Assignment 1 and 2

Copyright Information (bibliographic) Document Type: Book Chapter Title of book: Operations and Supply Chain Management (15 th Edition) Author of book: F. Robert Jacobs, Richard B. Chase Chapter Title: Chapter 2 Strategy Author of Chapter: F. Robert Jacobs, Richard B. Chase Year: 2018 Publisher: McGraw-Hill Education Place of Publishing: United States of America The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted materials. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or reproduction is not to be used for any purpose other than private study, scholarship, or research. If a user makes a request for, or later uses, a photocopy or reproduction for purposes in excess of fair use that user may be liable for copyright infringement. learning Objectives LO 2-1 Know what a sustainable business strategy is and how it relates to operations and supply chain management. LO 2-2 Define operations and supply chain strategy. LO 2-3 Explain how operations and supply chain strategies are implemented. LO 2-4 Understand why strategies have implications relative to.business risk. LO 2-5 Evaluate productivity in operations and supply chain management. A SUSTAINABLE OPERATIONS AND SUPPLY CHAIN STRATEGY Know what a sustainable business strategy is and how it relates to operations and supply chain management.

The ability to meet current resource needs without compromising the ability of future generations to meet their needs. line A business strategy that includes social, economic, and environmental criteria. Strategy should describe how a firm intends to create and sustain value for its current share­ holders. By adding to the concept, we add the requirement to meet these cur­ rent needs without compromising the ability of future generations to meet their own needs. Shareholders are those individuals or companies that legally own one or more shares of stock in the company. Many companies today have expanded the scope of their strategy to include stakeholders. Stakeholders are those individuals or organizations that are influenced, either directly or indirectly, by the actions of the firm. This expanded view means that the scope of the firm's strategy must not only focus on the economic viability of its shareholders, but should also consider the environmental and social impact on key stakeholders. To capture this expanded view, the phrase has been coined. The triple bottom line, Exhibit 2.1, considers evaluating the firm against social, economic, and environ­ mental criteria. Many companies have developed this expanded view through goals that relate to sustainability along each of these dimensions. Some alternative phrases for the same con­ cept are "People, Planet, and Profit" used by Shell Oil Company, and "Folk, Work, and Place" which originated with twentieth-century writer Patrick Geddes. The following expands on the meaning of each dimension of the triple bottom line framework. Social Responsibility. This pertains to fair and beneficial business practices toward labor, the community, and the region in which a firm conducts its business. A triple bottom line company seeks to benefit its employees, the community, and other social entities that are impacted by the firm's existence. A company should not use child labor, and should pay fair salaries to its workers, maintain a safe work environment with tolerable working hours, and not otherwise exploit a community or its labor force.

A business can also give back by contributing to the strength and growth of its com­ munity through health care, education, and other special programs. The Triple Bottom Line Economic Prosperity Environmental Stewardship Social Responsibility 24 25 Strategy Chapter 2 Economic Prosperity. The firm is obligated to compensate share­ holders who provide capital through stock purchases and other financial instruments via a compet­ itive return on investments. Com­ pany strategies should promote growth and grow long-term value to this group in the form of profit.

Within a sustainability framework, this dimension goes beyond just profit for the firm; it also pro­ vides lasting economic benefit to society. Environmental Stewardship. This refers to the firm's impact on the environment. The company should protect the environment as much as possible-or at least cause no harm. Managers should move to reduce a company's ecological footprint by carefully managing its consumption of natu­ ral resources and by reducing waste. Many businesses now conduct "cradle-to-grave" assessments of products to determine what the true environmental costs are-from processing the raw material to manufacture to distribution to eventual disposal by the final customer.

Conventional strategy focuses on the economic part of this framework. Because many of the processes that fall under the domain of operations and supply chain management have a social and environment impact, it is important these criteria be considered as well. Some proponents argue that, in many ways, European Union countries are more advanced due to the standard­ ized reporting of ecological and social losses that came with the adoption of the euro.

Although many company planners agree with the goals of improving society and pre­ serving the environment, many others disagree. Dissenting arguments relate to the potential loss of efficiency due to the focus on conflicting criteria. Others argue that these goals may be appropriate for rich societies that can afford to contribute to society and the envi­ ronment. A company in a poor or developing society/nation must focus on survival. The economic benefit derived from the use of abundant local resources may be viewed as worth their destruction.

In this chapter, we take a customer-centered approach; issues associated with people and the environment are left to an individual case approach. Depending on the country, industry, and scope of the firm, these other issues vary widely, and it would be difficult to provide a general approach for analysis. The issues and their relationship to operations and supply chain management are very real, however, and we anticipate they will become even more relevant in the future. LIGHTS ARE TURNED OFF AT AN SMBC NIKKO SECURITIES INC. OFFICE AS EMPLOYEES WORK ON DESKS EQUIPPED WITH LED BULBS IN AN ENERGY-SAVING MEASURE. © Tomohiro Ohsumi/Bloomberg/Getty Images nn,.:>r;>tlf,nc: and chain strategy The setting of broad policies and plans that will guide the use of the resources needed by the firm to implement its corporate strategy. effectiveness Performing activities in a manner that best implements strategic priorities at minimum cost. WHAT IS OPERATIONS AND SUPPLY CHAIN STRATEGY?

is concerned with setting broad policies and plans for using the resources of a firm and must be integrated with corporate strategy. So, for example, if Define operations and the high-level corporate strategy includes goals related to the environment and social respon­ supply chain strategy. sibility, then the operations and supply chain strategy must consider these goals. A major focus to the operations and supply chain strategy is operations effectiveness.

effectiveness relates to the core business processes needed to run the business. The processes span all the business functions, from taking customer orders, handling returns, manufacturing, and 26 Section 1 Strategy, Products, and Capacity managing the updating of the Website, to shipping products. Operational effectiveness is reflected directly in the costs associated with doing business. Strategies associated with operational effectiveness, such as quality assurance and control initiatives, process redesign, planning and control systems, and technology investments, can show quick near-term (12 to 24 months) results.

Operations and supply chain strategy can be viewed as part of a planning process that coordinates operational goals with those of the larger organization. Because the goals of the larger organization change over time, the operations strategy must be designed to antic­ ipate future needs. A firm's operations and supply chain capabilities can be viewed as a portfolio best suited to adapting to the changing product and/or service needs of the firm's customers. Planning strategy is a process just like making a product or delivering a service. The pro­ cess involves a set of activities that are repeated at different intervals over time. Just as prod­ ucts are made over and over, the strategy planning activities are repeated. A big difference is that these activities are done by executives in the boardroom!

Exhibit 2.2 shows the major activities of a typical strategic planning process. Strategic analysis is performed at least yearly and is where the overall strategy is developed. This step involves looking out and forecasting how business conditions that impact the firm's strategy are going to change in the future. Here, such things as changes in customer preferences, the impact of new technologies, changes in population demographics, and the anticipation of new competitors are considered. As part of the overall strategy, the firm needs to define a clear set of priorities to help guide the implementation of a plan. When possible, it is useful to define specific measures that relate to the objectives of the firm. A successful strategy will anticipate change and formulate new initiatives in response.

The corporate strategy is operationalized through a set of operations and supply chain initiatives. Initiatives are the major steps that need to be taken to drive success in the firm.

Many of these initiatives are repeated from year to year, such as the updating of existing prod­ uct designs and the operation of manufacturing plants in different regions of the world. New initiatives that innovatively respond to market dynamics are extremely important to company success. Initiatives that develop innovative products or open new markets, for example, drive future revenue growth.

Other initiatives that reduce costs directly impact the profitability of Formulating an Operations and Supply Chain Strategy Strategy Chapter 2 27 the firm. Companies with triple bottom line strategies may have initiatives that reduce waste or enhance the welfare of the local communities.

These activities are refined and updated as often as four times a year. Here, each initiative is evaluated and appropriate budget estimates for the next year or more are developed. Mea­ sures that relate to the performance of each initiative are needed so that success or failure can be gauged in an unbiased and objective way. Because of the quickly changing nature of global business, many businesses must revise plans several times per year.

Carefully designed projects are used to implement change. The planning of these projects requires the identification of the resources needed, such as the expertise of the project mem­ bers, special equipment, and other resources. Specific timing of the activities of the project are analyzed as part of each project implementation plan. Competitive Dimensions Given the choices customers face today, how do they decide which product or service to buy?

Different customers are attracted by different attributes. Some customers are interested pri­ marily in the cost of a product or service and, correspondingly, some companies attempt to position themselves to offer the lowest prices. The major competitive dimensions that form the competitive position of a firm are discussed next. Cost or Price: "Make the Product or Deliver the Service Inexpensively" Within every industry, there is usually a segment of the market that buys solely on the basis of low cost. To successfully compete in this niche, a firm must be the low-cost producer.

However, even this does not always guarantee profitability and success. Products and services sold strictly on the basis of cost are typically commodity-like; in other words, customers cannot distinguish the product or service of one firm from that of another. This segment of the market is frequently very large, and many companies are lured by the potential for significant profits, which they associate with the large unit volumes. As a consequence, however, competition in this segment is fierce-and so is the failure rate. After all, there can be only one low-cost producer, who usually establishes the selling price in the market.

Price, however, is not the only basis on which a firm can compete (although many econo­ mists appear to assume it is!). Other companies, such as BMW, seek to attract people who want higher quality-in terms of performance, appearance, or features-than what is avail­ able in competing products and services, even though it means a higher price. Quality: "Make a Great Product or Deliver a Great Service" There are two characteristics of a product or service that define quality: design quality and process quality.

Design quality relates to the set of features the product or service contains. This relates directly to the design of the product or service. Obviously, a child's first two-wheel bicycle is of significantly different quality than the bicycle of a world­ class cyclist. The use of special aluminum alloys and unique lightweight sprockets and chains is important to the performance needs of the advanced cyclist. These two types of bicycles are designed for different customers' needs. The higher-quality cyclist product commands a higher price in the marketplace due to its special features.

The goal in establishing the proper level of design r~ KEYIDEA \' Competing based on cost can be difficult unless the firm has some unique advantage over the competition.

For example, an inexpensive source of raw material or access to low-cost labor may create the necessary advantage. quality is to focus on the requirements of the AN AERODYNAMICS EXPERT LOGS RESULTS FROM A WIND TUNNEL TEST FOR customer. Overdesigned products and services CYCLING CLOTHING AND RACING BICYCLE DESIGN. with too many or inappropriate features will be David L. Ryan/Baston Globe/Getty Images 28 Section 1 Strategy, Products, and Capacity /'~·. { KEYIDEA f Same-day delivery of items ordered from the Internet is now an important competitive feature for some companies. Keep in mind that competitive priorities may change overtime. r KEYIDEA ~ Often, the services that are included. with a product are key differentiators in the marketplace. viewed as prohibitively expensive. In comparison, underdesigned products and services will lose customers to products that cost a little more but are perceived by customers as offering greater value.

Process quality, the second characteristic of quality, is critical because it relates directly to the reliability of the product or service. Regardless of whether the product is a child's first two-wheeler or a bicycle for an international cyclist, customers want products without defects.

Thus, the goal of process quality is to produce defect-free products and services. Product and service specifications, given in dimensional tolerances and/or service error rates, define how the product or service is to be made. Adherence to these specifications is critical to ensure the reliability of the product or service as defined by its intended use. Delivery Speed: "Make the Product or Deliver the Service Q u ick Iy" In some markets, a firm's ability to deliver more quickly than its competitors is critical. A company that can offer an onsite repair service in only 1 or 2 hours has a significant advantage over a competing firm that guarantees service only within 24 hours. Delivery Reliability: "Deliver It When Promised" This dimension relates to the firm's ability to supply the product or service on or before a promised delivery due date. For an automobile manufacturer, it is very important that its supplier of tires provide the needed quantity and types for each day's car production. Ifthe tires needed for a particular car are not available when the car reaches the point on the assembly line where the tires are installed, the whole assembly line may have to be shut down until they arrive. For a service firm such as Federal Express, delivery reliability is the cornerstone of its strategy. Coping with Changes in Demand: "Change Its Volume" In many markets, a company's ability to respond to increases and decreases in demand is important to its ability to compete. It is well known that a company with increasing demand can do little wrong. When demand is strong and increasing, costs are continuously reduced due to economies of scale, and investments in new technologies can be easily justified. But scaling back when demand decreases may require many difficult decisions about laying off employees and related reductions in assets. The ability to effectively deal with dynamic market demand over the long term is an essential element of operations strategy. Flexibility and New-Product Introduction Speed: "Change It" Flexibility, from a strategic perspective, refers to the ability of a company to offer a wide variety of products to its customers. An important element of this ability to offer different products is the time required for a company to develop a new product and to convert its processes to offer the new product. Other Product-Specific Criteria: "Support It" Thecompetitivedimen­ sions just described are certainly the most common. However, other dimensions often relate to specific products or situations. Notice that most of the dimensions listed next are primarily service in nature. Often, special services are provided to augment the sales of manufactured products. 1. Technical liaison and support. A supplier may be expected to provide technical assistance for product development, particularly during the early stages of design and manufacturing. 2. Meeting a launch date. A firm may be required to coordinate with other firms on a complex project. In such cases, manufacturing may take place while development work is still being completed. Coordinating work between firms and working simul­ taneously on a project will reduce the total time required to complete the project. 3. Supplier after-sale support. An important competitive dimension may be the ability of a firm to support its product after the sale. This involves availability of replacement parts and, possibly, modification of older, existing products to new performance lev­ els. Speed of response to these after-sale needs is often important as well. Strategy Chapter 2 29 4. Environmental impact. This dimension is related to criteria such as carbon dioxide emissions, use of nonrenewable resources, or other factors that relate to sustainability. 5. Other dimensions. These typically include such factors as colors available, size, weight, location of the fabrication site, customization available, and product mix options. The Notion of Trade-Offs Central to the concept of operations and supply chain strategy is the notion of operations focus and trade-offs. The underlying logic is that an operation cannot excel simultaneously on all competitive dimensions. Consequently, management has to decide which parameters of performance are critical to the firm's success and then concentrate the resources of the firm on these particular characteristics.

For example, if a company wants to focus on speed of delivery, it cannot be very flexible in its ability to offer a wide range of products. Similarly, a low-cost strategy is not compat­ ible with either speed of delivery or flexibility. High quality also is viewed as a trade-off to low cost.

A strategic position is not sustainable unless there are compromises with other positions.

Trade-offs occur when activities are incompatible so that more of one thing necessitates less of another. An airline can choose to serve meals-adding cost and slowing turnaround time at the gate-or it can choose not to, but it cannot do both without bearing major inefficiencies.

occurs when a company seeks to match the benefits of a successful position while maintaining its existing position. It adds new features, services, or technologies onto the activities it already performs. The risky nature of this strategy is shown by Continental Airlines' ill-fated attempt to compete with Southwest Airlines. While maintaining its posi­ tion as a full-service airline, Continental set out to match Southwest on a number of point­ to-point routes. The airline dubbed the new service Continental Lite. It eliminated meals and first-class service, increased departure frequency, lowered fares, and shortened gate turn­ around time. Because Continental remained a full-service airline on other routes, it continued to use travel agents and its mixed fleet of planes and also provide baggage checking and seat assignments.

Trade-offs ultimately grounded Continental Lite. The airline lost hundreds of millions of dollars, and the chief executive officer lost his job. Its planes were delayed, leaving hub cities congested, slowed at the gate by baggage transfers. Late flights and cancellations generated a thousand complaints a day. Continental Lite could not afford to compete on price and still pay standard travel agent commissions, but neither could it do without agents for its full-service business. The airline compromised by cutting commissions for all Continental flights. Sim­ ilarly, it could not afford to offer the same frequent-flier benefits to travelers paying the much lower ticket prices for Lite service. It compromised again by lowering the rewards of Continental's entire frequent-flier program. The results: angry travel agents and full-service customers. Continental tried to compete in two ways at once and paid an enormous strad­ dling penalty. Order Winners and Order Qualifiers: The Marketing­ Operations link A well-designed interface between marketing and operations is necessary to provide a busi­ ness with an understanding of its markets from both perspectives. The terms order win­ ner and order qualifier describe marketing-oriented dimensions that are key to competitive success. An is a criterion, or possibly a set of criteria, that differentiates the products or services of one firm from those of another. Depending on the situation, the order-winning criteria may be the cost of the product (price), product quality and reliability, or any of the other dimensions developed earlier. An is a screening criterion that permits a firm's products to even be considered as possible candidates for purchase.

Oxford Professor Terry Hill states that a firm must "requalify the order qualifiers" every day it is in business. When a firm seeks to match what a competitor is doing by adding new features, services, or technologies to existing activities. This often creates problems if trade­ offs need to be made.

One or more specific marketing-oriented dimensions that clearly differentiate a product from competing products.

Dimensions used to screen a product or service as a candidate for purchase. 30 Section 1 Strategy, Products, and Capacity For example, consider your purchase of a notebook computer. You might think that such features as screen size, weight, operating system version, and cost are important qualifying dimensions. The order-winning feature that actually differentiates those candidate notebook computers that qualify is battery life. In doing your search, you develop a list of computers that all have 14-inch screens, weigh less than three pounds, run the latest Microsoft Windows operating system, and cost less than $1,000. From this list of acceptable computers, you select the one that has the longest battery life.

In an industrial setting where a firm is deciding on a supplier, the decision can be quite dif­ ferent. Consider a firm that is deciding on a supplier for its office supplies. Companies such as Office Depot, OfficeMax, Quill, or Staples might be candidates. Here, the qualifying dimen­ sions are: Can the company supply the items needed, can the supplier deliver orders within 24 hours, are the items guaranteed, and is a private Web-based catalog available? Companies that have these capabilities would qualify for consideration as possible suppliers. The order winner might be the discount schedule that the company offers on the price of the items purchased. STRATEGIES ARE IMPLEMENTED USING OPERATIONS AND SUPPLY CHAIN ACTIVITIES-IKEA'S STRATEGY All the activities that make up a firm's operation relate to one another. To make these activi­ ties efficient, the firm must minimize its total cost without compromising customers' needs. Explain how operations To demonstrate how this works, consider how IKEA, the Swedish retailer of home prod­ and supply chain strategies ucts, implements its strategy using a set of unique activities. IKEA targets young furniture are implemented. buyers who want style at a low cost. IKEA has chosen to perform activities differently from its rivals.

Consider the typical furniture store, where showrooms display samples of the merchan­ dise. One area may contain many sofas, another area displays dining tables, and there are many other areas focused on particular types of furniture. Dozens of books displaying fabric swatches or wood samples or alternative styles offer customers thousands of product varieties from which to choose. Salespeople escort customers through the store, answering questions and helping them navigate through the maze of choices. Once a customer decides what he or she wants, the order is relayed to a third-party manufacturer. With a lot of luck, the furniture will be delivered to the customer's home within six to eight weeks. This is a supply chain that maximizes customization and service, but does so at a high cost.

In contrast, IKEA serves customers who are happy to trade service for cost. In addition to using sales associates, IKEA uses a self-service model with roomlike displays where fur­ niture is shown in familiar settings. Rather than relying on third-party manufacturers, IKEA designs its own low­ cost, ready-to-assemble furniture. In the store there is a self-serve warehouse, where customers can pick up prod­ ucts themselves and take them home the same day. Much of its low-cost operation comes from having customers service themselves, but IKEA offers extra services, such as home delivery, assembly, kitchen planning, and in­ store, by-appointment interior design consultation. Those services align well with the needs of its customers, who are young, not wealthy, and likely to have children.

Exhibit 2.3 shows how IKEA's strategy is imple­ mented through a set of activities designed to deliver it. such as the one for IKEA show how a company's strategy is delivered through a set of tailored activities. In companies with a clear strategy, a number of higher-order strategic themes (in darker green) can be identified Diagrams that show how and implemented through clusters of tightly linked activities. This type of map can be useful in a company's strategy is delivered through a set of understanding how good the fit is between the system of activities and the company's strategy.

supporting activities. Competitive advantage comes from the way a firm's activities fit with and reinforce one another. Used with the permission ofInter /KEA Systems B.V 31 Strategy Chapter 2 IKEA-Stylish Low-Cost Furniture Activity-system maps, such as this one for !KEA, show how a company's strategic position Is contained in a set oftailored activities designed to deliver it. In companies with a clear strategic position, o number ofhigher-order strategic themes (in darker green circles) can be identified and implemented through clusters oftightly linked activities (in lighter circles). The themes here all relate to reducing operations and supply chain­ related costs, which are important for the firm's success.

Based on Harvard Business School Press, from On Competition by Michael E. Porter, Boston, MA, 1998, p. 50. ASSESSING THE RISK ASSOCIATED WITH OPERATIONS AND SUPPLY CHAIN STRATEGIES The devastating earthquake and tsunami that hit Japan in March 2011 were a grim reminder that managing risk is a critical part of developing an effective operations and supply chain strategy.

The uncertainty in the global environment where most supply chains operate requires stra­ tegic planners to evaluate the relative riskiness of their operations and supply chain strategies.

is defined as the likelihood of a disruption that would impact the abil­ ity of the company to continuously supply products or services. Supply chain disruptions are unplanned and unanticipated events that disrupt the normal flow of goods and materials within a supply chain, and which expose firms within the supply chain to operational and financial risks. Operations and supply chain strategies must consider the risk in their supply chains and develop initiatives to cope with these disruptions and mitigate their impact on the business. We can categorize risks by viewing the inherent uncertainties related to operations and supply chain management along two dimensions: (1) supply chain coordination risks that are associated with the day-to-day management of the supply chain, which are normally dealt Understand why strategies have implications relative to business risk.

The likelihood of a disruption that would impact the ability of a company to continuously supply products or services. 32 Section 1 Strategy, Products, and Capacity A FACTORY BUILDING COLLAPSED IN SUKAGAWA CITY, FUKUSHIMA PREFECTURE, IN NORTHERN JAPAN ON MARCH 11, 2011.

A MASSIVE 8.9-MAGNITUDE EARTHQUAKE SHOOK JAPAN, UNLEASHING A POWERFUL TSUNAMI THAT SENT SHIPS CRASHING INTO THE SHORE AND CARRIED CARS THROUGH THE STREETS OF COASTAL TOWNS.

©FUKUSHIMA MINPO/AFP/ Getty lmages/Newscom with using safety stock, safety lead time, overtime, and so on; and (2) disruption risks, which are caused by natural or manmade disasters, such as earthquakes, hurricanes, and terrorism.

In this section, our focus is on the concepts and tools that are useful for managing the problems related to disruption risks. The events related to these risks are highly random and virtually impossible to predict with any precision.

Other than the Japan earthquake and tsunami mentioned, the following are examples of the types of events this section relates to:

In 1996, General Motors experienced an 18-day labor strike at a brake supplier factory.

This strike idled workers at 26 assembly plants and led to an estimated $900 million reduction in earnings.

In 1997, a Boeing supplier's failure to deliver two critical parts led to a loss of $2.6 billion.

In 2000, a IO-minute fire at a Phillips plant that supplied integrated circuits led to a $400 million loss to the firm.

• There are many other examples, including the 2010 Toyota recalls and the British Petroleum oil rig fire in the Gulf of Mexico. Risk Management Framework The nature of these types of risks lends them to a three-step risk management process that can be applied to situations where disruptions are possible. The three steps are as follows: 1. Identify the sources of potential disruptions. Assessing a type of vulnerability is the first step in the risk management framework. These are highly situation dependent, but the focus should be on highly unlikely events that would cause a significant disruption to normal operations. Such types of events include: natural disasters, capacity failures, infrastructure failures (air traffic system), terrorists, supplier failure, labor actions, equipment failure, commodity price volatility, and military/civil conflict. 2. Assess the potential impact of the risk. Here the goal is to quantify the probability and the potential impact of the risk. Depending on the specific incident, this assessment could be based on financial impact, environmental impact, ongoing business viability, brand image/reputation, potential human lives, and so on. 3. Develop plans to mitigate the risk. A detailed strategy for minimizing the impact of the risk could take many different forms, depending on the nature of the problem.

Risk mapping involves assessment of the probability or relative frequency of an event against the aggregate severity of the loss. Depending on the evaluation, some risks might be deemed acceptable and the related costs considered a normal cost of doing business. In some cases, Strategy Chapter 2 33 Risk Mitigation Strategies Risks Risk Mitigation Strategy Natural disaster (e.g., climate change, weather) Contingency planning (alternate sites, etc.), insurance Country risks Hedge currency, produce/source locally Supplier failures Use multiple suppliers Network provider failure Support redundant digital networks Regulatory risk (e.g., licensing and regulation issues) Up-front and continuing research; good legal advice, compliance Commodity price risks Multisource, commodity hedging Logistics failure Safety stock, detailed tracking and alternate suppliers Inventory risks Pool inventory, safety stock ~-~~·~···~~~~·--~-~~--~--~~~·~~~-~~-~~··~~~~~~~- Major quality failure Carefully select and monitor suppliers Loss of customers Service/product innovation Theft and vandalism Insurance, security precautions, knowledge of likely risks, patent protection, etc. Lean practices Distribution hubs the firm may find it is possible to insure against the loss. There may be other cases where the potential loss is so great that the risk would need to be avoided altogether.

A matrix (see Exhibit 2.4) that maps risks against specific operations and supply chain strategies. The matrix helps to understand the impact of different types of supply chain dis­ ruptions when using specific operations and supply chain strategies. For example, the first column evaluates the impact of natural hazards. Here we see that sole sourcing, lean practices, and the use of distribution hubs can have a major impact on the firm.

Unfortunately, some of the most cost-effective strategies are also the most risky. It is important to keep this in mind as you consider each concept. Thus far in the book, we have not discussed specific operations and supply chain strategies, such as outsourcing and sole sourc­ ing. You will learn about these as we progress through the book. RODUCTIVITY MEASUREMENT is a common measure of how well a country, industry, or business unit is using its resources (or factors of production). Since operations and supply chain management focuses on making the best use of the resources available to a firm, productivity measurement is fundamental to understanding operations-related performance. In this section, we define various measures of productivity. Throughout the rest of the book, many other performance measures will be defined as they relate to the material. A measure of how well resources are used. According to Goldratt's definition (see Chapter 23), all the actions that bring a company closer to its goals.

Evaluate productivity in operations and supply chain management. 34 Section I Strategy, Products, and Capacity In its broadest sense, productivity is defined as . . Outputs P roduct1v1ty =-.--­ [2.1] mputs To increase productivity, we want to make this ratio of outputs to inputs as large as practical.

Productivity is what we call a relative measure. In other words, to be meaningful, it needs to be compared with something else. For example, what can we learn from the fact that we oper­ ate a restaurant and that its productivity last week was 8.4 customers per labor hour? Nothing!

Productivity comparisons can be made in two ways. First, a company can compare itself to similar operations within its industry, or it can use industry data when such data are available (e.g., comparing productivity among the different stores in a franchise). Another approach is to measure productivity over time within the same operation. Here we would compare our productivity in one time period with that in the next.

As Exhibit 2.5 shows, productivity may be expressed as partial measures, multifactor mea­ sures, or total measures. If we are concerned with the ratio of some output to a single input, we have a partial productivity measure. If we want to look at the ratio of some output to a group of inputs (but not all inputs), we have a multifactor productivity measure. If we want to express the ratio of all outputs to all inputs, we can use a total factor measure ofproductivity to describe the productivity of an entire organization or even a nation. Examples of Productivity Measures Output Output Output Partial measure Labor or Capital or Materials or Output Output Multifactor measure Labor+ Capital + Energy or Labor+ Capital + Materials Output Goods and services produced Total measure Inputs or All resources used Input and Output Production Data ($1,000) Productivity Measure Examples Output 1. Finished units 2. Work in process 3. Dividends Total output Input 1. Labor 2. Material 3. Capital 4. Energy 5. Other expenses Total input $ 10,000 2,500 1,000 $ 13,500 $ 3,000 153 10,000 540 1,500 $ 15,193 Total measure Total output _ 13, 500 _ 0 89 Total input -15, 193 - · Multifactor measures:

Total output _ 13, 500 _ 4 28 Labor+ Material - 3, 153 - · Finished units _ 10, 000 _ 3 17 Labor+ Material - 3, 153 - · Partial measures:

Total output 13 500 ---- --'-- -25 Energy - 540 ­ Total output _ 13, 500 _ 25 Energy - 540 ­ Partial Measures of Productivity Business Productivity Measure Restaurant Customers labor hour Retail store Sales per square foot Chicken farm Lb. of meat lb. of feed plant Kilowatt hours per ton of coal cord of wood mill Tons of 35 Strategy Chapter 2 A numerical example of productivity appears in Exhibit 2.5. The data reflect quantitative measures of input and output associated with the production of a certain product. Notice that for the multifactor and partial measures, it is not necessary to use total output as the numera­ tor. Often, it is desirable to create measures that represent productivity as it relates to some particular output of interest. Using Exhibit 2.5 as an example, total units might be the output of interest to a production control manager, whereas total output may be of key interest to the plant manager. This process of aggregation and disaggregation of productivity measures provides a means of shifting the level of the analysis to suit a variety of productivity measure­ ment and improvement needs.

Exhibit 2.5 shows all units in dollars. Often, however, management can better understand how the company is performing when units other than dollars are used. In these cases, only partial measures of productivity can be used, because we cannot combine dissimilar units such as labor hours and pounds of material. Examples of some commonly used partial mea­ sures of productivity are presented in Exhibit 2.5. Such partial measures of productivity give managers information in familiar units, allowing them to easily relate these measures to the actual operations.

Each summer, USA Today publishes annual reports of productivity gains by the largest U.S. firms. Productivity has been on the rise for many years now, which is very good for the economy. Productivity often increases in times of recession; as workers are fired, those remaining are expected to do more. Increases also come from technological advances. Think of what the tractor did for farm productivity. Concept Connections ~ U© 2-~ K"now wfiat a sustainalJle business strategy is and How it relates to ~ operations anCI supply; cfiain management. Summary • A strategy that is sustainable needs to create value for the firm's shareholders and stakeholders.

• The shareholders are equity owners in the company.

• The stakeholders are those individuals and organiza­ tions that are influenced by the actions of the firm. Key Terms • This view means that a firm's strategy must focus not only on economic viability, but also on the environ­ mental and social impact of its actions. Sustainability The ability to meet current resource Triple bottom line A business strategy that includes needs without compromising the ability of future social, economic, and environmental criteria.

generations to meet their needs. ~~© 2-2 Define operations anCI supply;; cfiain strategy;. Summary • This involves setting the broad policies of a firm and creating a plan for using that firm's resources.

• The operations and supply chain strategy coordinates operational goals with those of the larger organization.

• A firm's operational capabilities should match the chang­ ing product or service needs of the firm's customers.

Major competitive dimensions that form the competitive • Cost • Quality • Delivery speed and reliability • Changes in volume • Flexibility and new-product introduction speed • Other product-specific criteria Usually there are trade-offs that occur relative to position of a firm include: these competitive dimensions. 36 Section I Strategy, Products, and Capacity Key Terms Operations and supply chain strategy The setting of broad policies and plans that will guide the use of the resources needed by the firm to implement its corporate strategy. Operations effectiveness Performing activities in a manner that best implements strategic priorities at mini­ mum cost. Straddling When a firm seeks to match what a com­ petitor is doing by adding new features, services, or technologies to existing activities. This often creates problems if trade-offs need to be made.

Order winners One or more specific marketing-oriented dimensions that clearly differentiate a product from competing products.

Order qualifiers Dimensions used to screen a product or service as a candidate for purchase.

tit(!!) 2-0 Exglain How ogerations anCI sugglM ellain strategies are imglementeCI. Summary • Strategies are implemented through a set of activities designed to deliver products and services in a manner consistent with the firm's overall business strategy. Key Terms Activity-system maps Diagrams that show how a company's strategy is delivered through a set of supporting activities. I!(!!) 2-4 lllnClerstanCI wily; strategies Have imglieations relative to Business risl<'. Summary Operations and supply chain strategies need to be evaluated relative to their riskiness.

• Supply chain disruptions are unplanned and unantici­ pated events that disrupt the normal flow of goods and materials. • Risks can be categorized along two dimensions: sup­ ply chain coordination risks and disruption risks.

• A three-step risk management framework involves identifying the potential disruptions, assessing the potential impact of the risk, and developing plans to mitigate the risk. Terms Supply chain risk The likelihood of a disruption that would impact the ability of a company to continuously supply products or services. Erm 2-5 Evaluate groCluetivi~ in ogerations an

According to Goldratt's definition (see Chapter 23), all the actions that bring a company closer to its goals. • Since these are relative measures, they are meaningful only if they are compared to something else. Often, the comparison is to another company.

. . Outputs [2.1] P ro d uctivity = 1 nputs 37 Strategy Chapter 2 Solved Problem L02-5 A furniture manufacturing company has provided the following data (units are $1,000). Com­ pare the labor, raw materials and supplies, and total productivity for the past two years. Last Year This Year Output: Sales value of production $22,000 $35,000 Input: Labor 10,000 15,000 Raw materials and supplies 8,000 12,500 Capital equipment depreciation 700 1,200 Other 2,200 4,800 Solution Last Year This Year Partial productivities Labor 2.20 2.33 Raw materials and supplies 2.75 2.80 Total productivity 1.05 1.04 Discussion Questions L02-1 1. What is meant by a triple bottom line strategy? Give an example of a company that has adopted this type of strategy. 2. Find examples where companies have used features related to environmental sustainability to win new customers. L02-2 3. What are the major priorities associated with operations and supply chain strategy? For each major priority, describe the unique characteristics of the market niche with which it is most compatible. 4. Why does the proper operations and supply chain strategy keep changing for companies that are world-class competitors? 5. What do the expressions order winner and order qualifiers mean? What was the order win­ ner for your last major purchase of a product or service? L02-3 6. Pick a company that you are familiar with and describe its operations strategy and how it relates to winning customers. Describe specific activities used by the company that sup­ port the strategy (see Exhibit 2.3 for an example). L02-4 7. At times in the past, the dollar showed relative weakness with respect to foreign curren­ cies such as the yen, euro, and pound. This stimulates exports. Why would long-term reliance on a lower-valued dollar be at best a short-term solution to the competitiveness problem?

8. Identify an operations and supply chain-related disruption that recently impacted a com­ pany. What could the company have done to minimize the impact of this type of disruption prior to it occurring? L02-5 9. What do we mean when we say productivity is a relative measure? Objective Questions* L02-1 1. Shell Oil Company's motto "People, Planet and Profit" is a real-world implementation of what OSCM concept? (Answer in Appendix D) 2. A firm's strategy should describe how it intends to create and sustain value for what entities? *Special thanks to Bill Ruck of Arizona State University for the problems in this section. 38 Section 1 Strategy, Products, and Capacity 3. What is the term used to describe individuals or organizations that are influenced by the actions of a firm? L02-2 4. How often should a company develop and refine the operations and supply chain strategy?

5. What is the term used to describe product attributes that attract certain customers and can be used to form the competitive position of a firm? 6. What are the two main competitive dimensions related to product delivery?

7. What are the two characteristics of a product or service that define quality? L02-3 8. What is the diagram that shows how a company's strategy is delivered by a set of support­ ing activities? 9. In implementing supply chain strategy, a firm must minimize its total cost without com­ promising the needs of what group of people? L02-4 10. What is defined as the likelihood of disruption that would impact the ability of a com­ pany to continuously supply products or services?

11. What are risks caused by natural or manmade disasters, which are impossible to reliably predict, called? 12. Match the following common risks with the appropriate mitigation strategy:

__ Country risks A. Detailed tracking, alternate suppliers __ Regulatory risk B. Careful selection and monitoring of suppliers __ Logistics failure C. Contingency planning, insurance __ Natural disaster D. Good legal advice, compliance __ Major quality failure E. Currency hedging, local sourcing 13. What is the term used to describe the assessment of the probability of a negative event against the aggregate severity of the related loss? L02-5 14. As operations manager, you are concerned about being able to meet sales requirements in the coming months. You have just been given the following production report: Jan Feb Mar Units produced 2,300 1,800 2,800 3,000 Hours per machine 325 200 400 320 Number of machines 3 5 4 4 Find the average of the monthly productivity figures (units per machine hour). 15. Sailmaster makes high-performance sails for competitive windsurfers. The following is information about the inputs and outputs for one model, the Windy 2000. Calculate the productivity in sales revenue/labor expense.

Units sold 1,217 Sale price each $1,700 Total labor hours 46,672 Wage rate $12/hour Total materials $60,000 Total energy ~~~-~~~ ~-$,'+~°"~- 16. Live Trap C01poration received the following data for its rodent cage production unit.

Find the total productivity. Output 50,000 cages Sales price: $3.50 per unit Input Production time Wages Raw materials (total cost) Component parts (total cost) 620 labor hours $7.50 per hour $30,000 $15,350 Strategy Chapter 2 39 17. Two types of cars (Deluxe and Limited) were produced by a car manufacturer last year. Quantities sold, price per unit, and labor hours follow. What is the labor productivity for each car? Explain the problem(s) associated with the labor productivity. (Answer in Appendix D) Quantity $/Unit Deluxe car 4,000 units sold $8,000/car Limited car 6,000 units sold $9,500/car Labor, Deluxe 20,000 hours $12/hour Labor, Limited 30,000 hours $14/hour 18. A U.S. manufacturing company operating a subsidiary in an LDC (less-developed coun­ try) shows the following results: U.S.

LDC Sales (units) 100,000 20,000 Labor (hours) 20,000 15,000 Raw materials (currency) $20,000 (US) 20,000 (FC) Capital (hours) 60,000 5,000 a. Calculate partial labor and capital productivity figures for the parent and subsidiary.

Do the results seem confusing? b. Compute the multifactor productivity figures for labor and capital together. Do the results make more sense? c. Calculate raw material productivity figures (units/$ where $1 = 10 units of the foreign currency). Explain why these figures might be greater in the subsidiary. 19. Various financial data for the past two years follow. Calculate the total productivity mea­ sure and the partial measures for labor, capital, and raw materials for this company for both years. What do these measures tell you about this company? Last Year This Year Output: Sales $200,000 $220,000 Input: Labor 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 20. An electronics company makes communications devices for military contracts. The com­ pany just completed two contracts. The navy contract was for 2,300 devices and took 25 workers two weeks (40 hours per week) to complete. The army contract was for 5,500 devices that were produced by 35 workers in three weeks. On which contract were the workers more productive?

21. A retail store had sales of $45,000 in April and $56,000 in May. The store employs eight full-time workers who work a 40-hour week. In April, the store also had seven part-time workers at 10 hours per week, and in May the store had nine part-timers at 15 hours per week (assume four weeks in each month). Using sales dollars as the measure of output, what is the percentage change in productivity from April to May?

22. A parcel delivery company delivered 103,000 packages last year, when its average employment was 84 drivers. This year, the firm handled 112,000 deliveries with 96 driv­ ers. What was the percentage change in productivity over the past two years?

23. A fast-food restaurant serves hamburgers, cheeseburgers, and chicken sandwiches. The res­ taurant counts a cheeseburger as equivalent to 1.25 hamburgers and chicken sandwiches as 0.8 hamburger. Current employment is five full-time employees who each work a 40-hour week. If the restaurant sold 700 hamburgers, 900 cheeseburgers, and 500 chicken sand­ wiches in one week, what is its productivity? What would its productivity have been if it had sold the same number of sandwiches (2,100), but the mix was 700 of each type? 40 Section 1 Strategy, Products, and Capacity Case: The Tao of Timbuk2* "T~mbuk2 is more than a bag. It's more than a brand.

Timbuk2 is a bond. To its owner, a Timbuk2 bag is a dependable, everyday companion. We see fierce, emo­ tional attachments form between Timbuk2 customers and their bags all the time. A well-worn Timbuk2 bag has a certain patina-the stains and scars of everyday urban adventures. Many Timbuk2 bags are worn daily for a decade or more, accompanying the owner through all sorts of defining life events. True to our legend of 'indestructibility,' it's not uncommon for a Timbuk2 bag to outlive jobs, personal relationships, even pets. This is the Tao of Timbuk2." What makes Timbuk2 so unique? Visit its website at www.timbuk2.com and see for yourself. Each bag is custom designed by the customer on its Website. After the customer selects the basic bag configuration and size, colors for each of the various panels are presented; various lines, logos, pockets, and straps can be selected so that the bag is tailored to the exact specifications of the customer. A quick click of the mouse and the bag is delivered directly to the customer in only two days. How does it do this?

This San Francisco-based company is known for producing high-quality custom and classic messenger bags according to the customer's personally customized order, using a team of approximately 25 hardworking cut­ ters and sewers. Over the years, it has fine-tuned its plant's production line to make it as efficient as possible, while producing the highest-quality messenger bags available. The local manufacturing is focused on the custom messenger bag. For these bags, orders are taken over the Internet. The customers are given many configuration, size, color, pocket, and strap options. The bag is tailored to the exact specifications of the customer on the Tim­ buk2 assembly line in San Francisco and sent via over­ night delivery directly to the customer.

Recently, Timbuk2 has begun making some of its new products in China, which is a concern to some of its long-standing customers. The company argues that it has designed its new products to provide the best pos­ sible features, quality, and value at reasonable prices and stresses that these new products are still designed in San Francisco. Timbuk2 argues that the new bags are much more complex to build and require substantially more labor and a variety of very expensive machines to pro­ duce. It argues that the San Francisco factory labor cost alone would make the retail price absurdly high. After researching a dozen factories in China, Timbuk2 found one that it thinks is up to the task of producing these new bags. Much as in San Francisco, the China factory employs a team of hardworking craftspeople who earn good wages. Timbuk2 visits the China factory every four to eight weeks to ensure superior quality standards and working conditions are met.

On the Timbuk2 website, the company argues it has the same hardworking group of bag fanatics designing and making great bags, and supporting the local com­ munity and the increasingly competitive global market. • Special thanks to Kyle Cattani of Indiana University for this case. 41 Strategy Chapter 2 The company reports that demand is still strong for the custom messenger bags made in San Francisco and that the new laptop bags sourced from China are receiving rave reviews. The additional business is allowing it to hire more people in all departments at the San Francisco headquarters, creating even more jobs locally.

Questions 1. Consider the two categories of products that Timbuk2 makes and sells. For the custom mes­ senger bag, what are the key competitive dimen­ sions that are driving sales? Is its competitive priorities different for the new laptop bags sourced in China? 2. Compare the assembly line in China to that in San Francisco along the following dimensions:

( 1) volume or rate of production, (2) required skill of the workers, (3) level of automation, and ( 4) amount of raw materials and finished goods inventory. 3. Draw two diagrams, one depicting the supply chain for those products sourced in China and the other depicting the bags produced in San Fran­ cisco. Show all the major steps, including raw material, manufacturing, finished goods, distribu­ tion inventory, and transportation. Other than man­ ufacturing cost, what other costs should Timbuk2 consider when making the sourcing decision? Practice Exam In each of the following statements, name the term defined or the items requested. Answers are listed at the bottom. 1. A strategy that is designed to meet current needs with­ out compromising the ability of future generations to meet their needs. 2. The three criteria included in a triple bottom line. 3. The seven operations and supply chain competitive dimensions. 4. It is probably most difficult to compete on this major competitive dimension. 5. This occurs when a company seeks to match what a competitor is doing while maintaining its existing competitve position. 6. A criterion that differentiates the products or services of one firm from those of another.

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