Chapter Two Operations and Supply Chain Strategy Chapter outline 2.1

Operations Strategy Model

2.2

Emphasis on Operations Objectives

2.3

Linking Strategies

2.4

Operations Competence

2.5

Global Scope of Operations

2.6

Supply Chain Strategy

2.7

Key Points

Student Internet Exercises Discussion Questions Selected Bibliography

There is an increasing awareness that operations should contribute to the global competitive stance of the business and not merely be a place to make the firm’s products or services. This can be done by contributing distinctive capability (or competence) to the business and continually improving the products an processes of the business. The Operations Leader box discusses how Corning Inc. competes through a strategy of cycle-time reduction and quality improvement. Skinner (1969) notes that operations is seldom neutral: “It is either a competitive weapon or a corporate millstone.” In his now-classic article, Skinner argues that operations should be fully connected to the business strategy. Operations strategies and decisions should fulfill the needs of the business and should add competitive advantage to the firm. In the previous chapter, we indicated that the operations function is a key wealth creator for the firm. Wealth can be created only by operations that are more productive than competitors’ in relation to a known market with the required financing and human resources. In other words, all of the functions of the firm must be well coordinated for wealth to be created and competitive advantage to occur. The cross-functional coordination of decision making is facilitated by an operations strategy that is developed by a team of managers from across the entire business. 18

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OPERATIONS LEADER Corning Inc. Competes through Cycle Time and Quality

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19

At Corning’s Telecommunications Products Division (TPD), the corporate performance goals and measures are selected by a cross-functional Goal Sharing Team that consists of 8 to 10 people from all levels of the company. The process includes brainstorming measures; researching them; inviting internal and external experts to consult with the team; setting goals, measures, and weights; and testing the measures for three to six months. The data and information Corning TPD uses to monitor and drive improved business performance are linked to its business strategy, values, and performance analysis. It collects and uses data to support the development of the division strategy, deployment of its strategic initiatives, investment in the company’s values, and improvement of results. Corning TPD also believes that cycle time and quality are much better indicators of business excellence and relative performance than financial indicators. Gerald J. McQuaid, division vice president of Corning TPD said, “We are unique in that we are willing to put our money on improvement of nonfinancial measures, knowing this improvement will link to financial measures. Most companies tell their employees, ‘Meet your financials, and then we will pay you for customer service.’ We don’t do that. We don’t have any thresholds in our system; we pay for customer service if our employees hit it, whether or not they meet their financials. That says we believe in the link.” Source: Laura Struebing, “Measuring for Excellence,” Quality Progress, December 1996, pp.25–30; and www.corning.com website, 2005.

The following definition of operations strategy is a starting point for our discussion: Operations strategy is a strategy for the operations function that is linked to the business strategy and other functional strategies, leading to a competitive advantage for the firm.

This definition will be expanded in the next section as a basis for guiding all decisions that occur in operations and connecting those decisions to other functions. At the end of the chapter we will extend operations strategy to a global context and to the entire supply chain.

2.1 OPERATIONS STRATEGY MODEL As depicted in Figure 2.1, operations strategy is a functional strategy that should be guided by the business strategy and should result in a consistent pattern in decisions [Hayes and Wheelwright (1984)]. The four elements inside the dashed box—mission, distinctive competence, objectives, and policies—are the heart of operations strategy. The other elements in the figure are inputs or outputs from the process of developing operations strategy. The outcomes of the process are operations decisions in the four parts of operations (process, quality, capacity, and inventory), which are well connected with the other functions in the business.

Corporate and Business Strategy

Corporate strategy and business strategy are at the top of Figure 2.1. The corporate strategy defines what business the company is pursuing. For example, Walt Disney Productions considers itself in the business of “making people happy.” The Disney Corporation includes not only the theme parks but production of cartoons, movie production, merchandizing, and a variety of entertainmentrelated businesses around the world.

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Introduction

THE MAGIC KINGDOM. Walt Disney is in the business of “making people happy.” This business strategy is implemented throughout the company. © Mark Peterson/CORBIS SABA

Business strategy follows from the corporate strategy and defines how a particular business will compete. Most large corporations have several different businesses, each competing in different market segments. Each business must find its own basis for competing in its particular markets. For example, Treacy and Wierserma (1997) define three generic types of business strategies, which can be selected by any particular business: customer intimacy, product leadership, and operational excellence.1 The operations strategy should then be connected to the particular business strategy selected.

Operations Mission Every operation should have a mission that is connected to the business strategy and in agreement with the other functional strategies. For example, if the business strategy is product leadership, the operations mission should emphasize new-product introduction and flexibility to adapt products to changing market needs. Other business strategies would lead to other operations missions, such as low cost or fast delivery, as will be illustrated below. The operations mission is thus derived from the particular business strategy selected by the business unit. How mission-driven companies can create shareholder value is explained by William George, an operations leader at Medtronic.

Distinctive Competence

All operations should have a distinctive competence (or operations capability) that differentiates it from the competitors. The distinctive competence is something that operations does better than anyone else. It may be based on unique resources (human or capital) that are difficult to imitate. Distinctive competence can also be based on proprietary or patented technology or any innovation in operations that cannot be easily copied. The distinctive competence should match the mission of operations. For example, it does no good to have a distinctive competence of superior inventory management systems when the operations mission is to excel at new-product introduction. Likewise, the distinctive competence must be something that is coordinated with marketing, finance, and the other functions so that it is supported across the entire business as a basis for competitive advantage. Distinctive competence may be used to define a particular business strategy in an ongoing business. The business strategy does not always emanate from the market; it may be built instead on matching operations’ distinctive competence (current or projected) with a market. Both a viable market segment and a unique capability to deliver the product or service offered must be present for the firm to compete. In an insightful article, Clark (1996) argues that distinctive competence is an essential ingredient for a successful business strategy. 1

They define customer intimacy as catering closely to every customer need, product leadership as having the latest new products, and operational excellence as being the lowest-cost producer.

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FIGURE 2.1 Corporate strategy

Operations strategy model.

Business strategy

Internal analysis

Operations strategy

Functional strategies in

Mission

marketing, finance, engineering,

External analysis

Distinctive competence

human resources, and information systems

Objectives (cost, quality, flexibility, and delivery)

Policies (process, quality capacity, and inventory)

Consistent pattern of decisions

Results

Wal-Mart has a mission to be the low-cost retailer. To achieve this mission they have developed a distinctive competence in cross-docking aimed at lowering costs of shipping. Using cross-docking, goods from suppliers’ trucks are transferred across the loading dock to waiting Wal-Mart trucks and delivered to the stores without entering the warehouse. Wal-Mart also has a more sophisticated inventory control system than its competitors and therefore can hold inventories to a minimum. These distinctive competencies help Wal-Mart compete at low cost.

Operations Objectives

Operations objectives are the third element of operations strategy. The four common objectives of operations are cost, quality, delivery, and flexibility.2 These objectives should be derived from the mission, and they constitute a 2

In some cases, innovation has been added as a fifth operations objective.

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Introduction

Wal-Mart has distinctive competencies to support its low cost strategy.

restatement of the mission in quantitative and measurable terms. The objectives should be long-range oriented (5 to 10 years) to be strategic in nature. Table 2.1 shows some common measures of objectives that can be used to quantify long-range operations performance. The objectives for 5 years into the future are compared to the current year and also to a current world-class competitor. The comparison to a world-class competitor is for benchmarking purposes and may serve to indicate that operations is behind or ahead of the competition. But the objectives should be suited to the particular business, which will not necessarily exceed the competition in every category.

Operations Policies

Operations policies constitute the fourth element of operations strategy. Policies should indicate how the operations objectives will be achieved. Operations policies should be developed for each of the major decision categories (process, quality, capacity, and inventory). These policies should, of course, be well integrated with other functional decisions and policies. This is one of the most difficult things to actually achieve in business and is one of the reasons a truly integrated operations strategy is needed. Table 2.2 indicates some important policies for operations. Note, these policies may require trade-offs or choices in each case. For example, in the capacity area there is a choice between one large facility or several smaller ones. While the large facility may require less total investment due to economies of scale, the smaller facilities can be located in their markets and provide better customer service. So the choice of policies depends on what objectives are

Chapter 2

OPERATIONS LEADER How MissionDriven Companies Create LongTerm Shareholder Value: Medtronic’s Former CEO Bill George

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. . . I have developed a deep conviction that the widely accepted philosophy, that the primary mission of a for-profit corporation is to maximize shareholder value, is flawed at its core. While that philosophy may result in short-term increases in shareholder value, it is simply not sustainable over the long term. Over time, shareholder value will stagnate and eventually decline for companies that drive their strategy simply from financial considerations. . . . The best path to long-term growth in shareholder value comes from having a wellarticulated mission that employees are willing to commit to, a consistently practiced set of values, and a clear business strategy that is adaptable to changing business conditions. Companies that pursue their mission in a consistent and unrelenting manner in the end will create shareholder value far beyond what anyone believes is possible. . . . The real flaw in the sole mission of maximizing shareholder value is the inability to motivate a large group of employees to exceptional performance. Tying financial incentives of the management team—be they bonuses, incentive compensation, stock grants, or stock options—to immediate results that increase shareholder value will indeed motivate the top people in the organization, at least in the short term. This is well established and documented. Unfortunately, the top people represent only a small fraction of the people doing the work of the organization. . . . There is a better way to increase long-term shareholder value, but this cannot be the primary objective. It is my belief that corporations are created for a purpose beyond making money. Sustained growth in shareholder value may be the end result, but it cannot be the sole purpose. The purpose of a company boils down to one thing: serving the customers. This is true across all industries and all types of businesses: stock brokers, banks, aerospace companies, consumer goods, retailing, etc. . . . If it is superior (in serving its customers) to everyone else in the field, and can sustain this advantage over the long term, that company will create ultimate shareholder value. . . . In the end, motivating employees with a mission and a clear sense of purpose is the only way I know of to deliver innovative products, superior service and unsurpassed quality to customers over an extended period of time. Over time, an innovative idea for a product or a service will be copied by your competitors. Creating an organization of highly motivated people is extremely hard to duplicate. Source: William George, “Address Given to the Academy of Management,” Academy of Management Executive 15, no. 4 (November 2001), pp. 39–47.

TABLE 2.1 Typical Operations Objectives

Current Year

Objective: 5 Years in the Future

Current: World-Class Competitor

55% 4.1

52% 5.2

50% 5.0

85% 3% 1%

99% 1% 0.5%

95% 1% 1%

90% 3 wk

95% 1 wk

95% 3 wk

10 mo 3 mo

6 mo 3 mo

8 mo 3 mo

Cost Manufacturing cost as a percentage of sales Inventory turnover Quality Customer satisfaction (percentage satisfied with products) Percentage of scrap and rework Warranty cost as a percentage of sales Delivery Percentage of orders filled from stock Lead time to fill stock Flexibility Number of months to introduce new products Number of months to change capacity by ⫾20%

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TABLE 2.2 Examples of Important Policies in Operations

Policy Type

Policy Area

Strategic Choice

Process

Span of process Automation Process flow Job specialization Supervision

Make or buy Handmade or machine-made Flexible or hard automation Project, batch, line, or continuous High or low specialization Highly decentralized or centralized

Quality

Approach Training Suppliers

Prevention or inspection Technical or managerial training Selected on quality or cost

Capacity

Facility size Location Investment

One large or several small facilities Near markets, low cost, or foreign Permanent or temporary

Inventory

Amount Distribution Control systems

High levels or low levels of inventory Centralized or decentralized warehouse Control in great detail or less detail

being pursued in operations, availability of capital, marketing objectives, and so forth.

2.2 EMPHASIS ON OPERATIONS OBJECTIVES It is possible to use the four operations objectives, discussed above, to describe different ways to compete through operations. Suppose we start with the idea of competing through quality. For the moment we can think of quality as satisfying customer requirements. This assumes that marketing has identified a particular type of customer for the business or a particular market segment of customers. If we are competing through quality as the first priority, there are many things that we would do in product design and operations. For example, we would work with the selected customers to define their specific requirements; we would also want to be sure that the process that we have is capable of meeting those customers’ needs and is under control. We would ensure that workers are trained to provide the product or service needed and so on. The point is that a quality objective leads to certain actions and policies in operations to provide a product or service that the customer wants. Now, suppose that we had decided to pursue a low-cost objective instead of quality. Actually, low cost is compatible with the quality objective in the way that we have defined quality, satisfying a particular set of customers.3 Perhaps the best way to achieve lower cost is to focus on customer requirements (quality) in both product design and operations, as a way of eliminating rework, scrap, inspection, and other forms of non-value-added steps in operations. It has been found always to be cheaper to prevent errors and mistakes than to correct them after they occur. The cost savings of this approach can be dramatic. But a low-cost objective may require more than just an emphasis on quality. Heavy investment in automation and information systems may also be needed to reduce costs. In this case, some actions required for low cost are the same as those for quality and some are unique. 3

Later, we will broaden the definition of quality to include superior product attributes or features that may indeed cost more in the short run.

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Had we selected delivery time as the key objective, we would also want to use quality improvement as a way of reducing wasted time in operations. When rework, scrap, inspection, and other non-value-added steps are eliminated from operations, the time to order, produce, and deliver the product is also reduced. But focusing on time is different than focusing on quality, although these two are related. Typical products spend most of their time in operations waiting and sitting in line for the next step. The waiting time may be as much as 80 or 90 percent of the total time of production. The best way to reduce time, beyond quality improvement efforts, is to attack time directly. This is done by reducing machine changeover time, by moving processes closer together, by smoothing out flows, by simplifying complex operations, and by redesigning the product or service for fast production. These actions would be taken in addition to those of a quality improvement objective. Finally, we could choose to emphasize flexibility in operations. By reducing time, flexibility will automatically improve. For example, suppose that it originally took 16 weeks to make a product and we have now reduced the production time to 2 weeks. This will make it possible to change the schedule within a 2-week time frame rather than a 16-week time frame, thereby making operations more flexible to changes in customer requirements. On the other hand, flexibility can be attacked directly by adding capacity, by buying more flexible equipment, or by redesigning the product for high variety. What we see from these examples is that operations objectives are connected. If we stress quality improvement, we also get cost reduction, time improvement, and more flexibility. It seems that quality is the place to start, along with time reduction. Then other objectives may be attacked directly by taking unique actions for that objective, as needed. A series of such actions will then result in continuous improvement of all four operations objectives at the same time.4 Zara, a giant fashion retailer in Europe, is able to achieve fast replenishment of hot-selling items in its stores within a few weeks rather than the months taken by competitors. By stressing quality processes and supply chain management practices, Zara achieves fast restocking of its stores and lower costs.

2.3 LINKING STRATEGIES Not only should objectives be linked, but the entire operations strategy should be linked to business strategy and to marketing and financial strategies as well. Table 2.3 illustrates this linkage by showing two diametrically opposite business strategies that can be selected and the resulting functional strategies. First, there is the product imitator (or operational excellence) business strategy, which would be typical of a mature, price-sensitive market with a standardized product. In this case, the operations mission would emphasize cost as the dominant objective, and operations should strive to reduce costs through such policies as superior process technology, low personnel costs, low inventory levels, a high degree of vertical integration, and quality assurance aimed at saving cost. Marketing and finance would also pursue and support the product imitator business strategy as shown in Table 2.3. The second business strategy shown in the table is one of product innovation and new-product introduction (or product leadership). This strategy would typically be used in an emerging and possibly growing market where advantage 4

For more details, see the famous “sand-cone model” by Ferdows and De Meyer (1990).

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Introduction

TABLE 2.3 Strategic Alternatives

Business Strategy

Strategy A

Strategy B

Product Imitator

Product Innovator

Market conditions

Price-sensitive Mature market High volume Standardization

Product-features-sensitive Emerging market Low volume Customized products

Operations mission

Emphasize low cost for mature products

Emphasize flexibility to introduce new products

Distinctive competence operations

Low cost through superior process technology and vertical integration

Fast and reliable new-product introduction through product teams and flexible automation

Operations policies

Superior processes Dedicated automation Slow reaction to changes Economies of scale Workforce involvement

Superior products Flexible automation Fast reaction to changes Economies of scope Use product development teams

Marketing strategies

Mass distribution Repeat sales Maximizing of sales opportunities National sales force

Selective distribution New-market development Product design Sales made through agents

Finance strategies

Low risk Low profit margins

Higher risks Higher profit margins

can be gained by bringing out superior-quality products in a short amount of time. Price would not be the dominant form of competition, and higher prices could be charged, thereby putting lower emphasis on costs. In this case, operations would emphasize flexibility to rapidly and effectively introduce superior new products as its mission. Operations policies could include the use of new-product introduction teams, flexible automation that could be adapted to new products, a workforce with flexible skills, and possibly purchase of some of the key services and materials from outside to retain flexibility. Costs would not be emphasized to the same degree as in the first strategy. Once again, finance and marketing also need to support the business strategy to achieve an integrated whole. What Table 2.3 indicates is that drastically different types of operations are needed to support different business strategies. It also illustrates that flexibility and superior-quality products might cost more for the product innovator strategy. There is no such thing as an all-purpose operation that is best for all circumstances. Thus, when asked to evaluate operations, one must immediately consider the business strategy as well as the mission and objectives of operations. Table 2.3 also suggests that all functions must support the business strategy for the strategy to be effective. For example, in the product imitator strategy marketing should focus on mass distribution, repeat sales, competitive pricing, and maximization of sales opportunities. On the other hand, in the product innovator strategy marketing should focus on selective distribution, new-market development, product design, and perhaps sales through agents. It is not enough for just operations to be integrated with the business strategy; all functions must support the business strategy and each other. Hill (1994) is an advocate of the above approach that integrates marketing and operations and clearly selects a particular mission for operations. He makes the distinction between order winners and order qualifiers. An order winner is an

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objective that will win orders from the customers in a particular segment that marketing has selected as the target market. In the product imitator strategy, the order winner is price for the customer; this implies the need for low cost in operations, marketing, and finance. Other objectives in this case (flexibility, quality, and delivery) can be considered order qualifiers in that the company must have acceptable levels of these three objectives to qualify to get the order. Insufficient levels of performance on order qualifiers can lose the order, but higher performance on order qualifiers cannot by themselves win the order. Only price/ cost will win the order in this case. In the product innovator strategy, the order winner is flexibility to rapidly and effectively introduce superior products; order qualifiers are cost, delivery, and quality. Note how the order winner depends on the particular strategy selected and that all functions must pursue superior levels relative to competition on the order winner, while achieving acceptable levels to the customer on order qualifiers. What is the order winner at Wal-Mart? It’s low cost and everything is geared to keeping costs down. The same cannot be said about Nordstrom’s, which competes on upscale merchandise and superior customer service. Since the order winners in these stores are different, so are the operations strategies.

2.4 OPERATIONS COMPETENCE A recent trend in operations strategy is to stress distinctive competence as the primary basis for a business strategy. The distinctive competence must, of course, have a market and customer. The reverse is also true: a market without a distinctive competence does not provide the basis for a competitive strategy, and at best the operations strategy can be defensive or neutral. Distinctive competence, as we have defined it above, refers to resources or capabilities that are unique relative to competitors. For the distinctive competence to be sustainable it must be difficult to imitate or copy. Resources or capabilities that are difficult to imitate include the following examples: • Skills of employees and managers, particularly those that can’t be easily learned. • Proprietary equipment or processes that are patented or otherwise protected. • An ability to continuously learn and improve operations at a rapid pace. • Partnerships with customers or with suppliers that are developed and nurtured over the long run. • An advantageous location for facilities gained by being the first mover (e.g., access to rare natural resources or an attractive retail location). • Organizational knowledge that has been built up internally over time. • Proprietary or unique information and control systems. As can be seen from these examples a sustainable distinctive competence is not something that can be purchased on the open market. Rather, it is often built up by the organization over time. If it could be purchased from the market, then competitors could easily duplicate it. Competitors cannot easily duplicate internal resources that are developed over time. A sustainable distinctive competence in operations is consistent with the “resource-based view” of the firm that advocates building strategy on resources that are rare, valuable, inimitable, and nonsubstitutable (Schroeder, et al., 2002).

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Introduction

The Dell Computer Corporation has a sustainable distinctive competence in both marketing and production. Dell developed its famous direct marketing approach for the sale of computers by Internet and phone orders. This not only leads to a unique marketing channel in the computer business, but also is based on a distinctive competence in operations. When orders for computers are accepted online or by telephone, the customer immediately pays for the computer, usually by credit card. The computer is then assembled directly from the order and shipped to the customer within five days. To accomplish this Dell has developed proprietary software that allows it to quickly enter orders into its system and to track the order to completion. They have also developed partnerships with suppliers that can immediately supply the assembly lines of the Dell factories with the required parts and components. Dell factory employees have flexible skills so they can assemble a large number of different computers that are built in lot sizes of one. The fast assembly of computers limits Dell’s need for inventory, thus providing for rapid turnover of inventory and low costs. Since the product is shipped within five days, the customer payment is received in advance, and suppliers are paid later, Dell has a positive cash-to-cash cycle and can therefore hold working capital to a minimum. This example gives only one way of building a distinctive competence that is difficult for competitors to copy or find a substitute and also is rare and valuable. While the methods Dell uses are well known to competitors they have not duplicated Dell’s efficient and responsive system of production and marketing. Distinctive competencies are sometime “sticky” and not easily duplicated, even though they could be. This is because the competitors would have to retool their entire production system, write new software, develop long-term supplier relationships, and retrain employees to copy the Dell system. Distinctive competence provides an advantage for operations and can be the basis for competing. While market positioning is important, it is more powerful when coupled with a distinctive competence in operations. Competitively neutral operations, without a distinctive competence cannot be expected to provide an advantage in cost, quality, delivery, or flexibility. A sustainable distinctive competence or capability is needed to provide a performance advantage.

2.5 GLOBAL SCOPE OF OPERATIONS Every day in the popular press we read that markets are becoming global in nature. Due to expanding worldwide communications systems and global travel, consumer demand is more homogenized on an international basis. Many products and services are global in nature, including soft drinks, VCRs, TVs, banking, travel, automobiles, motorcycles, farm equipment, machine tools, and a wide variety of other products. To be sure, there are still market niches that are national in character, but the trend is toward more global markets and products. As a result of these changes, business and operations are becoming more global. Traditional businesses are operated on a multicountry basis rather than a global basis. In a traditional company, decisions are handled differently in each country around the world. The business sees itself as selling to local markets, there is mostly local competition, and there is limited export and import. Also, each country has its own quality, process technology, and cost structure. Sources of supply are handled locally, or regionally, and export is subject to currency fluctuations. A traditional company is organized with a separate division or subsidiary for each country in which the company operates.

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When operating in global markets, a traditional company is at a competitive disadvantage. The scale of operations is wrong, products may be inadequate, and the company is organized the wrong way to produce and market its products. As a result, the global corporation has emerged with the following characteristics. Facilities and plants are located on a worldwide basis, not country by country. Products and services can be shifted back and forth between countries. This is being done in the automobile industry, electronics, and many other industries today. Components, parts, and services are sourced on a global basis. The best worldwide source of supply is found, regardless of its national origin. Global product design and process technology are used. A basic product or service is designed, whenever possible, to fit global tastes. When a local variation is needed, it is handled as an option rather than as a separate product. Process technology is also standardized globally. For example, Black and Decker has recently designed worldwide hand tools. Even fast food is becoming a global product. Demand for products is considered on a worldwide, not a local, basis. Therefore, the economies of scale are greatly magnified, and costs can be lower. The VCR came out as a worldwide product and was never marketed locally. Its demand and cost were scaled for a global market right from the start. Local competitors were kept out of the market. Logistics and inventory control systems are global in nature. This makes it possible to coordinate shipments of products and components on a worldwide basis. For services operations, facilities are interconnected through a worldwide communications system. For example, consulting firms, fast food, banks, and travel services are globally interconnected. A global corporation is organized into divisions that have global responsibility for the marketing, R&D, and operations functions. These functions are not fragmented into several domestic and international divisions. Some services have also taken on a global scope of operations. For example, consulting firms, telecommunications, air travel, entertainment, financial services, and software programming have global operations. All parts of the world receive these services, and global consolidation has taken the place of these once fragmented service industries. Certainly, not all service is global. There still remain services that are delivered on a local basis to serve local markets, but the trend toward globalization is undeniable. The implications for operations management of this change toward global business are profound. Operations strategy must be conceived of as global in nature. A global distinctive competence should be developed for operations,

We have a great new marketing strategy

Marketing

But, does it fit with our distinctive competence in operations?

OM Veep

This company needs to be market directed

Marketing

Really?

OM Veep

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Part One

Introduction

along with a global mission, objectives, and policies. Product design, process design, facility location, workforce policies, and virtually all decisions in operations are affected. To achieve an international perspective, we will provide a global orientation to decisions throughout this text.

2.6 SUPPLY CHAIN STRATEGY In the same way that operations can be expanded to a global context, operations strategy can also be expanded to supply chain strategy. Today, some firms no longer compete with each other, but entire supply chains compete. In Chapter 10, we define a supply chain as a sequence of business processes and information that provides a product or service from suppliers through manufacturing and distribution to the ultimate customer. Supply chain strategy thus takes into account not only the business and corporate strategy of the firm but also the strategies of the suppliers and customers in the firm’s supply chain. Supply chain strategy should be aimed at achieving a sustainable competitive advantage for the entire supply chain. This advantage can be achieved by expanding many of the concepts already covered in this chapter. For example, a supply chain should have a distinctive competence that is valuable and difficult to imitate or replace by competitors. This distinctive competence should be based on what the firm does along with actions of its supply chain partners. In a similar way, the supply chain partners and the firm should be working toward the same mission and objectives in order to have a consistent supply chain strategy. Since no single firm controls the entire supply chain, a coherent supply strategy can be difficult to achieve. Nevertheless, it is important to realize that supply chain partners that are working at cross purposes will not be competitive with other supply chains that have achieved a high degree of cooperation and consistency. In this chapter we have contrasted the product innovator and product imitator strategies. By the same token, an entire supply chain can implement these two types of strategies. As a result, not all supply chains have the same strategies but they are configured according to their fundamental purpose and therefore exhibit different missions, objectives, distinctive competencies and policies. For example, earlier in this chapter we discussed Wal-Mart’s mission to be a low cost retailer. Because of its enormous size and clear mission, Wal-Mart can impose a low cost strategy on the entire supply chain. If supply chain partners do not support the low cost strategy, they will no longer participate in Wal-Mart’s supply chain. It is clear from this example how a supply chain strategy can exist beyond the boundaries of a single firm. It will, of course, be more difficult to define and implement such a strategy in smaller and more diffuse supply chains. In every operations decision it is important to consider the proper context whether it be global or the supply chain of which the firm is only a part. Global operations and the supply chain help to set the context, not only for operations strategy, but also for decision making in all parts of operations.

2.7 KEY POINTS This chapter has emphasized the idea of achieving a competitive advantage through operations by developing an operations strategy that the market and the customers of the business value. The key points are as follows:

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• The strategy for the operations function must be linked to the business strategy and other functional strategies, leading to a consistent pattern of decisions, unique capability, and competitive advantage for the firm. • Operations strategy consists of mission, distinctive competence, objectives, and policies. These four elements must be tightly integrated with each other and with other functions. • The operations mission should be aligned with the business strategy. Possible missions for operations include low cost, fast new product introduction, fast delivery, or best quality. • The distinctive competence of operations should support the mission and differentiate operations from its competitors. Possible distinctive competencies include proprietary technology, superior human resource practices, best location of facilities, unique organization culture, and ability for rapid change. • The objectives of operations are cost, quality, delivery, and flexibility. These objectives can work in concert if non-value-adding activities are removed from operations. One of the four objectives should be selected as an order winner; the others are order qualifiers. • Operations policies indicate how operations objectives will be achieved. Operations policies should be developed for each of the major decision areas (process, quality, capacity, and inventory). Policies require trade-off choices in operations. • There is no one best strategy for all operations. The mission, distinctive competence, objectives, and policies of operations depend on whether a product imitator, product innovator, or other strategy is being pursued by the business. • The business strategy can be built on a sustainable distinctive competence that is difficult for competitors to copy or imitate. • The scope of operations strategy is now expanding to a global basis, particularly for those businesses pursuing a global business strategy. • In some situations the basis of competition is not the firm, but the entire supply chain. Supply chain strategy is an extension of operations strategy that considers not only the firm but also the strategies of its supply chain partners.

STUDENT INTERNET EXERCISES

1. Medtronic http:/www.medtronic.com Check the Medtronic website for evidence of a mission or vision statement. How can the mission be related to operations strategy and operations decisions? 2. Wal-Mart Company http://www.walmartstores.com Go to “About Wal-Mart” and read about culture and international operations. Come to class prepared to discuss what sets Wal-Mart apart from its competition and how Wal-Mart is approaching global operations. 3. Perpetual Company http://www.perpetual.com.au/ What is the Perpetual company mission statement and how is it related to operations?

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Part One

Introduction

Discussion Questions 1. What are the reasons for formulating and implementing an operations strategy? 2. Describe a possible mission for operations and some associated strategies that fit the following business situations: a. Ambulance service b. Production of standard automobile batteries c. Production of electronics products that have a short product life cycle 3. An operations manager was heard complaining, “The boss never listens to me—all the boss wants from me is to avoid making waves. I rarely get any capital to improve operations.” a. Does the business have an operations strategy? b. What should be done about the situation? 4. Define the following terms in your own words: mission of operations, order winner, order qualifier, and distinctive competence. 5. How would you determine whether a company has an operations strategy or not? What specific questions would you ask, and what information would you gather? 6. Evaluate your local hospital in terms of its emphasis on the four objectives of operations: cost, quality, delivery, and flexibility. Are all departments focused on the same objectives? What are the order winners and what are the order qualifiers? 7. Define some of the strategic decisions that might be required in grocery store operations depending on whether the mission (order winner) was emphasizing cost or quality. 8. What kinds of external factors might affect the following types of operations? a. Airline b. Bank c. Semiconductor manufacturing 9. Using newspapers, magazines, or the Internet, find examples of operations strategies. Write a few paragraphs describing the situation and the strategies being pursued.

10. Find an example of an operation in your local community that has been successful in simultaneously improving quality, reducing throughput time, improving on-time deliveries, and reducing costs. How has this operation been able to achieve these seemingly conflicting results? 11. Think of an operation where higher quality will cost more money. What is your definition of quality in this case? Why does higher quality cost more? If you use a different definition of quality, will higher quality cost less? 12. What do you consider to be the distinctive competence of the following companies? If you don’t know the distinctive competence, see if you can determine it from their Internet site or articles on the company. a. Starbucks Coffee Company b. Hewlett Packard c. Citibank 13. Explain how a distinctive competence in operations can be the basis for competition in the company. 14. Give two examples of a distinctive competence that can be sustained and not easily duplicated. Explain why it is hard to copy these distinctive competencies. 15. Give examples of a global business that you are familiar with. How has globalization of this business affected operations? 16. What are the practical consequences of a lack of strategic linkage between the business and the operations function? 17. Give three examples of supply chains that compete with each other. In each case determine the basis of competition between the supply chains (e.g. quality, low cost, fast delivery, flexibility, etc.) 18. Define the distinctive competence for two different supply chains of your choice. Explain why the distinctive competence is valuable, difficult to imitate, and hard to find a substitute by competitors.

Selected Bibliography Ahmad, Sohel, and Roger G. Schroeder. “Dimensions of Competitive Priorities: Are They Clear, Communicated and Consistent?” Journal of Applied Business Research 18, no. 1 (2002), pp. 77–86.

Alegre-Vidal, Joaquín, Rafael Lapiedra-Alcamí, and Ricardo Chiva-Gómez. “Linking Operations Strategy and Product Innovation: An Empirical Study of Spanish Ceramic Tile Producers.” Research Policy 33, no. 5 (July 2004), pp. 829–40.

Chapter 2

Barnes, David, Matthew Hinton, and Suzanne Mieczkowska. “The Strategic Management of Operations in e-Business.” Production Planning & Control 15, no. 5 (July 2004), pp. 484–95. Boyer, Kenneth K. “Strategic Consensus in Operations Strategy.” Journal of Operations Management 17, no. 3 (March 1999), pp. 289–305. Clark, Kim B. “Competing through Manufacturing and the New Manufacturing Paradigm: Is Manufacturing Strategy Passé?” Production and Operations Management 5, no. 1 (Spring 1996). Collin, James, and Jerry Porras. Built to Last: Successful Habits of Visionary Companies. New York: HarperCollins, 1997. Dyer, Davis, and Daniel Gross. The Generations of Corning: The Life and Times of a Global Corporation. Oxford: Oxford University Press, 2001. Edwards, Tim, Giuliana Battisti, and Andy Neely. “Value Creation and the UK Economy: A Review of Strategic Options.” International Journal of Management Reviews 5/6, no. 3/4 (September 2004), pp. 191–214. Frohlich, Markham T. “A Taxonomy of Manufacturing Strategies Revisited.” Journal of Operations Management 19, no. 5 (October 2001), p. 541. Gunasekaran, A., L. Forker, and B. Kobu. “Improving Operations Performance in a Small Company: A Case Study.” International Journal of Operations & Production Management 20, no. 3 (2000), p. 316. Hayes, Robert H., and David M. Upton. Strategic Operations: Competing through Capabilities. New York: Free Press, 1996. Hayes, Robert H., and Kim B. Clark. Dynamic Manufacturing: Creating the Learning Organization. New York: Free Press, 1988. Hayes, Robert H., and Steven C. Wheelwright. Restoring Our Competitive Edge: Competing through Manufacturing. New York: Wiley, 1984. Hill, Terry. Manufacturing Strategy: Text and Cases, 3rd ed. New York: McGraw Hill, 2000. Ketokivi, Mikko, and Roger G. Schroeder. “Manufacturing Practices, Strategic Fit and Performance: A Routine-Based View.” International Journal of Operations & Production Management 24, no. 2 (2004), pp. 171–190.

Operations and Supply Chain Strategy

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McDougall, Paul, and Darrell Dunn. “Fixing HP with Strong Operations Strategy.” Information Week 1026 (February 14, 2005), pp. 24–26. Pagell, Mark. “Do Trade-offs Exist in Operations Strategy? Insights from the Stamping Die Industry.” Business Horizons 43, no. 3 (May–June 2000), p. 59. Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press, 1980. Safizadeh, Hossein M. “Revisiting Alternative Theoretical Paradigms in Manufacturing Strategy.” Production and Operations Management 9, no. 2 (Summer 2000), pp. 111–27. Schroeder, Roger G., John C. Anderson, and Gary Cleveland. “The Content of Manufacturing Strategy: An Empirical Study.” Journal of Operations Management 6, no. 4 (August 1986), pp. 405–16. Schroeder, Roger G., Kimberly A. Bates, and Mikko A. Junttila. “A Resource-Based View of Manufacturing Strategy and the Relationship to Manufacturing Performance.” Strategic Management Journal 23, no. 2 (2002), pp. 105–17. Skinner, Wickham. “Manufacturing—Missing Link in Corporate Strategy.” Harvard Business Review, May–June 1969, pp. 136–45. ———. “Manufacturing Strategy on the ‘S’ Curve.” Production and Operations Management 5, no. 1 (Spring 1996). Smith, Thomas M. “The Relationship of Strategy, Fit, Productivity, and Business Performance in a Services Setting.” Journal of Operations Management 17, no. 2 (1999), pp. 145–61. Treacy, Michael, and Fred Wiersema. The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market. New York: Perseus Press, 1997. Ulrich, Dave, and Norm Smallwood. “Capitalizing on Capabilities.” Harvard Business Review, June 2004, pp. 119–27.