PRODUCTION SYSTEMS AND OPERATIONS MANAGEMENT
- ©1998 Joseph Martinich. All rights reserved.
None of these materials can be stored,
transmitted or reproduced by any means
(electronic, mechanical, photocopying or
otherwise) without the written permission of Joseph
Martinich. These materials may be used by
students in classes taught by Professor
Martinich at University of Missouri - St. Louis.
OPERATIONS AND STRATEGY
- Without a Strategy an organization is like a rudderless ship in a
storm without a map
- A strategy (strategic plan) tells you where you are, where
you want to go, and provides a mechanism to steer the
organization
- It should focus on effectiveness (doing the right things),
rather than on efficiency (doing things right)
- When decisions must be made, the strategy should guide the
selection of criteria used and the tradeoffs made
- When we refer to the organization strategy, we mean the
business unit strategy.
- Note: Business strategies are the mechanism to transform an
organization's core values and purpose into action.
Strategies can, and must, change over time and can be
different for different business units/divisions.
- Strategy Formulation Steps
1. Establish the Organization's Goals (and Performance Measures)
- Be financially stable
- Maximize long-term profit
- Be the company that makes Japan synonymous with
quality
- Be among the top five orchestras in the world
- Be the first country to land a person on the moon
- Be #1 or #2 in every market in which we compete, and
have the agility of a small enterprise.
2. Analyze
(a) Market Characteristics
(b) Competition
(c) Competitive Strengths and Weaknesses
3. Identify and Select
(a) Products
(b) Geographic Markets
(c) Order-winning Dimensions
4. Specify Policy Constraints and Guidelines
- Corporate Values
- Employment Security
- Environmental Responsibility
- Will only introduce products that make a
significant technological advance
- Examples
- In early 1990's Toyota and Honda did not lay off
U.S. workers even though demand was low -
employment security and public relations
- Malden Mills: Factories burned down, but owner
(Aaron Feuerstein) did not fire people. He paid
their salaries and health benefits. Views
workforce as the ultimate competitive weapon
(productivity surged).
- H-P: Would not introduce PCs until it believed it made
a technological advance in the product.
- Order-Winning Dimensions (OWDs)
- Those dimensions that the organization uses to differentiate
itself from competitors. (The one thing customers think of
when they buy the organization's products.)
- Those things it wants to do especially well to "win" business
from its competitors
- Primary OWDs
- Price
- Quality (including customer service)
- Flexibility
- Product variety and customization
- Volume
- Delivery
- Speed
- Reliability (JIT)
- Location/Convenience
- Innovation
- Uniqueness of Products
- Speed and Frequency of Introduction
- Developing OWDs and Strategy
- There is no one best strategy
- Sony and HP vs. Matsushita and TI
- Ritz Carlton vs. Red Roof Inns
- A good strategy should guide the activities of each functional
unit.
- It should guide the marketing message, target audience,
promotion, pricing, etc.
- It should guide the design, planning and operation of
the production system.
- Historically companies' strategies were driven by marketing
issues (e.g. product positioning) without considering the
production system capabilities.
- Result: Selling based on quality or flexibility, but
production system designed for low cost
- There is a strong Marketing-Operations Relationship
- Marketing decisions affect operations and vice versa
- If we use quality, flexibility, or speed as OWDs, then
our production system better produce high quality
products, a variety of products, or produce quickly.
- Our choice of OWDs and production system must be
compatible
- OWDs can be created in two ways:
- Recognize market opportunity, design product and
establish production system to produce it (Marketing
driven)
- Identify operational competitive strengths; identify
products and markets that can exploit them (Operations
driven).
- Strategy should guide the most important and common
operational decisions
- Process and technology selection
- Extent of vertical integration
- Make versus buy; relationship with suppliers
- Extent of Technological Competence
- Facilities
- Capacity
- Location
- Focus
- Quality
- Role of quality: OWD versus acceptable
- How to measure it
- Plan to achieve it
- Personnel
- Organization (teams)
- Role in quality, process improvement
- Policies regarding job security and training
- Inventory and Materials Management
- Breadth of Products Held in Inventory
- Service Level (Safety Stock)
- Examples of how OWDs have been driven by operations, and how
operations had to be developed to support/promote OWDs.
- Price/Low Cost Producers
- Wal-Mart: Developed efficient information, materials
management, and distribution system, which allowed it
to be price leader. Also wanted to compete on
flexibility (large selection of goods sold), so facilities
had to be compatible (large).
- Steel Mini-mills: Special technology and production
process allows low cost production of limited range of
lower grade commodity steels. Compete on price rather
than quality or product variety.
- Southwest Airlines: All aspects of operations, from
ticketing to boarding to food, aimed at low cost, but
high quality as defined by frequency and on-time.
- Quality
- Toyota: Developed Lean production system that was
initially low cost, but eventually was highest quality.
- Production system quality drove quality and price
as OWDs
- Flexibility: Customization
- Machine shops: Their flexible production processes
allow them to compete primarily on customization,
rather than price.
- Dell and Gateway 2000: Difficult to distinguish product
on price or quality, so they focus on customization and
quick delivery. Had to develop flexible JIT production
system to achieve this.
- Flexibility: Variety of Products
- Caterpillar: Has made manufacturing more flexible; can
make many different products without reconfiguring
assembly lines. This has allowed Cat to add 220 new
products using existing technology, cut manufacturing
time by 75%, and inventories by 60%.
- Barnes and Noble; Borders: Selling on variety and
selection, not price.
- Delivery: Speed
- LensCrafters: Technology and on-site process allows
1-hour eyeglass manufacturing.
- One-hour photo developing, dry-cleaning, shoe repair:
On-site process and technology allows quick
production. (Very uniform product)
- Dell Computer: JIT production system allows 2-day
delivery of customized products
- Delivery: Convenience
- Location
- Automobile Club of America (AAA)
- Needed nationwide network of facilities
with telecommunications network
- American Express
- Needed worldwide network of facilities and
telecommunications network (fast delivery)
- Citibank
- Can move money world-wide easily
- Au Bon Pain
- Saturate area with facilities; need nearby
factories to produce dough and on-site
baking facilities (also fast delivery)
- Innovation: Product Uniqueness
- Sharp Corp.: dominant in consumer electronics because
of its dominance in liquid-crystal display technology.
Uses unique ability in producing LCDs to drive
selection of products.
- Detroit Hyatt Regency Hotel: Perceived market for
Japanese customers. Developed production system (job
design and training) that includes Japanese speaking
employees and Japanese brochures/signs.
- Nooter Corp.; Has technology, equipment, and facilities
to make huge customized metal tanks, vessels, and heat
exchangers. They can weigh 500 tons and be 10 feet in
diameter. Only 10 competitors world-wide have the
production capability.
- Replacements Ltd.: (Uniqueness and
Flexibility/Variety) Largest seller of replacement china
(if you break a piece of out-of-production china, they
can replace it). Stock 47,000 china patterns.
- Microsoft: Dominance of unique product (Windows
operating system) allows tie-ins with other software
products. (Software development technology drives
OWD.)
- Innovation: Speed in introducing new products
- Short Product Cycle: First company into a market gains
a significant market share advantage over subsequent
competitors.
- McKinsey & Co. study showed a delay of six months in
bringing a product to market can cost a company
one-third of the product's lifetime profit potential.
- Hewlett-Packard (HP) has dominated the laser-printer
industry by being first to market with new models
- Intel: Strong R&D and "standardized" production
processes and facilities facilitates frequent product
introductions in industry with high cost of introduction.
- Motorola, a product quality leader, suffered a substantial loss
of market share in the microprocessor industry in the late
1980's because it was slow in developing new products.
- Boeing; trying to sell planes based on price and speed of
delivery, but production system was set up for flexibility and
quality (not efficiency and speed).
- Each functional unit (Marketing, Operations, etc.) should have a
strategy that supports the organization/business unit strategy. This
should identify what that functional unit must do well to support
the organization strategy.
- Operations Strategy
- Statement of goals for the operations function; how to
measure their achievement.
- What you measure and reward is what you get. So you
should use measurements and rewards that promote
achievement of your goals, rather than inhibit them.
- A major problem with operations is the focus on
productivity and cost measures, especially at the
work-station or department level.
- Localized cost minimization and
productivity maximization frequently runs
counter to achieving organization's true
goals.
- If OWD is speed, flexibility, or quality, then we
must make them the main measures and factors in
reward - not cost
- Goals and measures should reflect both the
breadth of effects and the longer-term effects of
operations decisions.
- Example: (Deming 6/4/90)
- Travel department evaluated on cost of travel, so
it sends employee to training session at
unreasonable time with no sleep to save airfare
and hotel expense. Cost to company is much
higher because employee cannot learn as well.
- Most productivity measures are either not useful or are
harmful. They are based on output per unit of one
resource (labor, machine-hour). Not on profitability.
- Productivity measures are usually meaningful only for
evaluating the performance of individual machines or
departments over time or for comparing the
performance of individuals performing the same tasks
under comparable conditions.
- Major deficiency of productivity measures is that they
can often be improved by shrinking operations.
- Stephen Roach, of Morgan Stanley, warns against
shrinking an organization simply to increase
productivity: "It's a recipe for total capitulation of
market share." In the short term the productivity
measures may look good, but long-term
profitability is doomed.
- Strategic Operational Issues
- Vertical Integration
- What parts of the production process should be done
internally and which parts, if any, should be contracted
out.
- Facilities
- Organization and Focus
- By Product: A facility makes one type of product
- Product-focused
- By Process: Facility focuses on single or a few
processes that are shared by many products (e.g.,
heat-treating, coating)
- Process-focused
- By Geographical market (could make one or
many products; provides quick delivery, customer
access; market-specific features)
- OWD-focused
- Capacity
- Many small versus few large facilities
- Location(s)
- Close to customers
- Close to production resources
- Technological Capabilities
- It is important to be knowledgeable about all phases of
the production process; even those that are performed
externally
- Keeping processes in-house is beneficial for the
following reasons
- Performers of the production process are in the
best position to make improvements in the design
of equipment and processes.
- Product and process innovation are more effective
when they are done together. Intimate knowledge
of the production technology and process makes it
possible to understand how changes in product
design can mesh with the current process and how
current or new technologies can be applied to
products.
- Ex: Corning Inc. used its technological
expertise in making glass for sunglasses and
auto headlights, to develop the glass used in
liquid-crystal displays (LCD's).
- Proprietary processes are powerful weapons
against competitors.
- Technology as a Competitive Weapon
- Technological Aversion
- Many American companies have tended to
get rid of the difficult manufacturing tasks.
- Many new products, product improvements,
and cost reductions originate by those
performing the production process.
- By not performing the difficult production
tasks itself a company loses its production
know-how and eliminates a major portion of
its product and process development
infrastructure.
- Hill: "... if the manufacturing task is easy,
any company can do it! Therefore, the key
to manufacturing success is to resolve the
difficult manufacturing issues, for this is
where the high profits are found."
URL: http://www.umsl.edu/~jmartini/pomnotes/webstrategy.htm
Page Owner: Joseph Martinich (Joseph.Martinich@umsl.edu)
Last Modified: August 27, 1998