Class – 2
Productivity &
Operations
Strategy
1
The Evolution of Supply Chain
Ø In 1927, Ford ran a vertically integrated factory where all stages of
manufacturing were controlled by Ford.
Ford
Production
Units
Ford Customer
Ford
Assembly Unit
Ford Dealer
Ford Distributor
2
1
The Evolution of Supply Chain (Cont.)
Ø During 1980s and 1990s manufacturers
realized that a company can not be
best in everything.
Ø Companies started using outsourcing
§
§
§
Cost savings
Advanced skills
Focus
Ø This shift has led to what we call
supply chain management today
Ø What is the main drawbacks of such a
shift?
Benefits
Risks
Cost Savings
Advanced
Skills
Focus
3
Supply Chain Management: Definition
Ø Supply Chain: set of organizations linked by one or more upstream
and downstream flows of products, services, finances, or
information from a source to a customer.
Ø Supply chain management is the management of such a chain:
“The management of upstream and downstream value-added
flows of materials, final goods, and related information among
suppliers, company, retailers, and final consumers”
4
2
Boeing’s
Global
Strategy Yields
Competitive
Strategy
Ø Boeing’s strategy for its 787 Dreamliner is
unique from both an engineering and a global
perspective.
Ø The global nature of both technology and the
aircraft market meant finding exceptional
developers and suppliers, wherever they
might be.
Ø Boeing teamed with more than 20
international suppliers to develop
technologies and design concepts for the 787.
Ø Boeing has worked with General Electric and
Rolls-Royce to develop more efficient engines.
5
Boeing’s Global Strategy Yields Competitive Strategy
Firm
Rolls-Royce
BAE Systems
Alenia Aeronautics
Country
UK
UK
Italy
Component
Engines
Electronics
Upper centre, fuselage and horizontal
stabilizer
Kawazaki Heavy Industries Japan
Forward fuselage, fixed section of wings
Toray Industries
Japan
Carbon fibre for wing and tail units
Chengdu Aircraft Group
China
Rudder
Labinel
France Wiring
Saab
Sweden Cargo and access doors
6
3
A Global View of
Operations and Supply
Chain
Ø Boeing is competitive because its sales and
production are worldwide.
Ø Spain’s Zara moves inventory to stores around
the world faster than its competitors by building
flexibility into design, production, and
distribution.
Ø Sony purchases components from suppliers in
Thailand, Malaysia, and elsewhere around the
world for assembly in its electronic products.
Ø Volvo S40 is built in Belgium on a platform shared
with Mazda 3 (built in Japan) and Ford Focus
(built and sold in Europe).
7
Growth of World Trade
Ø The rate of world
trade, global capital
markets, and the
international
movement of people is
increasing.
35 –
30 –
25 –
Percent
Ø Today’s operations
manager must have a
global view of
operations strategy.
Collapse of the
Berlin Wall
20 –
15 –
10 –
5–
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0–|
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 (est*)
Year
8
4
Reasons to Globalize
Tangible
Reasons
Intangible
Reasons
Reasons to Globalize
1. Reduce costs (labour, taxes, tariffs, etc.)
2. Improve the supply chain
3. Provide better goods and services
4. Understand markets
5. Learn to improve operations
6. Attract and retain global talent
9
Reasons to Globalize (Cont.)
Ø Reduce costs: international operations seek to take advantage of the tangible
opportunities to reduce their costs:
Ø Improve the supply chain: it can often be improved by locating facilities in
countries where unique resources are available:
§
Metals companies are relocating to the mining regions of northern Ontario
10
5
Reasons to Globalize (Cont.)
Ø Provide better goods and services: International operations helps reduce response
time to meet customer’s product and service requirements.
Ø Understand markets: Interaction with foreign suppliers and customers helps
international firms learn opportunities for new products or expand the life cycle
Ø Learn to improve operations: Learning does not take place in isolation.
Ø Attract and retain global talent: Global organizations can attract and retain better
employees by offering more employment opportunities.
11
Developing Mission and Strategies
Ø An effective operations management
effort must have a “mission” so it
knows where it is going, and a
“strategy” so it knows how to get
there.
Ø This is the case for a small domestic
organization, as well as a large
international organization.
Ø Mission: The purpose or rationale for
an organization’s existence.
12
6
Mercedes Benz
Mission Statement
To be the best, the first
and last choice to
purchase an automobile.
13
Dell Mission Statement
To be the most successful
computer company in the world
at delivering the best customer
experience in markets we serve.
In doing so, Dell will meet
customer expectations of: Highest
quality with wide variety.
14
7
Strategy and Operations Strategy
Strategy: The long-term plans that determine the direction an organization takes to
achieve its mission and become (or remain) competitive.
Operations Strategy: Long term plans for the operations function related to products,
processes, costs, delivery times, etc.
§ It should be aligned with the organizational goals and strategies.
Competitive Strategy
Operations Strategy
High Quality
Reliable
Low cost
Lean
Variety
Flexible
15
Achieving Competitive Advantage Through
Operations
Ø Competitive advantage: It implies creation of a system that has a
unique advantage over competitors.
Ø Hunter Fan differentiated itself as a premier maker of quality
ceiling fans that lower heating and cooling costs for its customers.
§
Its strategy is one of differentiating itself via quality from others
in industry.
Ø Nucor Steel satisfies customers by being the lowest-cost steel
producer in the world.
§
It focuses on value at low cost.
Ø Dell achieves rapid response by building personal computers with
each customer’s requested software in a matter of hours.
§
Dell’s dominant strategy is quick, reliable response.
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8
Competitive Priorities and Capabilities
A company’s competitive strategy defines, relative to its competitors, the set
of customer needs that it seeks to satisfy through its products and services.
Competitive capabilities are the differentiation, cost leadership, and response
dimensions that a process actually possesses and is able to deliver.
Approach
Differentiation
§ Innovative design
§ Broad product line
Example
§ After-sale service
§ Experience
Caterpillar’s heavy equipment service
Hard rock cafe’s dining experience
Apple
Dell
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Competitive Priorities and Capabilities
Approach
Example
Cost Leadership
§ Low overhead
Canada post comparing to FedEx
§ Effective capacity use
§ Toyota
Response
§ Flexibility
§ Reliability and on time
delivery
§ Quickness and
development speed
§ Variety
Porter Airlines' high aircraft utilization
Inventory Management and JIT
Hewlett-Packard’s response to volatile world market
FedEx’s “absolutely, positively on time”
Pizza Hut’s five-minute guarantee at lunchtime, Zara
Amazon.com
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9
Strategy Development
Ø Pierre has just completed culinary school and is ready to open his
own restaurant.
Ø Considering his strengths and weaknesses, Pierre defines the mission
for his restaurant as “To provide outstanding French fine dining for
the people of Calgary”.
Ø Pierre’s supporting operations strategy is to ignore the options of cost
leadership and quick response and focus on differentiation.
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Strategy Development for Pierre
Ø Pierre’s operations requires him to evaluate product designs (menus and meals)
and selection of process, layout, and location:
§ Where to locate the restaurant? (Location selection)
§ How big the restaurant should be? How many tables? (Capacity design)
§ How many foods in the menu? (product & process design)
Ø He must also evaluate the human resources, supplier’s inventory, scheduling, and
maintenance that will support his mission.
§ Depending on the menu, which skills the cooks should have? (Human resource)
§ Which ingredients and how much should be stocked? (Inventory)
§ What quality should the food ingredients meet? (Quality)
§ How many shifts do the cooks work? Is the restaurant open for both lunch and
dinner? (Scheduling)
§ How frequently the kitchen equipment should be inspected? (Maintenance)
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10
Examining Process Design for Strategy Development
Variety of products
High
Moderate
Process focused
JOB SHOPS
(Print shop,
emergency room,
fine-dining
restaurant)
Repetitive
(Modular) Focus
ASSEMBLY LINE
(Cars, Appliances,
TVs, fast-food
restaurants)
Low
Low
Mass
Customization
Customization at
High Volume
(Dell computer
PCs, Cafeteria)
Product Focused
CONTINUOUS
(Steel, beer, oil,
paper,
institutional
kitchen)
Moderate
Volume
High
21
Competitive Strategy and Firm’s Performance
A company’s performance depends on the expectation of its customers for purchase
of goods or services.
Customers prioritize the product usually based on:
§ Price: The amount must be paid by customer for a good or service.
§ Quality: Characteristics of a good or service determined by its design, material,
performance, etc.
§ Responsiveness: Availability of goods or services when needed.
§ Variety: Choices of models and options available to customers.
Customer
=
willingness to pay
Quality, Variety, Responsiveness,
after-sale service, etc.
Price
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11
How Companies Compete?
Business organizations compete to one another in
different ways
Hyundai may lack reliability
for lower price to compete
with Mazda
Variety
Flexibility
Price
Quality
Dell may lack timeliness for
flexibility to compete with HP
Responsiveness
Customer
Service
Location
FedEx should be responsive in
order to compete with Canada
Post at the cost of higher price
23
Order-qualifying and winning factors
Customers may use two categories of purchasing criteria:
Order qualifiers: attributes that make the product a potential
purchase.
Order winners: attributes which actually cause the purchase.
Example: Customer has $20,000 to buy a car
BMW
$35000
TOYOTA
$17500
PORSCHE
$41500
HONDA
$19000
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12
Order-qualifying and winning factors
Ø Suppose it is December 23rd and you would like to send a Xmas gift to
your beloved in another country.
Ø You have three options to send your gift:
§ What is your order qualifier?
§ What is your order winner?
$45 – 2 days
$20 – 5 days
$40 – 2 days
25
The Productivity Challenge
Ø The creation of goods and services
requires changing resources into goods
and services.
Ø The more efficiently we make this
change, the more productive we are and
the more value is added to the good or
service provided.
Ø Productivity is the ratio of outputs (goods
and service) divided by the inputs
(resources, such as labour and capital)
26
13
Improving Productivity
at Starbucks
Ø “This is a game of
seconds…”
Ø A team of 10 analysts
continually look for ways
to save time.
Ø Operations improvements
have helped Starbucks
increase yearly revenue
per outlet by $200,000 to
$940,000 in six years.
Some improvements
Stop requiring signatures
on credit card purchases
under $25
Saved 8 seconds
per transaction
Change the size of the ice
scoop
Saved 14 seconds
per drink
New espresso machines
Saved 12 seconds
per shot
27
How to Measure Competitiveness?
Productivity: The value of outputs (services and products) produced
divided by the values of input resources (wages, costs of equipment, etc.)
𝐏𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐯𝐢𝐭𝐲 =
𝐏𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐯𝐢𝐭𝐲 𝐠𝐫𝐨𝐰𝐭𝐡 =
𝐎𝐮𝐭𝐩𝐮𝐭
𝐈𝐧𝐩𝐮𝐭
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐩𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐯𝐢𝐭𝐲 − 𝐏𝐫𝐞𝐯𝐢𝐨𝐮𝐬 𝐩𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐯𝐢𝐭𝐲
𝐏𝐫𝐞𝐯𝐢𝐨𝐮𝐬 𝐩𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐯𝐢𝐭𝐲
28
14
Productivity Measurement
Ø In a steel production company, productivity can measure:
§
§
§
The labour-hours per tonne of a specific type of steel.
The capital (dollars invested) per tonne of a specific type of steel.
The energy used per tonne of a specific type of steel.
Ø Labour productivity:
Productivity =
Units produced
1,000
=
= 4 units/labour-hour
Labour-hours used 250
One resource input ð single-factor productivity
29
Multi-Factor Productivity
Productivity =
Output
Labour + Material + Energy
+ Capital + Miscellaneous
u Also known as total factor productivity
u Output and inputs are often expressed
in dollars
Multiple resource inputs ð multi-factor productivity
30
15
Measures of Productivity
Partial
measures
Output
Labor
Output
Machine
Output
Capital
Output
Energy
Multifactor
measures
Output
Labor + Machine
Total
measure
Value of Goods or Services Produced
Value of all inputs used to produce them
Output
Labor + Capital + Energy
31
Computing Single Factor and Multifactor Productivity
Ø Collins Title wants to evaluate its labour and multifactor productivity with a
new computerized title-search system. The company has a staff of four, each
working eight hours per day (for a payroll cost of $640/day) and overhead
expense of $400 per day.
Ø Collins processes and closes on eight titles each day. The new computerized
title-search system will allow the processing of 14 titles per day.
Ø Although the staff, their work hours, and pay are the same, the overhead
expenses are now $800 per day.
Ø Find the labour productivity, and multifactor productivity in old and new
systems.
32
16
Computing Single Factor and Multifactor Productivity
(Cont.)
14
33
Productivity at Modern Lumber Inc. (Single Factor)
Ø At Modern Lumber Inc., Art Binley, president and producer of apple crates
sold to growers, has been able to produce 240 crates per 100 logs.
Ø He currently purchases 100 logs per day, and each log requires 3 labourhours to process.
Ø He believes that he can hire a professional buyer who can buy a betterquality log at the same cost. If this is the case, he can increase his production
to 260 crates per 100 logs. His labour-hours will increase by 8 hours per day.
Ø What would be the impact on productivity (measured in crates per labourhour) if the buyer is hired?
34
17
Productivity at Modern Lumber Inc. (Single Factor)
Ø Current labour productivity:
240 crates
240
=
=
= 0.8 crate per labour − hour
100 logs × 3 hours/log 300
Ø Labour productivity with buyer
=
260 crates
260
=
= 0.844 crate per labour − hour
hours
308
100 logs × 3
+ 8 hours
log
Ø Using current productivity as a base, the increase will be 5.5%.
35
Productivity at Modern Lumber Inc. (Multifactor)
Ø Art Binley has decided to look at his productivity from a multifactor
perspective. To do so, he has determined his labour, capital, energy, and
material usage and decided to use dollars as the common denominator.
Ø His total labour-hours are now 300 per day and will increase to 308 per day.
Ø His capital and energy costs will remain constant at $350 and $150 per day,
respectively.
Ø Material costs for the 100 logs per day are $1000 and will remain the same.
Ø Because he pays an average of $10 per hour, Binley determine his
productivity increase as follows:
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18
Productivity at Modern Lumber Inc. (Multifactor)
Current system
System with Professional
Buyer
Labour
300 h @ $10/h =$3000
Material
100 logs/day $1000
$1000
Capital
$350
$350
Energy
$150
$150
Total Cost
308 h @ $10/h =
$4500
$3080
$4580
Multifactor productivity = 240 crates/$4500
= 0.0533 crates/dollar
= 260 crates/$4580
= 0.0568 crates/dollar
37
Carpet Installers
a. Four workers installed 720 square meters of carpet in eight hours.
𝐏𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐯𝐢𝐭𝐲 =
𝐒𝐪𝐮𝐚𝐫𝐞 𝐦𝐞𝐭𝐞𝐫𝐬 𝐨𝐟 𝐜𝐚𝐫𝐩𝐞𝐭 𝐢𝐧𝐬𝐭𝐚𝐥𝐥𝐞𝐝
𝐋𝐚𝐛𝐨𝐮𝐫 𝐡𝐨𝐮𝐫𝐬 𝐰𝐨𝐫𝐤𝐞𝐝
=
=
𝟕𝟐𝟎 𝐬𝐪𝐮𝐚𝐫𝐞 𝐦𝐞𝐭𝐞𝐫𝐬
𝟒 𝐰𝐨𝐫𝐤𝐞𝐫𝐬 × 𝟖 𝐡𝐨𝐮𝐫𝐬
𝟕𝟐𝟎 𝐬𝐪𝐮𝐚𝐫𝐞 𝐦𝐞𝐭𝐞𝐫𝐬
𝟑𝟐 𝐰𝐨𝐫𝐤𝐞𝐫 𝐡𝐨𝐮𝐫𝐬
b. A machine produced 68 usable pieces (e.g., good quality) in two hours.
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19
Productivity at Orange Inc.
Ø The accounting department at Orange Inc. provided the following
information about the process for the past four weeks:
Unit produced
Labor ($)
Material ($)
Overhead ($)
Week 1
Week 2
Week 3
Week 4
1,124
12,735
21,041
8,992
1,310
14,842
24,523
10,480
1,092
10,603
20,442
8,736
981
9,526
18,364
7,848
39
Productivity at Orange Inc.
Ø Use the multifactor productivity ratio to see whether recent process
improvements at Orange had any effect and, if so, when the effect was
noticeable.
𝟏,𝟏𝟐𝟒
𝐌𝐅𝐏 𝐰𝐞𝐞𝐤 𝟏 = 𝟏𝟐,𝟕𝟑𝟓(𝟐𝟏,𝟎𝟒𝟏(𝟖,𝟗𝟗𝟐 = 𝟎. 𝟎𝟐𝟔𝟐𝟖
𝟏,𝟑𝟏𝟎
𝐌𝐅𝐏 𝐰𝐞𝐞𝐤 𝟐 = 𝟏𝟒,𝟖𝟒𝟐(𝟐𝟒,𝟓𝟐𝟑(𝟏𝟎,𝟒𝟖𝟎 = 𝟎. 𝟎𝟐𝟔𝟐𝟖
𝟏,𝟎𝟗𝟐
𝐌𝐅𝐏 𝐰𝐞𝐞𝐤 𝟑 = 𝟏𝟎,𝟔𝟎𝟑(𝟐𝟎,𝟒𝟒𝟐(𝟖,𝟕𝟑𝟔 = 𝟎. 𝟎𝟐𝟕𝟒𝟓
𝟗𝟖𝟏
𝐌𝐅𝐏 𝐰𝐞𝐞𝐤 𝟒 = 𝟗,𝟓𝟐𝟔(𝟏𝟖,𝟑𝟔𝟒(𝟕,𝟖𝟒𝟖 = 𝟎. 𝟎𝟐𝟕𝟒𝟒
40
20
Productivity at Orange Inc.
Ø Has labor productivity changed? Use the labor productivity ratio to
support your answer.
𝟏,𝟏𝟐𝟒
𝐋𝐚𝐛𝐨𝐫 𝐰𝐞𝐞𝐤 𝟏 = 𝟏𝟐,𝟕𝟑𝟓 = 𝟎. 𝟎𝟖𝟖𝟐𝟔
𝟏,𝟑𝟏𝟎
𝐋𝐚𝐛𝐨𝐫 𝐰𝐞𝐞𝐤 𝟐 = 𝟏𝟒,𝟖𝟒𝟐 = 𝟎. 𝟎𝟖𝟖𝟐𝟔
𝟏,𝟎𝟗𝟐
𝐋𝐚𝐛𝐨𝐫 𝐰𝐞𝐞𝐤 𝟑 = 𝟏𝟎,𝟔𝟎𝟑 = 𝟎. 𝟏𝟎𝟐𝟗𝟖
𝟗𝟖𝟏
𝐋𝐚𝐛𝐨𝐫 𝐰𝐞𝐞𝐤 𝟒 = 𝟗,𝟓𝟐𝟔 = 𝟎. 𝟏𝟎𝟐𝟗𝟖
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21