Operations and Supply Chain Strategy Chapter 1

Operations and
Supply Chain Strategy

Chapter 1

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Learning Objectives

Discuss the importance of operations/supply chain management.

Describe the history and development of three exemplary organizations.

Explain how single organizations can follow different competitive strategies to be successful.

Illustrate the differences and similarities between manufacturing and service activities.

Characterize supply chain strategy within a single organization and across multiple organizations.

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Discussion Starter

What is Operations

Management?

Source: © Image Source/Corbis

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Company Decisions

Where and how to produce?
What it should include?
How it should be delivered?
How much is the customer willing to pay?
How much will it cost to make?
How much profit do we want to make?

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Operations Management

The process that effectively produce,

transform, and deliver a product or service.

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Supply Chain Management

The organization of supply chain activities
Maximize customer value.
Maximize competitive advantage.

Source: © Image Source/Corbis

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Difference Between Operations
& Supply Chain Management

Operations Management refers to processes within a SINGLE firm.
Supply Chain Management refers to processes and exchanges across MULTIPLE firms.

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Three Exemplary Organizations

World Class Operations and Supply Chain Management Companies:

Kellogg

Sony

American Express

International, different products & services

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Kellogg’s Company

Maker of popular cereal, breakfast, and snack products, such as Kellogg’s Corn Flakes, Rice Krispies, Raisin Bran, Pop-Tarts, Eggo Waffles, and Nutri-grain bars
Founded in 1906 in Battle Creek, Michigan, by W. K. Kellogg.
Adhere to strong quality standards and developing new technologies, such as Waxtite wrappers to keep cereal fresh for long periods of time.

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Figure 1.1: Kellogg’s 2006
Sales Around the World (in $ billions)

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Kellogg’s Supply Chain

The supply chain consists of 27 manufacturing plants in the United States and 19 plants in 15 countries around the world, including Australia, Mexico, India, Brazil, and Japan.
Key supply chain decisions must be made throughout Kellogg’s network of plants.

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Sony – Electronics and
Entertainment Provider to the World

Electronic products & Entertainment (cameras, video cameras, computers, games and its entertainment, including television programs, movies, and music).
The company was founded as Tokyo Telecommunications Research Institute, on May 7, 1946 the end of World War II, by Masaru Ibuku and Akio Morita (renamed Sony in 1958).
Initial operations were under constant pressure.
The first revenues were generated by repairing radios that had been damaged during the war.

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Sony – Electronics and
Entertainment Provider to the World

Sony’s first successful products were a power megaphone and a magnetic tape recorder.
Sony produces around the world, with 50 percent of total electronics production occurring in Japan and the remainder in China, the rest of Asia, and the Americas/Europe.
Sony also sells products around the world. Interestingly, the majority of the products made in Japan, China, and the rest of Asia are for export.

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Figure 1.2: Sony Electronics
Production by Geographic Region

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Discussion Starter

What Supply Chain
Decisions Would Sony Make?

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American Express—Financial
Services Worldwide

One of the world’s largest and most prestigious financial and travel services companies.
The company serves individual customers, small businesses, and merchants by providing a variety of credit cards, banking and financial services, and travel-related services.
Its 2007 annual revenue was in excess of $24 billion, and it employed over 65,000 employees in several countries around the world.

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American Express—Financial
Services Worldwide

Founded in 1850 in New York and was among the first and most successful of the express delivery companies.
American Express was not a financial services company, but its largest clients were banks.
Delivering the banks’ typically small parcels of such things as stock certificates, notes, currency, and other financial instruments was considerably more profitable than transporting larger freight.

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American Express—Financial
Services Worldwide

The company soon scaled down its parcel and freight delivery business and started selling its own financial products.
Launched money orders in 1882 and travelers’ cheques in 1891.
In 1915, American Express started providing travel-related services.
American Express issued its first charge card in 1958.

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American Express—Financial
Services Worldwide

The year 1986 was very special for AMEX, as its earnings exceeded $1 billion for the first time in history.
During recent years, building relationships with merchants has become the company’s top priority, along with increasing acceptance of the American Express Card across a wide range of industries and geographical markets.
The company also began forming a number of strategic partnerships with selected airlines, banks, retailers, and other key businesses around the world.

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Operations Strategy
within a Single Organization

Cost

Low-cost operations

Quality

Consistent Quality

Superior Quality

Time/Delivery

On-time Delivery

Delivery Speed

Product Development speed

Flexibility

Range of products/customization

Variety

Volume Flexibility

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Competitive Priorities vs. Capabilities

Competitive priorities are the relative rankings of what the company would LIKE to achieve.
Competitive capabilities are the relative effectiveness that the company is ABLE to actually achieve.

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Cost

Cost is often the first thing that companies think of when they are developing an operations strategy.
Lowering prices will lead to reduced profits or even losses.
Low-cost operations seek to provide a product or service that is less expensive than similar products or services offered by competitors:

Automation

Low wage countries

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Quality

Quality involves offering a product or service that is superior to the alternatives in the eyes of the customer.
Two Key Aspects of Quality:

Consistent quality involves meeting the product specifications and the promises made to customers with high reliability

Superior quality is a term describing a product or service that clearly is better than another in one or more aspects.

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Time/Delivery

Time/delivery refers to the gap between when a customer orders a product and when he or she receives it.

On-time delivery involves delivering a product when it is promised, but not necessarily quickly.

Delivery speed means that a corporation offers to deliver a product or service faster than a competitor.

Product development speed refers to the time between generations or major changes to a product.

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Flexibility

Differentiate their offerings from those of companies that emphasize low cost.

Customization is the ability to make a product to exactly fit customer needs.

Mass customization the process in which products are produced in high volume at roughly the same cost as standard products, but are customized to individual customer tastes.

Postponement which involves keeping products in a standard format and then adding unique components for the individual customer at the last possible moment.

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Variety

The ability to handle a wide range or assortment of products without undue costs.
Volume flexibility is the ability to adjust production volume either up or down to meet fluctuations in demand.

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Table 1.2: Examples of Companies
with Different Operations Strategies

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Operations’ Role
within Business Strategy

Business Strategy
Mission Statement
Functional Strategies

Core Goals of Each Department

Ex. Marketing – % Market Share, Sales Revenue etc.

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Figure 1.4: Relationships Between
Business Strategy and Functional Strategies

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Operational Decision Areas

Operational Decision Areas

Tactical Tools

Infrastructural Decisions

Shorter Term, more frequent, less capital

Structural Decisions

Long term, high capital, less frequent

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Services

Business processes can be categorized as primarily manufacturing or primarily services.
80% of jobs and sales in developed countries are services.
Use service to differentiate products.
Examples of Services – consulting, medical care, project management

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Differences Between
Services and Manufacturing

The nature of their output—tangible vs. intangible.
The degree of customer contact and co-production.
Simultaneous production and consumption
Manufacturing processes convert raw materials and inputs into finished products that have a physical, tangible form.
Services generally produce more intangible, perishable outputs (ex. restaurants).

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Similarities Between
Services and Manufacturing

Carry Inventory

Services inventory supplies needed.

Manufacturing may carry finished goods.

Process

Must be “top notch”

Hotels

Toyota’s Service Parts

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Supply Chain Strategy

Linked set of multiple organizations
Structured fashion
Supply Chains have existed since trading routes were developed.
Information Technology

Quick & Inexpensive Communication

Globalization

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Global Nature of Supply Chains

Many companies have increased their offshore sourcing of parts, components, and finished goods.
Manage multiple suppliers and shippers.
According to the World Trade Organization, world merchandise exports have risen from $157 billion in 1963 to $8.907 trillion in 2004, an increase of 57 times.

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Global Nature of Supply Chains

China’s trade with the United States has grown from $5.7 billion in 1981 to $286 billion in 2005.
The Council of Supply Chain Management Professionals (CSCMP) estimates that logistics costs 9.5 percent of U.S. GDP.
Numerous challenges in managing that global supply chain include differing laws and regulations, different languages, cultural barriers, and political strife.
Supply chain management plays a critical role in managing the manufacture and flow of goods around the world.

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Supply Chain Within
a Single Organization

Many companies have elevated the importance of supply chain management over the past 10 years .
Many large companies signal the importance of supply chain management by appointing a vice president or director of supply chain management.
Two Major Supply Chain Areas for Companies

Sourcing/purchasing includes the processes associated with identifying material and service needs, locating and selecting suppliers, negotiating contract and payment terms, and tracking to assess supplier performance.

Logistics plans, implements, and manages the efficient, effective flow and storage of goods and services from the point of origin to the point of end consumption.

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Figure 1.5: Organizational Structure
with Detail on Supply Chain Positions

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Figure 1.6: Supply Chain View of
Personal Computer Production and Sales

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Supply Chain
Challenges in Tracing Food

Complex supply chain for food products in developed world.
Traceability in the food supply chain is becoming a major issue.
RFID

Indirect reading

Allow multiple items to be read

More information on code

Contaminated Pet Food from China

4,000 pets died

Food Poisoning

76 million illnesses

5,000 deaths

Operations and Supply Chain Strategy Chapter 1

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