OPERATIONS &

PRODUCTION
MANAGEMENT
Lecture 2

Operations performance and

Operations Strategy
Introduction
The quality objective
The speed objective
The dependability objective
The flexibility objective
The cost objective
The top-down and bottom-up perspectives
The market requirements and operations
resources perspectives
The process of operations strategy

EXAMPLE
Operations management can have a very significant impact on a businesss financial
performance. Even when compared with the contribution of other parts of the business, the
contribution of operations can be dramatic. Consider the following example. Kandy Kitchens
currently produce 5,000 units a year. The company is considering three options for boosting
its earnings. Option 1 involves organizing a sales campaign that would involve spending an
extra a100,000 in purchasing extra market information. It is estimated that sales would rise by
30 per cent. Option 2 involves reducing operating expenses by 20 per cent through forming
improvement teams that will eliminate waste in the firms operations. Option 3 involves
investing a70,000 in more flexible machinery that will allow the company to respond faster to
customer orders and therefore charge 10 per cent extra for this speedy service. Table 2.2
illustrates the effect of these three options.

ANALYSIS OF EXAMPLE
Option 1:Increasing sales volume by 30 per cent certainly improves the
companys sales revenue, but operating expenses also increase.
Nevertheless, earnings before investment and tax (EBIT) rise to
a1,000,000.
Option 2 :But reducing operating expenses by 20 per cent is even more
effective, increasing EBIT to a1,200,000. Furthermore, it requires no
investment to achieve this.
Option 3 :The third option involves improving customer service by
responding more rapidly to customer orders. The extra price this will
command improves EBIT to a1,000,000 but requires an investment of
a70,000.
Note how options 2 and 3 involve operations management in changing
the way the company operates.
Note also how, potentially, reducing operating costs and improving
customer service can equal and even exceed the benefits that come from
improving sales volume.

The stakeholder perspective on

operations performance

Operations can contribute to

competitiveness

Top managements performance objectives

for operations
Of all stakeholder groups, it is the organizations top management who
can have the most immediate impact on its performance.
They represent the interests of the owners (or trustees, or electorate, etc.)
and therefore are the direct custodians of the organizations basic purpose.
They also have responsibility for translating the broad objectives of the
organization into a more tangible form. So what should they expect from
their operations function.
Broadly they should expect all their operations managers to contribute to
the success of the organization by using its resources effectively.
To do this it must be
creative, innovative and energetic in improving its processes, products
and services. In more detail, effective operations management can give
five types of advantage to the business:

OM five types of advantage to the

business
It can reduce the costs of producing products and services, and being
efficient.
It can achieve customer satisfaction through good quality and service.
It can reduce the risk of operational failure, because well designed and
well run operations should be less likely to fail, and if they do they
should be able to recover faster and with less disruption (this is called
resilience).
It can reduce the amount of investment (sometimes called capital
employed) that is necessary to produce the required type and quantity
of products and services by increasing the effective capacity of the
operation and by being innovative in how it uses its physical resources.
It can provide the basis for future innovation by learning from its
experience of operating its processes, so building a solid base of
operations skills, knowledge and capability within the business.

The Five Operations Performance Objectives

1.

2.

3.

4.

5.

Quality: You would want to do things right; that is, you would not want to make
mistakes, and would want to satisfy your customers by providing error-free goods
and services which are fit for their purpose. This is giving a quality advantage.
Speed : You would want to do things fast, minimizing the time between a
customer asking for goods or services and the customer receiving them in full,
thus increasing the availability of your goods and services and giving a speed
advantage.
Dependability: You would want to do things on time, so as to keep the delivery
promises you have made. If the operation can do this, it is giving a dependability
advantage.
Flexibility: You would want to be able to change what you do; that is, being able
to vary or adapt the operations activities to cope with unexpected circumstances
or to give customers individual treatment. Being able to change far enough and
fast enough to meet customer requirements gives a flexibility advantage.
Cost: You would want to do things cheaply; that is, produce goods and services at
a cost which enables them to be priced appropriately for the market while still
allowing for a return to the organization; or, in a not-for-profit organization, give
good value to the taxpayers or whoever is funding the operation. When the
organization is managing to do this, it is giving a cost advantage.

The Quality Objective

Quality is consistent conformance to customers
expectations
Quality is the most visible part of what an
operation does
It is something that A customer finds relatively
easy to judge about the operation
It is clearly A major influence on customer
satisfaction or dissatisfaction
A customer perception of high-quality products
and services means customer satisfaction
And therefore the likelihood that the customer
will return.

Quality Inside The Operation

Quality reduces costs. The fewer mistakes made
by each process in the operation, the less time
will be needed to correct the mistakes and the less
confusion and irritation will be spread.
Quality increases dependability. Increased costs
are not the only consequence of poor quality. At
the supermarket it could also mean that goods run
out on the supermarket shelves with a resulting
loss of revenue to the operation and irritation to
the external customers.

The Speed Objective

The Speed Objective

Inside the operation, speed is also important.
Fast response to external customers is greatly
helped in:
decision-making and
speedy movement of materials and
information inside the operation.

Speed inside the operation

Speed reduces inventories.
Speed reduces risks.
Forecasting tomorrows events is far less of a risk
than forecasting next years.
The further ahead companies forecast, the more
likely they are to get it wrong.
The faster the throughput time of a process the
later forecasting can be left.

The dependability objective

Dependability inside the operation

Dependability saves time
Dependability saves money.
Dependability gives stability

The flexibility objective

The flexibility objective

Product/service flexibility
the operations ability to introduce new or modified
products and services;

Mix flexibility
the operations ability to produce a wide range or mix of
products and services;

Volume flexibility
the operations ability to change its level of output or
activity to

Produce different quantities or volumes of products and

services over time;
Delivery flexibility
the operations ability to change the timing of the delivery
of its services or products.

Flexibility inside the operation

Flexibility speeds up response.
Flexibility saves time.
Flexibility maintains dependability.

Low cost is a universally

attractive objective
Productivity
Single-factor productivity
Multi-factor productivity

Single-factor productivity
Often partial measures of input or output are
used so that comparisons can be made. in the
automobile industry productivity is sometimes
measured in terms of the number of cars
produced per year per employee. This is called
a single-factor measure of productivity.
Single-factor productivity=Output from the operation
One input to the operation

The cost objective

Productivity is the ratio of what is produced
by an operation to what is required to
produce it. The measure that is most frequently
used to indicate how successful an operation is
at doing this is productivity.

Output from operations

Input to operations

Multi-factor productivity
Total factor productivity is the measure that
includes all input factors.
Multi-factor productivity = Output from the operation
All inputs to the operation

Improving productivity
to reduce the cost of its inputs while
maintaining the level of its outputs
reducing the costs of some or all of its
transformed and transforming resource inputs.
cutting out waste

Cost reduction through internal

effectiveness
High-quality operations do not waste time or effort having to re-do
things, nor are their internal customers inconvenienced by flawed
service.
Fast operations reduce the level of in-process inventory between and
within processes, as well as reducing administrative overheads.
Dependable operations do not spring any unwelcome surprises on
their internal customers. They can be relied on to deliver exactly as
planned. This eliminates wasteful disruption and allows the other
micro-operations to operate efficiently.
Flexible operations adapt to changing circumstances quickly and
without disrupting the rest of the operation. Flexible micro-operations
can also change over between tasks quickly and without wasting time
and capacity.

External effect of five performance

objectives

Worked example

Slap.com is an Internet retailer of speciality cosmetics. It orders products

from a number of suppliers, stores them, packs them to customers orders,
and then dispatches them using a distribution company. Although broadly
successful, the business is very keen to reduce its operating costs. A
number of suggestions have been made to do this. There are as follows:
Make each packer responsible for his or her own quality. This could
potentially reduce the percentage of mis-packed items from 0.25 per cent
to near zero. Repacking an item that has been mis-packed costs 2 per item.
Negotiate with suppliers to ensure that they respond to delivery requests
faster. It is estimated that this would cut the value of inventories held by
slap.com by 1,000,000.
Institute a simple control system that would give early warning if the
total number of orders that should be dispatched by the end of the day
actually is dispatched in time. Currently one per cent of orders is not
packed by the end of the day and therefore has to be sent by express
courier the following day. This costs an extra 2 per item.

Because demand varies through the year, sometimes staff have

to work overtime.
Currently the overtime wage bill for the year is 150,000.
The companys employees have indicated that they would be
willing to adopt a flexible working scheme where extra hours
could be worked when necessary in exchange for having the
hours off at a less busy time and receiving some kind of extra
payment.
This extra payment is likely to total 50,000 per year.
If the company dispatches 5 million items every year and if
the cost of holding
inventory is 10 per cent of its value, how much cost will each
of these suggestions save the company?

Analysis

Eliminating mis-packing would result in an improvement in quality. 0.25 per

cent of 5 million items are mis-packed currently. This amounts to 12,500 items
per year. At @2 repacking charge per item, this is a cost of 25,000 that would be
saved.
Getting faster delivery from suppliers helps reduce the amount of inventory in
stock by 1,000,000. If the company is paying 10 per cent of the value of stock
for keeping it in storage the saving will be a1,000,000 0.1 = 100,000.
Ensuring that all orders are dispatched by the end of the day increases the
dependability of the companys operations. Currently, 1 per cent are late, in
other words, 50,000 items per year. This is costing 2 50,000 = 100,000 per
year which would be saved by increasing dependability.
Changing to a flexible working hours system increases the flexibility of the
operation and would cost 50,000 per year, but it saves 150,000 per year.
Therefore, increasing flexibility could save a100,000 per year.
So, in total, by improving the operations quality, speed, dependability and
flexibility, a total of 325,000 can be saved.

Operations
Strategy

Operations strategy

No organization can plan in detail every aspect

Some strategic direction still needed
E.g. where they are heading
and how they could get there
formulate a set of general principles which
will guide its decision-making

Operations strategy
pattern of strategic decisions and actions
which set the role, objectives and activities
of the operation.
Operational is the opposite
of strategic,
meaning day-to-day and detailed.
The content of operations strategy is the
specific decisions and actions which set
the operations role, objectives and
activities.
The process of operations strategy is the
method that is used to make the specific
content decisions.

What is strategy and what is

operations strategy?
Setting broad objectives that direct an enterprise
towards its overall goal.
Planning the path (in general rather than specific
terms) that will achieve these goals.
Stressing long-term rather than short-term
objectives.
Dealing with the total picture rather than
stressing individual activities.
Being detached from, and above, the confusion
and distractions of day-to-day activities

Implementing v/s Supporting v/s

Driving Strategy
Implementing business strategy. The most basic role of
operations is to implement strategy. Most companies will
have some kind of strategy but it is the operation that puts it
into practice. You cannot, after all, touch a strategy; you
cannot even see it; all you can see is how the operation
behaves in practice. (insurance co)
Support strategy goes beyond simply implementing
strategy. It means developing the capabilities which allow
the organization to improve and refine its strategic goals.
(Mobile co)
Driving business strategy. The third, and most difficult,
role of operations is to drive strategy by giving it a unique
and long-term advantage.( customer and supplier)

Hayes and Wheelwrights four stages of operations

contribution

Stage 1: Internal neutrality. This is the very poorest level of contribution by the operations
function. It is holding the company back from competing effectively. It is inward-looking and, at
best, reactive with very little positive to contribute towards competitive success. back in any way.
It attempts to improve by avoiding making mistakes.
Stage 2: External neutrality. The first step of breaking out of stage 1 is for the operations
function to begin comparing itself with similar companies or organizations in the outside market
(being externally neutral). This may not immediately take it to the first division of companies
in the market, but at least it is measuring itself against its competitors performance and trying to
implement best practice.
Stage 3: Internally supportive. Stage 3 operations are amongst the best in their market. Yet,
stage 3 operations still aspire to be clearly and unambiguously the very best in the market. They
achieve this by gaining a clear view of the companys competitive or strategic goals and
supporting it by developing appropriate operations resources. The operation is trying to be
internally supportive by providing a credible operations strategy.
Stage 4: Externally supportive. Yet Hayes and Wheelwright suggest a further stage stage 4,
where the company views the operations function as providing the foundation for its competitive
success. Operations looks to the long term. It forecasts likely changes in markets and supply, and
it develops the operations-based capabilities which will be required to compete in future market
conditions. Stage 4 operations are innovative, creative and proactive and are driving the
companys strategy by being one step ahead of competitors what Hayes and Wheelwright call
being externally supportive.

Perspectives on operations strategy

Different authors have slightly different views and
definitions of operations strategy. Between them, four
perspectives emerge:
Operation strategy is a top-down reflection of what the
whole group or business wants to do.
Operations strategy is a bottom-up activity where
operations improvements cumulatively build strategy.
Operations strategy involves translating market
requirements into operations decisions.
Operations strategy involves exploiting the capabilities
of operations resources in chosen markets.

The top-down perspectives

Top-down strategies
A large corporation will need a strategy to
position itself in its global, economic, political
and social environment
This will consist of decisions about what types
of business the group wants to be in, what
parts of the world it wants to operate in, how
to allocate its cash between its various
businesses, and so on. Decisions such as these
form the corporate strategy of the
corporation.

Bottom-up strategies
Emergent strategies

Emergent strategies
Strategy is gradually shaped over time and based
on real-life experience rather than theoretical
positioning.
Indeed, strategies are often formed in a relatively
unstructured and fragmented manner to reflect the
fact that the future is at least partially unknown
and unpredictable (see Figure ).
This view of operations strategy is perhaps more
descriptive of how things really happen, but at
first glance it seems less useful in providing a
guide for specific decision-making.

Bottom-up strategies
When any group is reviewing its corporate
strategy, it will also take into account the
circumstances, experiences and capabilities of the
various businesses that form the group.
Similarly, businesses, when reviewing their
strategies, will consult the individual functions
within the business about their constraints and
capabilities.
They may also incorporate the ideas which come
from each functions day-to-day experience.
Therefore an alternative view to the top-down
perspective is that many strategic ideas emerge
over time from operational experience.

The market requirements and

operations resources perspectives

Market-requirements-based strategies
To satisfy the requirements of its markets.
To survive in the long term.
Understanding markets is usually thought of as the
domain of the marketing function, it is also of
Importance to operations management.
It is impossible to ensure that operations is
achieving the right priority between its
performance
objectives
(quality,
speed,
dependability, flexibility and cost).

The market influence on

performance objectives
Operations seek to satisfy customers through
developing their five performance objectives.
Low Priced
High Quality
Fast Delivery
Reliable delivery
Innovative Products and Services

The market influence on

performance objectives
Competitive factors
Order-winning factors
Qualifying factors
Less important factors

Order-winning factors
Importance of competitive factors is to distinguish
between order-winning and qualifying factors.
Order-winning factors are those things which
directly and significantly contribute to winning
business.
They are regarded by customers as key reasons
for purchasing the product or service.
Raising performance in an order-winning factor
will either result in more business or improve the
chances of gaining more business.

Qualifying factors
Qualifying factors may not be the major competitive
determinants of success, but are important in another
way.
They are those aspects of competitiveness where the
operations performance has to be above a particular
level just to be considered by the customer.
Performance below this qualifying level of
performance will possibly disqualify the company from
being considered by many customers.
But any further improvement above the qualifying
level is unlikely to gain the company much competitive
benefit.

Less important factors

less important factors which are neither
order-winning nor qualifying.
They do not influence customers in any
significant way.
They are worth mentioning here only because
they may be of importance in other parts of the
operations activities.

Figure 3.7 shows the difference between

order-winning, qualifying and less
important factors in terms of their utility
or worth to the competitiveness of the
organization.
The curves illustrate the relative amount
of competitiveness (or attractiveness to
customers)
as
the
operations
performance at the factor varies.
Order-winning factors show a steady
and significant increase in their
contribution to competitiveness as the
operation gets better at providing them.
Qualifying factors are givens; they
are expected by customers and can
severely disadvantage the competitive
position of the operation if it cannot raise
its performance above the qualifying
level.
Less important objectives have little
impact on customers no matter how well
the operation performs in them.

The Market Influence

On Performance
Objectives

Different banking services require different performance objectives

It is about four years now since we specialized in the small-to-medium firms market. Before that we
also used to provide legal services for anyone who walked in the door. So now we have built up our
legal skills in many areas of corporate and business law. However, within the firm, I think we could
focus our activities even more. There seem to be two types of assignment that we are given. About
forty per cent of our work is relatively routine. Typically these assignments are to do with things
like property purchase and debt collection. Both these activities involve a relatively standard set of
steps which can be automated or carried out by staff without full legal qualifications. Of course, a
fully qualified lawyer is needed to make some decisions; however, most work is fairly routine.
Customers expect us to be relatively inexpensive and fast in delivering the service. Nor do they
expect us to make simple errors in our documentation, in fact if we did this too often we would lose
business. Fortunately our customers know that they are buying a standard service and dont expect
it to be customized in any way. The problem here is that specialist agencies have been emerging
over the last few years and they are starting to undercut us on price. Yet I still feel that we can
operate profitably in this market and anyway, we still need these capabilities to serve our other
clients. The other sixty per cent of our work is for clients who require far more specialist services,
such as assignments involving company merger deals or major company restructuring. These
assignments are complex, large, take longer, and require significant legal skill and judgment. It is
vital that clients respect and trust the advice we give them across a wide range of legal
specialism's. Of course they assume that we will not be slow or unreliable in preparing advice, but
mainly its trust in our legal judgment which is important to the client. This is popular work with
our lawyers. It is both interesting and very profitable. But should I create two separate parts to our
business, one to deal with routine services and the other to deal with specialist services? And, what
aspects of operations performance
should each part be aiming to excel at? (Managing Partner, Branton Legal Services)

Analysis Table 3.2 has used the information supplied above to

identify the order winners, qualifiers and less important competitive
factors for the two categories of service. Two types of service are
very different. Routine services must be relatively inexpensive and
fast, whereas the clients for specialist services must trust the quality
of advice and range of legal skills available in the firm. The
customers for routine services do not expect errors and those for
specialist services assume a basic level of dependability and speed.
These are the qualifiers for the two categories of service. Note that
qualifiers are not unimportant. On the contrary, failure to be up to
standard at them can lose the firm business. However, it is the order
winner that attracts new business. Most significantly, the
performance objectives which each operations partner should stress
are very different. Therefore there does seem to be a case for
separating the sets of resources (e.g. lawyers and other staff ) and
processes (information systems and procedures) that produce each
type of service.

The process of
operations strategy

A process which formally links the total organization strategic

objectives (usually a business strategy) to resource-level
objectives.
The use of competitive factors (called various things such as
order winners, critical success factors, etc.) as the translation
device between business strategy and operations strategy.
A step which involves judging the relative importance of the
various competitive factors in terms of customers preferences.
A step which includes assessing current achieved performance,
usually as compared against competitor performance levels.

The process of
operations strategy

An emphasis on operations strategy formulation as an iterative

process.
The concept of an ideal or greenfield operation against
which to compare current operations. Very often the question
asked is: If you were starting from scratch on a green field
site, how, ideally, would you design your operation to meet the
needs of the market? This can then be used to identify the
differences between current operations and this ideal state.
A gap-based approach. This is a well-tried approach in all
strategy formulation which involves comparing what is
required of the operation by the marketplace against the levels
of performance the operation is currently achieving.

What should the formulation process

be trying to achieve?
Comprehensive
critical first step in seeking to achieve an effective
operations strategy. Business history is littered
with world-class companies that simply failed
to notice the potential impact of, for instance, new
process technology or emerging changes
in their supply network. Also, many strategies
have failed because operations have paid undue
attention to only one key decision area.