OPSM 901: Operations Management

Session 1:The Process ViewProcess PositioningStrategic Fit

Koç University Graduate School of BusinessEMBA Program

Zeynep Aksinzaksin@ku.edu.tr

Key Principle of course:1. The Strategic Role of Ops

“A company’s operations function is

either a competitive weapon

or

a corporate millstone.

It is seldom neutral.” [Skinner ‘69]

Operations as a Competitive Weapon

Dell Computers

Innovative Supply Chain Strategy (direct model) Southwest Airlines

Leader in lowfare flights, by elimination of all waste Zara

More on this later today.. Vestel Durable Goods

Distribution optimization leads to increased customer satisfaction as well as lower costs

Key Principle of Course:2. The Process View of Ops

UL

Sup. WH

WH

Sub. WH

KA Ind. Markets

Groceries Markets

.

.

.

Sana KA: 64 daysGroceries:132 daysShelf life: 120 days!

76 days collection time

Sales cost: 4%Trade rebate: 12%Logistics: complex

1997: 35000/76000 tons Sana and Aymar collected

Consumer centric-efficient SC

UL

Distributors

Groceries Market KA

Consumer

Sana KA: 2 weeks

36 days collection time

Warehouse stock level12% - 8%

Sales cost: 6%Trade rebate: 5.2%Logistics: simple

120000-140000/180000 outlets

Make-to-order

Operations & the Process View:What is a Process?

Inputs OutputsGoods

Services

Labor & Capital

Informationstructure

Network ofActivities and Buffers

Flow units(customers, data, material, cash, etc.)

Resources

ProcessManagement

Organization Chart

Process

customer customer

suppliers

Life is a process..

Projects: one time processes Eating lunch at the cafeteria EMBA program Your career Your life

What is Operations Management?

Management of business processes

How to structure the processes and manage resources to develop the appropriate capabilities to convert inputs to outputs.– What is appropriate?

All Managers are Operations Managers

All managers must transform inputs into outputs

Example: Accounting Manager– Inputs: data, information, labor– Transformation: application of accounting principles

and knowledge– Outputs: accounting reports, knowledge of

performance, ...

All managers have an “operation” to run

What defines a “good process”?Performance: Financial Measures

Absolute measures: – revenues, costs, operating income, net income– Net Present Value (NPV) =

Relative measures:– ROI, ROE– ROA =

Survival measure:– cash flow

Assets Total Average

TaxEBIT

T

tt

t

r

C

0 1

Performance Measurement

Basing performance measurement only on financial ratios may be deceiving in that it does not capture continuous improvement and innovation

The Balanced Score Card (BSC) system was developed by R. Kaplan ve D. Norton in 1992 (HBS 1,1992.)

The objective is to give managers measurements that reflect both financial and operational performance in a balanced way

Balanced Score Card (BSC)

BSC, complements financial measures with– Customer satisfaction– Process

• Throughput times• Defect rates, etc.

– Learning and development

related measures that help to reflect future financial success

BSC

Visionand

Strategy

Financial

Customer Processes

Learning and Development

Obj

ecti

ve

Mea

sure

men

ts

Tar

gets

Init

iati

ves

How should our shareholders view us so that we can claim financial success

Which processes should we perfect to be seen as successful by our customers and shareholders

How can we sustain learning and development to adhere to our vision

How should customers view us so that we attain our vision

Firms compete on product attributes.This requires process capabilities.

Price (Cost) P Quality Q

– Customer service– Product quality

Time T– Rapid, reliable delivery– New product development

Variety V– Degree of customization

“order winners”

To deliver we need “capabilities”

Performance Measures

Performance

Objective Some typical Measures

Cost Minimum delivery time/average delivery time, utilization of resources, labor productivity, added value, efficiency, cost per operation hour

Quality Number of defects per unit, level of customer complaints, scrap level, mean time between failures, customer satisfaction scores

Speed Customer query time, Order lead time, frequency of delivery, actual versus theoretical throughput time, cycle time

Flexibility Time needed to develop new products/services, range of products/services, machine change-over time, average batch size, time to increase activity rate, average capacity/maximum capacity, time to change schedules

Process Capabilities are affected by Process Structure and Management

Process structure or architecture:– (1) inputs and outputs– (2) flow unit (“jobs”)– (3) network of activities & buffers

• quantity & location• precedence relationships

– (4) resource allocation• capacity & throughput

– (5) information structure

Operations Planning & Control Organization

Fit between Strategy and Processes

Processes must fit the operations strategy of the firm:Competing on

-Cost (Southwest Airlines)-Quality (Toyota)-Flexibility (HP)-Speed (McDonalds)

all require different process designs and different measures to focus on.

Corporate StrategyKey Performance Indicators Operations StrategyProcess Design& Improvement

Linking the strategic role & process view:Strategic Operational Audit

DesiredBusiness Strategy

Operations Strategy

DesiredCapabilities

Marketing, …, Financial Strategy

Desired Oper’l Structure:

Processes & Infrastructure

Product Attributes

P, T, Q, V

Process Attributes

C, T, Q, Flex

Existing Capabilities

Operational Structure:

Processes & Infrastructure

Existing Desired

FeasibleBusiness Strategies

Strategy Gap?

Measures

Capability Gap?

Process Gap?

Strategy vs. Operational Effectiveness: The Operations Frontier as the minimal curve containing all current

positions in an industry

Value/ Responsiveness

operations frontier

A

B

C

CostHigh Low

Low

High

Increasing Customer Value

Value

A

B

C

CostHigh Low

High

Low

Operations Frontier

Değer Artırımı

Lowering Costs

Value

A

B

C

CostHigh Low

HIgh

Low

Operations Frontier

Lowering Costs

Some process classifications and terminology…

Low complexity, high divergence

High complexity, low divergence

High complexity, high divergence

Classifying by degree of judgement

complexity vs. divergence

what is done? how is it done?

Classification of Processesby process architecture

Project

Job Shop

Batch

Line Flow

Continuous Flow

Job Shop

Flow Shop

The Job Shop Process

Process Layout One of a Kind Build

– (To Customer Order)

Absence of Rigid Flow Pattern Usually High Product Mix

Process Layout

Lathe#Lathe#11

Lathe#Lathe#22

Lathe#Lathe#33

LatheLathe#4#4

Product #1735B: Start of Production

Drill Drill Press Press #1#1

Drill Drill Press Press #2#2

Paint Paint MachineMachine

Packaging Packaging Machine #1Machine #1

Packaging Packaging Machine #2Machine #2

Finish

Production

The Flow Line Process

Product Layout Discrete Parts Rigid Flow Pattern Product Mix of Standard Products

Product Layout

Product #1735B

LatheLatheStart

Production

Drill Drill Press #2Press #2 Paint MachinePaint Machine

Drill Drill Press #1Press #1

Packaging Machine #2Packaging Machine #2

Finish Production

Classification of Processes:by Positioning Strategy

Functional Focus:

Product Focus:

A B

C D

Product 1

Product 2

A D B

C B A

Product 1

Product 2

= resource pool (e.g., X-ray dept, billing)

Classification of Processes:by Customer Interface

SU

PP

LIE

R

CL

IEN

T

Make-to-Stock

Assemble-to-Order

Make-to-Order

Engineer-to-Order

Raw Material Components Semifinished Finished

Forecast Order

Shouldice HospitalVideo Case

Shouldice Business Model

Medical– Simple hernias– Optimized process– Check-ups and follow-up

Social– Club Med like experience– Co-production at individual

and cohort level– A network for life

Shouldice Patient Experience

COST

QUALITY

SPEED

FLEXIBILITY

Low, both real and opportunity

Low recurrence, satisfaction with experience

Fast operation and recovery

The process rules; only simple hernias

Comparison to General Hospital

Hernia complexity

Shouldice: preparesfor the simplest

General Hospital: prepares for the most complex

A product/process matrix

General Hospital:

Variety & flexibility

High cost

Low margins

Low Cost

High margins

Shouldice Hospital:

Standardization

Cost, speed, quality

Process

Flexible job

Rigid line flow

ProductHigh customization

Low volumeHigh unit margin

High standardizationHigh volume

Low unit margin

Industrialization

Shouldice as a lean enterprise

Shouldice General Hospital

Focus on low risk cases No focus, multiple goals

Clear single value prop. Confusion of value prop.

Predictable process Unpredictable process

Strive for perfection Strive for threshold perf.

Eliminate waste Tolerate some excess

Manage patient flows View patients as functional tasks

Pull patients into process Push patients through process

Womack and Jones (2000) From Lean Production to Lean Enterprise, HBR March-April 1994

Shouldice Process Life Cycle

Birth of the Shouldice formula Process selection, design,

and improvement Innovation at the interfaces Process overtaken (when?)

Focus at Shouldice: the results

Breakthrough service High customer and employee satisfaction Industrial approach

ProcessFlexibility

Jumbled Flow.Process segmentsloosely linked.

Disconnected LineFlow/Jumbled Flowbut a dominant flowexists.

JOB SHOP

(Commercial Printer,Architecture firm)

BATCH

(Heavy Equipment,Auto Repari)

LINE FLOWS

(Auto Assembly,Car lubrication shop)

CONTINUOUSFLOW

(Oil Refinery)

ProductVariety

LowLow Standardization

One of a kindLow Volume

Many ProductsFew Major Products

High volume

High StandardizationCommodity Products

Connected LineFlow (assembly line)

Continuous, automated,rigid line flow.Process segments tightlylinked.

Oppor

tunity

Costs

Out-of

-poc

ket

Costs

High

Low

High

Matching Process Choice with Strategy:Product-Process Matrix

Marks & Spencer vs. Zara

Why is profitability in textile so low, when margins are so high?

Expected demand Actual demand

Perfect forecast

Excess demandExcess stock

Zara Business Concept

Low Cost Focus on getting it

approximately correct Define a fast process Solve the material

constraint Constrain designers Optimize the offer Offer follow-up (next batch)

and create customer flows

Fashion Store experience Copy fashion Involve the customers and

his group Create a network/brand

Integrated fashion delivery: Fashion at low cost

Zara Customer Offer: Product/Process Attributes Quality:

– Raw Material: poor/OK

– Knit: poor

– Look: grand

– Customer satisfaction: fashion at low price

Cost:– Low monetary cost

– Low time cost “The Zara experience”

Time:– Fast copying of leading

styles

– Fast delivery in own stores

– Limited editions

Variety/Flexibility:– Limited product variety:

only what is on display

– Every customer is participating in the process

– Customer defines the next batch

Classical textile business process:12 month lead time

DesignPurchase

RMMfg Dist Sell Discount

Zara Business Process: 5 day lead time

1.Scan fashion shows

2.Simplify hits&

Library of designs

Purchase RM

2.Shoppers and store mgrs.PULL next designDesigners adapt

ShoppingExperience

3.Final design ofNext batch

.

Mfg Dist

The design process

Creative designPreliminary

designsFinal product

design

Final product design

Preliminary designs

Creative design

OutsourceAnd scan

Copy andsimplify

Adapt andoptimize

Traditional

Zara

Accurate Response

Improving Forecasts

0

500

1000

1500

2000

2500

3000

3500

4000

0 500 1000 1500 2000

Initial Forecast

Tot

al S

ales

Accurate Response

Improving Forecasts

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0 500 1000 1500 2000 2500 3000 3500 4000

Updated Forecast, Incorporating 20% of Sales Data

Tot

al S

ales

Accurate Response

Improving Forecasts

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0 500 1000 1500 2000 2500 3000 3500 4000

Updated Forecast, Incorporating 80% of Sales Data

Tot

al S

ales

Zara’a Approach to Newsboy Losses

Expected demand Actual demand

Small batches

Excess stock and unmet demand are avoided by stopping production when market saturates

Disruptive Technological Change

Time

Performance

Zara QualityFreshness

M&S Zara

Zara as a lean enterprise

Zara M&S

Clear focus on one customer type and one process

No focus, multiple and simultaneous goals

Unique and clear value prop. Confusion of implicit value proposition

Predictable process Unpredictable and fuzzy process

Strive for perfection Satisfied with threshold performance

Eliminate waste Tolerate some excess

Manage customer flows View customers as a sequence of tasks

Pull customers into process Pushes customers through the system

Industrialization 1: Standardizing

High Fashion

Marks &Spencer

Mass Merchants

Process

Product

Flexible Job Shop

Batch Flow

Rigid Line Flow

High Customization

Some Customization

High Stardardization

Industrialization 2: Flexibility

High Fashion

Zara Marks &Spencer

Mass Merchants

Process

Product

Flexible Job Shop

Batch Flow

Rigid Line Flow

High Customization

Some Customization

High Stardardization

Strategic Value Gained

High Fashion

Out of price!

Zara

Marks &Spencer

Out of Fashion!

Mass Merchants

Process

Product

Flexible Job Shop

Batch Flow

Rigid Line Flow

High Customization

Some Customization

High Stardardization

Textile Apparel Industry: history

1920s M&S: Investment in technical part of the design; high quality products

After World War II: Les Nouvelles Galeries offered novelty at low prices

Mid-70s Benetton: process reversal and color flexibility; outsourcing of design, manufacturing, retail

Gap Inc. and C&A: position between low-end mass merchandisers and higher-end department stores

Mid-80s Zara: brand consistency and very fast product cycles Mango : shopping experience H&M: Zara fashion at C&A price

For next time

Read the case TEMSA Think through the questions at the end of the

case (in the section “What to do next?)