include financial measures such as days’
cash on hand and operating income by unit or
division, as well as non financial metrics such
as average time to respond to service calls, lead
time, or percentage of sales from new products.
Operations as Service
Core Services
Core services are basic things that
customers want from products they
purchase
Primary Characteristics of
Services
Intangibility
Perishability
Inseparability
Variability
Core Services Performance
Objectives
Quality
Flexibility Operations Speed
Management
Price (or cost
Reduction)
Value-Added Services
Value-added services differentiate the
organization from competitors and build
relationships that bind customers to the firm
in a positive way
Value-Added Services
Information - provide critical data to market
Problem Solving – troubleshooting ability
Sales Support – demonstrate the offering
Field Support – replace/replenish stock, spares
Value-Added Service
Categories
Problem Solving
Operations Sales Support
Information
Management
Field Support
Services Versus Goods
Goods Services
1) Goods can be resold 1) Reselling services is unusual
2) Services cannot be inventoried
2) Goods can be inventoried
3) Many aspects of quality are
3) Some aspects of quality are difficult to measure
measurable
4) Selling is often a part of production
4) Selling is distinct from of service
production of goods 5) Service provider, not the service, is
5) Goods are transportable transportable
6) Often easy to automate 6) Service is often difficult to
production of goods automate
7) Are tangible 7) Are intangible
8) Involve higher customer
8) Involve less customer
interaction
interaction
The Service-Goods Continuum
Efficiency, Effectiveness
and Value
Efficiency: To produce a good or service at a
lowest possible cost or input.
Effectiveness: Doing the right things to create
most value for the company.
Value: Quality divided by Price
E.g. Providing a better product at the same price
or same product at a lower price.
What is Productivity?
Productivity is a measure of the effective use of
resources, usually expressed as the ratio of
output to input
Output
Productivity = Input
Productivity is a common measure of how well a
country, industry or business unit is using its
resources.
What factors affect the
productivity of a business?
Work methods
Capital
Quality
Training
Technology
Management
Total Measure Productivity
Total measure Productivity
= Outputs
Inputs
or
= Goods and services produced
All resources used
Partial Measure Productivity
Partial measures of productivity =
Output or Output or Output or Output
Labor Capital Materials Energy
Multifactor Measure
Productivity
Multifactor measures of productivity =
Output .
Labor + Capital + Energy
or
Output .
Labor + Capital + Materials
Partial Measures of
Productivity
BUSINESS PRODUCTIVITY MEASURE
Restaurant Customers(meals) per labor
hour
Retail store Sales per square foot
Utility plant Kilowatts per ton of coal
Paper mill Tons of paper per cord of
wood
Example of Productivity
Measurement
You have just determined that your service
employees have used a total of 2400 hours of
labor this week to process 560 insurance forms.
Last week the same crew used only 2000 hours of
labor to process 480 forms. Is productivity
increasing or decreasing?
Answer: Last week’s productivity = 480/2000 =
0.24, and this week’s productivity is = 560/2400 =
0.23. So, productivity is decreasing slightly.
Problem 1
A travel agency processed 240 customers on Day 1
with a staff of 12, and 360 customers the on Day 2
with a staff of 15. What can be said about the
productivity shift from Day 1 to Day 2?
a. An increase in productivity from Day 1 to Day 2
b. A decrease in productivity from Day 1 to Day 2
c. The same productivity from Day 1 to Day 2
d. Can not be computed from data above
e. None of the above
Problem 2
Output Output Input Input (Rs.)
(Particulars) (Rs.) (Particulars)
Finished units 10,000 Human 3,000
Work in process 2,500 Material 1,500
Dividends 1000 Capital 10,000
Bonds - Energy 500
Other Income - Other Expenses 1,500
Total Output 13,500 Total Input 16,500
Calculate the following:
1)Total Productivity Measure
2)Multifactor Productivity Measure of Human, Capital and
Material
3)Partial Productivity Measure of Human
Problem 3
A furniture manufacturing company has provided the
following data. Compare the labour, raw materials and
supplies, and total productivity for 2004 and 2005.
Particulars 2004 (Rs.) 2005 (Rs.)
Sales 22,000 35,000
Labour 10,000 15,000
Raw Materials and 8,000 12,500
supplies
Capital Equipments 700 1,200
and Depreciation
Other 2200 4,800
Problem 4
Two types of cars were produced by a car
manufacturer in 2005. Quantities sold, price per unit,
and labour hours follow. What is the labour
productivity for each car?
Particulars Quantity Rs./Unit
Deluxe car 40 units sold Rs. 3,20,000/car
Limited car 60 units sold Rs. 4,00,000/car
Labour, Deluxe 20,000 hours Rs. 30/hour
Labour, Limited 30,000 hours Rs. 40/hour
Problem 5
A US manufacturing company operating a subsidiary in an
LDC shows the following results:
Particulars US LDC
Sales (units) 1,00,000 20,000
Labour (hours) 20,000 15,000
Raw Materials (currency) $ 20,000 FC 20,000
Capital Equipment (hours) 60,000 5,000
a) Calculate partial labour and capital productivity figures for
the parent and subsidiary. Do the results seem misleading?
b) Compute the multifactor productivity for labour and capital
together. Are the results better?
c) Calculate raw material productivity (1$=10 FC). Explain why
these figures might be greater in the subsidiary.
Problem 6
Various financial data for 2004 and 2005 are as follows.
Calculate total productivity measure and partial productivity
measures for labour, capital and raw materials for this
company for both the years. What do these measures tell you
about this company?
Particulars 2004 2005
Sales 2,00,000 2,20,000
Labour 30,000 40,000
Raw Materials 35,000 45,000
Energy 5,000 6,000
Capital 50,000 50,000
Other 2,000 3,000
Problem 7
An electronic company makes
communication devices for military
contracts. The company just completed two
contracts. The Navy contract was for 2,300
devices and took 25 workers in 2 weeks (40
hours per week) to complete. The Army
contract was for 5,500 devices that were
produced by 35 workers in 3 weeks. On which
contract were the workers more productive?
Problem 8
A retail store had sales of Rs. 45,000 in April
and Rs. 556,000 in May. The store employs
eight full time workers who work 40 hours a
week. In April the store also had seven part-
time workers who worked 10 hours a week
and in May, the store had nine par-time
workers who worked 15 hours a week
(assume four weeks in each month). Using
sales value as the measure of output, what is
the percentage change in productivity from
April to May.
Problem 9
A parcel delivery company delivered
1,03,000 packages in 2004 when its average
employment was 84 drivers. In 2005, the
firm handled 1,12,000 deliveries with 96
drivers. What was the percentage change in
productivity from 2004 to 2005?
