Operations Management for MBAs - Chapter 1
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Two themes that are central to operations
Customer Satisfaction and Competitiveness
A purposeful collection of people, objects, and procedures for operating within an environment
is concerned with transforming inputs into useful outputs according to an agreed-upon strategy and thereby adding value to some entity; this constitutes the primary activity of virtually every organization.
- Transformation process
- A mechanism for controlling the system
Occurs when one part of a systems is improved to the detriment of the other parts of the system and, perhaps, the organization as a whole
- Alter: changed structurally, physical change, cut, stamped, formed, assembled. Examples are haircuts, operation to remove appendix
- Transport: an item is located somewhere other than where it needs to be.
- Store: Kept protected from the environment for a period of time.
- Inspect: to better understand the item's properties.
Two types of outputs
- Products: physical goods
- Services: abstract or non-physical
- Any physical entity accompanying a transformation that adds value
- If there is no facilitating good, then it is a pure service
Bundles of benefits, some of which may be tangible and other intangible, and they ay be accompanied by a facilitating good or goods.
- Upfront monetary investment
- Other monetary life-cycle costs of using the service or product such as maintenance
- The hassles involved in obtaining the product or service, such as travel, financing, or friendliness of service.
- Output per worker hour
- Also called "partial factor" measure of productivity because it only takes into account the worker
Total Factor Productivity
A broad measure of productivity that considers all the factors of production - labor, capital, materials, and energy - in the denominator.
Effectiveness and Efficiency
- Effectiveness: Doing the right thing - measurement of achievement
- Efficiency: Doing the thing right - focus on the proper task or goal
Benefits (Customer value)
- Pure research - working with the basic technology to develop new knowledge
- Applied research - attempting to develop new knowledge along particular lines
- Attempt to utilize the findings of research and expand the possible applications, often consisting of modifications or extensions to existing outputs to meet customer interests.
- Early years - Remove bugs, increase performance
- Middle years - Options and variants
- Late years - Prolong life of output
Two Alternatives to Research
- Imitation of a new product
- Outright purchase of someone else's invention
The generation of new knowledge concerning how to produce outputs
The activities of a product or service it is intended to perform, thereby providing benefits to the customer.
- Conformance to specifications
- Quick Response
External benefits of high quality
- Customer Satisfaction
- Customer Referrals
- Repeat Business
- Reputation in the market
- Charge a premium price
- More profit and market share
- Protection from competitors
- Attractiveness of follow on products
- Minimize risk and liability
Internal Benefits of high quality
- "Do it right the first time"
- Improves worker morale
- Reduces scrap and waste
- Smoothes workflows
- Improves control
- Reduces other costs
Two primary costs of quality
- Control Costs
- a. Prevention costs: Planning, training, product design, maintenance
- b. Appraisal costs: Measuring, testing, test equipment, inspectors, reports
- Failure Costs
- a. Internal cost of defects: Extra labor and materials to repair, scrap, rework, expedite
- b. External cost of defects: ill will, complaints, lawsuits, recalls, warranties, insurance
W. Edwards Deming's major cause of poor quality
Offering a product or service exactly suited to a customer's desires or needs
David Upton's definition for flexibility
The ability to change or react with little penalty in time, effort, cost, or performance
Major competitive advantages of flexibility
- Faster matches to customers' needs because changeover time from one product or service to another is quicker
- Closer matches to customer's needs
- Ability to supply the needed items in the volumes required for the markets
- Faster design-to-market time
- Lower cost of changing production
- Ability to offer a full line of products w/o cost of stocking
- Ability to meet market demands
Four Mass Customization Strategies from Harvard Business Review - Gilmore and Pine
- Collaborative customizers: Dialog with customers to help articulate needs and develop customized outputs
- Adaptive customizers: offer a standard product that customers can modify
- Cosmetic customizers: produce a standard product presented differently to different customers
- Transparent customizers: provide custom products without the customer knowing that the product has been customized for them
Prerequisites for and Advantages for Rapid Response
- Sharper focus on customer - customer at the center
- Better management - improving infrastructure and systems
- Efficient processing
- Higher quality
- Elimination of overhead
- Improved focus
- Reduced changes
- Faster revenue generation
- Better Communication
- Improved morale
- Long term viability of a firm or organization
- Short term - current success of a firm in the marketplace as measured by its market share or profitability
- Of a nation - its aggregate competitive success in all markets
Supply Chain Management
Finding the best mix of producers and assemblers to deliver a product or service to a customer
- A set of objectives, plans, and policies for the organization to compete successfully in it markets.
- What the competitive advantage will be and how to achieve it and sustain it
Resource-based view of strategy
A business strategy formation that considers the set of resources available to the organization as the primary driver of the business strategy
Expresses the organization's values and aspirations
Expresses the organization's purpose or reason for existence.
External forces that affect strategy
- Environment - economy, government regulations, and climate
- Competitors - new product introductions, industry consolidation, new entrants
- Technology available
- Customer requirements
Internal Forces that affect strategy
- Organizational resources
- Organization's core competencies/capabilities
- Its culture
- Its weaknesses
Represents the organization's underlying core logic and strategic choices for creating and capturing value within a network.
Life Cycle Curve of strategy
- Introduction and early adoption
- Acceptance and growth of the market
- Maturity with market saturation
Four Product Development strategies by Maidique and Patch
- First to market
- Second to market
- Cost of minimization or late to market
- Market segmentation
- Attempt to have their products available before the competition
- Strong applied research required
- Higher Prices give large short term profits
- Lower prices give more market share and larger long term profits
- Try to quickly imitate successful outputs by first-to-market organizations
- Less emphasis on applied research and more emphasis on fast development.
- Learn from mistake of first-to-market and offer improved or advanced version of original products.
Cost minimization or Late-to-Market
- Wait until a product becomes fairly standardized and demand is large.
- Compete on the basis of cost as opposed to features
- Focus of R&D is on improving the production process to make it cheaper/quicker
- Focus is on niche markets with specific needs
- Applied engineering skills and flexible manufacturing systems needed
- A curve representing two factors and comparing operational strategies of companies.
- Example Unit cost v. output variety
- Plot company strategy
- Use technology to move the curve for your company.
- Streamline operations and make cost-variety trade offs, moving down the performance frontier curve toward competitor. Adoption of new technologies.
- Adopt new technology without streamlining operations and move to a new frontier.
Two major attributes of focus - Mckinsey & Company Research
- Stressing one key business value
- Sticking to what is known best
The focused organization
- An organization that chooses to stress one or two key areas of strength
- Adopting a focus strategy means knowing not only what customers to concentrate on, but also knowing what customer you do not want.
Common areas of organizational focus
- Innovations: new products and services to market quickly
- Customization: quickly redesign and produce
- Flexibility of output: switch between variants quickly
- Flexibility of volume: switch between high and low volumes quickly
- Performance: outputs with unique valuable features
- Quality: better craftsmanship or consistancy
- Reliability: customer count on performance
- Reliability of delivery: never late
- Response: short leadtimes
- Service: help and support
- Price: Lowest
- A characteristic of a product or service that is required if the product is even to be considered.
- A prerequisite to enter the market
- A characteristic that will win the bid or purchase
- Response time
Most common reason for loss of focus
The focus was never really clearly defined to start with
Sand cone model of focus
- There is a preferred order in developing strengths on various competitive dimensions
- 1. Quality products
- 2. Delivery dependability
- 3. Speed
- 4. Cost
- The collective knowledge and skills an organization has that distinguish it from the competition
- Become the building block fro organizational practices and business processes referred to as core capabilities
- Derived from their strong relationship to an organization's ability to integrate a variety of technologies and skills in the development of new products and services.
- Provide the basis for developing new products and service and are a primary factor in determining an organization's long-term competitiveness
Characteristics and Advantages of Core Capabilites
- Provide the basis for developing new products and services
- provide access to new markets
- strongly related to the benefits provided by the product or service that customers value
- difficult to imitate
Three characteristics that hinder imitation
- Bartmess & Cerny
- It is complex and requires organizational learning over a long period of time
- It is based on multiple functional areas, both internal and external to the organization
- It is the result of how the functions interact rather than the skills/knowledge within the functions themselves.
Subcontracting out certain activities or services
Strategically important capabilities
- They are strongly related to what customers perceive to be the key characteristics of the product or service
- They require highly specialized knowledge and skills - core capability
- They require highly specialized physical assets, and few suppliers possess them
- The organization has a technological lead or is likely to obtain one.
Creeping breakeven phenomenon
As outputs are outsourced, the remaining outputs appear to be more expensive to produce in-house
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