Operations Strategy 15 - bssve.inbssve.in/StudyMaterials/MMT020.pdf · Operations Strategy, ......

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Professor Charles FineProfessor Donald Rosenfield

Sloan School of Management & ESDMassachusetts Institute of Technology

Cambridge, Massachusetts 02142

September 2010

Operations Strategy15.769

www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in

1www.onlineeducation.bharatsevaksamaj.net www.bssskillmission.in

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Charles H. Fine

a. Joined Sloan faculty in January 1983Operations Management GroupPhD, Stanford Business School

b. Experience in Auto, Aero, Elect, Telecom, CPc. Taught: Intro to Ops, Service Ops, SC, Ops Strat, …d. Research in

i. Economics of Quality Improvementii. Economics of Flexible Manufacturingiii. Supply Chain Designiv. Value Chain Dynamics & Roadmapping



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Donald B. Rosenfield

a. Director, Leaders For Global Operations ProgramSenior Lecturer, Sloan

b. Joined MIT part time in 1980, full time in 1988, after 12 years in consulting

Ph.D in OR from Stanford, 3 degrees from MITOperations Management Group

c. Worked extensively with LGO companiesd. Taught: Intro ops, DMD, Ops Strat, Service ops,

Practice of opse. Work in ops strategy, supply chain management



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“Housekeeping”

1. Course Materials:

Books: Clockspeed, by C. Fine, Perseus Books, 1998.

Operations Strategy, Beckman &Rosenfield, Irwin/McGraw Hill, 2007

2. GradingClass participation 30%Case write-ups (3) 45%

Two individualOne “extended” (group)

Final project (group) 25%

3. Values Academic Integrity--”Do your own work”Behavioral Integrity -- “Do unto others . . . “



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Values, Integrity, & Professional Standards

1. Sloan core values: integrity, respect, collaboration, innovation, and positive impact.

2. Do unto others . . . (laptops & phones off; timeliness; respect)

3. Academic Integrity: Understand the definition of Plagiarism.

4. Regular case write-ups are individual work.

5. Extended case write-ups and final projects are group work.

6. For group work in this class: Please use Type 3 collaboration: “Each team member

must contribute substantially to the deliverable and understand the whole as well as

the parts.”



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Academic Integrity

The general policy for this class is that you should learn through your own work, feel free to build on the work of others, and clearly delineate which is which. You should feel free to surf the web and the universe to your heart’s content in search of relevant knowledge and ideas for this course. However, do not represent the ideas or work of others as your own and be sure to acknowledge your debts to others.



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Class Participation

a. Do you attend class?

b. Do you participate positively to the

learning experience in the class?

c. Do you distract others inappropriately?

Grade=f(contribution to classroom learning process)



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15.769 – Course Schedule

Class 1 - Course introduction; Innovation and operations disciplineCase: “McDonald’s Corp, (Abridged)”

Class 2 - Frameworks for strategy, and the decision category approachCase: “Zara”

Class 3 - Developing an operations strategy; application of decision category approach and the capabilities approachesCase: “BYD Company, Ltd”

Class 4 - Value Chain Dynamics & Operations DecisionsClockspeed, Chapters 1-4



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Class 5 - Value Chain Dynamics: Lessons from the Auto Industry The Machine that Changed the World, Womack, et al, Chapters 1-3

Class 6 - Enterprise Architecture and Operations StrategyCase: “Southwest Airlines: In a Different World”

Class 7 - Vertical integration and Outsourcing Case: “Boeing Commercial Airplanes’ 787 Dreamliner”

Class 8 - Business ProcessesCase: “Pharmacy Service Improvement at CVS (A)”



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Class 9 - Process technology decisions and multiple plantsCase: “ITT Automotive: Global Manufacturing Strategy”

NO CLASS – Columbus Day

Class 10 - Capacity Strategy - How to make decisions on Capacity and Capacity expansion Case: “Capacity Planning at Genentech”

NO CLASS – SIP Week



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Class 11 – Facilities Strategies and Globalization, Comparisons of Plant Productivity Case: “Applichem”

Class 12 – Summary Lecture on Facilities Strategy and Globalization Chapter 5 of Beckman and Rosenfield on facilities strategy

Class 13 - Sourcing and Supplier Management Case: “Toyota Supplier Relations: Fixing the Suprima Chassis (A)”

Class 14 - Information systems and the impacts of the electronic economyCase: “Amazon Web Services”



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Class 15 – Logistics Systems and the Fulfillment Supply Chain Case: “Dell Inc.: Improving the Performance of the Desktop PC Supply Chain”

Class 16 – Competing on Quality: Sources of Quality and Different Measures of Quality Case: “Delamere Vineyard”

Class 17 - Competing on Cost Versus Competing on Availability Case: “New Balance Athletic Shoe”

Class 18 - Competing on Cost Versus Competing on Features andInnovativeness: Types of Quality and the Product Development Process Case: “BMW: The 7-Series Project”



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Class 19 – Competition in the Housing Industry: Improving Cost, Quality and AvailabilityCase: “House Building Disrupted: Supply Chain Re-Engineering during an Epic Disaster”

Class 20 – Models for Gaining Advantage in a Global Environment, How toPosition Within a Value Chains Case: “Fast, Global, & Entrepreneurial: Supply Chain Management, Hong Kong Style”, (Li and Fung)

Class 21 - Globalization, Joint Ventures Sourcing Overseas, andMacroeconomic Effects of Off Shoring Case: “Chiang-Sho, Ltd”

Class 22 - Supplier Power and Overseas Sourcing, Moving Up the Value Chain in Outsourcing Case: “Flextronics International”



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Class 23 – Presentations Part 1 Finish Chapter 11 of Beckman and Rosenfield

Class 24 – Presentations Part 2 and Wrap Up



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Themes in Operations Strategy15.769

System Integrality and consistency as core to operations excellence. e.g., Toyota, McDonald’s, Southwest, ZaraFit Business, Operations and functional strategies

e.g., Auto industry, Southwest, BYDOperations Innovation as source of Advantage

SWA, Toyota, Dell, McDonald’s, BYDStrategy is the pattern of operations decisions

Boeing, ITT, CVS, Genentech, Applichem, Amazon, Toyota, DellProcesses embody distinctive and core capabilities

“Any process is better than no process.” -- M. Hammer Operations Strategies are the selection of competitive dimensions and require design tradeoffs

BMW, Delamere, New Balance, HousingYou are never done -- continuous improvement/innov is mandatory

McD, Toyota, BYD (RFP <---> CI)X

X

X



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MIT OpenCourseWarehttp://ocw.mit.edu

15.769 Operations StrategyFall 2010 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.



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A Framework for Operations

Strategy

How operations can be used for competitive advantage in

today’s world



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Problem One: Conflicts

• More capacity

• Variety

• Cost

• Meeting targets

• Better forecasts

• Economical operations

• Other strategic criteria

• Maintaining quality



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Problem Two: Role in Strategy

Corporate Plans

R&D

Marketing

Sales Finance

Strategic

Planning

Manufacturing



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We first address some business

strategy issues

• Which businesses should we be in?

• How do we compete and compare with our competitors in each

one?

• What dimensions of customer performance do we focus on

• To answer these questions, we first look at alternative views of

how individual businesses compete



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Competitive Strategy: The

Positioning View

Source: Adapted from Porter

Industry Competitors

New Entrants

Su

pp

liers

Bu

ye

rsSubstitutes

bargaining

power

bargaining

power

thre

at

thre

at

Sources of Barriers to Entry• Economies of scale• Product differentiation and brand loyalty• Capital requirements• Switching costs• Access to distribution channels• Cost disadvantages independent of scale• Proprietary product technology• Favorable access to raw materials• Favorable locations• Government subsidies• Learning or experience curve• Government policy

Suppliers Have Power When:• Fewer suppliers than those supplied• No substitute products• Industry is not an important customer• Suppliers’ input is important to industry• Supplier products are differentiated or

switching costs are high• Suppliers may forward integrate

Buyers Have Power When:• Buyers are concentrated or purchase large

volumes relative to industry sales• Purchases represent a significant

fraction of their costs• Products purchased are standard or

undifferentiated• Buyers face few switching costs• Buyers earn low profits• Buyers can backward integrate• Products purchased are unimportant to

quality of buyers’ products• Buyer has full information

Sources of Intense Rivalry• Numerous or equally balanced competitors• Slow industry growth• High fixed or storage costs• Capacity augmented in large increments• Diverse competitors• High strategic stakes• High exit barriers

Substitutes May Become a Threat When:• Good price performance• Low switching costs• Industry is willing to substitute



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Positioning View

• Positioning is based on the external market, industry

dynamics, and the structure of the value chain

Time

volume

growth



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Positioning View

• Options for firm positioning:

– Cost leadership

– Differentiation

• And, by focusing on segments

– Distinct customer groups

– Groups with similar needs

• BUT, assumes operations excellence is not a source of

competitive advantage



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Resource-Based View

• Competitive advantage is derived from the firm’s development of

unique bundles of resources and capabilities that are:

– Inimitable: are difficult or costly to imitate or replicate

– Valuable: allow the firm to improve its market position relative to

competitors

– Rare: in relatively short supply



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Resource-Based View

• Resource: an observable, but not necessarily tangible, asset that

can be valued and traded

– e.g., brand, patent, parcel of land, license

– Asset or input to production than an organization owns,

controls or has access to on a semi-permanent basis

• Capability: not observable, and hence necessarily intangible,

cannot be valued and changes hands only as part of an entire unit

– Processes, activities or functions performed within a system

– Utilize the organization's resources

– Example: How a company innovates



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Resource-Based View

• Types of capabilities

– Process-based

• e.g., McDonald’s

– Systems- or coordination-based

• e.g., Ritz-Carlton

• e.g., Southwest Airlines

– Organization-based

• e.g., Toyota

– Network-based

• e.g., Dell and the fulfillment supply chain

• e.g., Cisco and the technology suppliers



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Competitive Strategy: Integrating the

Positioning and Resource-Based Views

Capabilities Positioning

Cost

Leadership

Differentiation

Focus

Process

Coordination

Organization

Network



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• Corporate

• Business Unit

• Function

The process must then involve

three levels:



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…as well as customer goals

• Cost

• Quality

• Availability

• Features/Innovativeness

• Environmental Performance



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…yielding an integrated framework

Cross-Functional

Integration (Fit)

Business StrategyCapabilities Positioning

Operations

Marketing

Suppliers

Complementors Competitors

Research and

Development

Human

Resources

Finance and

Accounting

Customers

• Cost

• Quality

• Availability

• Features/

Innovativeness

• Environmental

Performance

Functional Strategies

Time Delay



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Industry Forces

- Industry attractiveness

- Competitive structure:

opportunities and threats

Strategic Plan:

Gaining and Maintaining

Competitive Advantage

Functional Strategies

Mktg. Ops.

Finance R&D

External

Influences

Internal

Influences

Goals

Objectives

Organization’s

“Culture”

- Capabilities: Sources of

strengths/weaknesses

- Competitive

priorities

The essence is internal/external

and functional fit

But there is a fourth level!www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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Fourth level: Decision Category

Approach

• The decision category approach examines manufacturing

decision categories for consistency with strategic vision

– Structural decisions

• Bricks and mortar

• Machinery

– Infrastructure

• People

• Systems

• Procedures

– Fit with business, corporation, and other functions



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Companies vary considerably on

this ideal approach

• Use of both capabilities and positioning

• Formality of process

• Type of formal method

• Input of operations

• Focus on all decision categories



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Major Manufacturing

Decision Categories

1. FACILITIES

• size

• location

• focus

2. CAPACITY

• amount

• timing

• type

3. VERTICAL INTEGRATION AND SUPPLIER MANAGEMENT (The technology supply chain)

• direction

• extent

• interfaces

• collaboration

4. PRODUCTION TECHNOLOGIES AND PROCESSES

• equipment

• automation

• interconnectedness

• scale

• flexibility

5. WORK FORCE AND MANAGEMENT

• RFI?

• Policies (wages, security, etc.)

• skill levels

6. INFORMATION TECHNOLOGIES

• use and level of investment

• parity or differentiation

7. SUPPLY CHAIN AND MATERIALS (The fulfillment supply chain)

• logistics facilities and methods

• inventory policies

• vendor relations

• production planning

8. ORGANIZATION AND INCENTIVES

• structure

• reporting levels

• degree of centralization

• role of staff

• control/reward systems

• costing systems

9. BUSINESS PROCESSES • product generation

• interfaces

• responsibilities

• vendor development

• order fulfillment

• service and support

• quality and CI, flexibility, and

other cross-cutting capabilities



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IT decisions

• How much to invest

• Where to focus investment

• Standardized or customized applications

• Should IT be standardized within the company

– Standardization allows common learning and implementation advantages

– But there is less flexibility for local needs

• Organization, implementation and measurement

• Parity or competitive advantage



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Measures of Performance

• Operations Costs

– Unit costs

– Total (volume) costs

– Lifetime costs

• Availability

– Percentage of on-time shipments

– Response to results for info or changes

– Product and volume flexibility

– Delivery time

• Quality

– Return rate

– Product reliability and durability

– Cost and rate of field repairs

• Innovativeness and Features

– Product innovativeness

– Time to market and development cycle

• Environmental Performance

– Ease of disassembly and recycling

– Use of resources

The strategic mission matches the organization’s strengths to a

limited set of external measures of performance



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Decision Categories map to 3D

concurrent engineering

Product ProcessProcess technology

Capacity

Facilities

IT

Business Processes- PG

Supply ChainFulfillment SC

Materials mgmt

Supplier mgmt

Vertical integration

Infrastructure – HR, organization, IT infrastructure, other business processes



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Identify the right measures!



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Strategy Technology Infrastructure Marketing & Sales

• Low unit cost • Specialized equipment• Materials planning

and control

• Narrow line

• Price

• High service level • Reserve capacity • Inventory • Dependability

• Wide line custom

products

• Flexible machines

• Reserve capacity• Worker skills

• Customer needs

and scheduling

• Product innovation • General purpose• Development

• Team skills

• Market leadership

• New segments

The Classic Strategies



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Decision

CategoryDescription of Past Policy Strengths Weaknesses

Production

technologies

& processes

Capacity

Workforce &

management

Present Operations Policies

Operations Unit



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Summary of decision category

framework

• Understanding of external (value chain, dynamics, competitors,

etc.) and internal (capabilities)

• Consistency at four levels (corporation, business, function, and

decision category)

• Strategy is pattern of decisions within the nine categories

• Strategy is the identification of the competitive priorities from the

five means of competition



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15.769 Operations Strategy

Fall 2010

For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.



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http://ocw.mit.edu

1 Value Chain Dynamics:Business and Supply ChainBusiness and Supply Chain

Strategy iin a FFast-ClClockkspeed W d Worldt ld

Professor Charles FineMMassachhusetts IInstiitute off T Techhnollogy

Sloan School of ManagementCambridge, Massachusetts 02142g ,

September 2010



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2 Supply Chains and Value Chains Supply ChainManaggementOrder fulfillment Reaction & Anticipation -Inventory -Quality, cost & service -Flexibility -Response times -Logistics -Distribution -Procurement -Forecasting -Transpportation “The Physics of Flow”

Value ChainValue Chain DesignS t D iSystem DesignStatic

-Core competences Core competences-Make/Buy-Relationship Design-Strategic IntentStrategic Intent

Dynamic -Fast Clockspeed-External ForcesExternal Forces -Disintegration -Dependence -Capability development Capability development -Disintermediation

“The Biology of Evolution”www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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Voice of theCustomer

3

Developm

eent Chain

DesignSupply

Develop 3-D

LaunchConcurrent Engineering

Supply Produce Distribute Sell Customer

The Three Chains of Enterprise Design:Fulfillment, Development, & Capability Chains

Capability Supply Chain

Fulfillment Supply Chainwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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4 3-D Concurrent Engineering & the imperative of concurrencythe imperative of concurrency

Process (for production Value Chain Product

(or Service)(or Service) & delivery)& delivery) (Partners/S ppliers)(Partners/Suppliers)

D t il dDetailed Design Specs M t i lMaterials Functions

P d t/ Product/ System Architecture

Modular/ Integral

Life Cycles

UnitUnit Processes

Technology E i tEquipment

P d ti Production System Objectives SystemsSystems People Capacity

Value Logisticsg & Coord System Information InventoryInventory Integration

Chain Architecture Sourcing SelectionSelection Relationship

Developpment& Capab. Chains

FulfillmentSupply Chain

Fulfillment Architecture Technology www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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“Gear Model” to support Roadmapping ofValue Chain Dynamics (VCD)Value Chain Dynamics (VCD)

Regulatory Policy

D i

Corporate Strategy

Dynamics Dynamics

Industry Structure DynamicsCustomer

Technology& Innovation

Dynamics DynamicsPreference Dynamics

Dynamics

Business Cycle

Dynamics

Capital MarketGears differ by size/speed DynamicsDynamicsEach has an engine & clutch



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6 MANUFACTURING STRATEGY FORMULATION 1. DRAFT MISSION STATEMENT (ADVISED BY BENCHMARKS)

2. SET OPERATING OBJECTIVES

--QUALITY--COSTCOST --LEAD TIMES --FLEXIBILITY --CUSTOMER SATISFACTION --INNOVATIVENESS

3. DEVELOP POLICIES & INVESTMENTS

STRUCTURAL INFRASTRUCTURAL

CAPACITY ACQUIS. HUMAN RESOURCES FACILITIES QUALITY ASSUR. EQUIPMENT/TECH. PDTN. PLAN/CONT. VERTICAL INTEG. PRODUCT DEVELOP.

PERF. MEAS/EVAL CAPITAL ALLOC. ORG. STRUCTURES.



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•

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Major Manufacturing Decision CategoriesDecision Categories

1. FACILITIES • size • location • focus

2. CAPACITY • amount • timing • type type

3. VERTICAL INTEGRATION AND SUPPLIER MANAGEMENT • direction • extent • interfaces • interfaces • collaboration

4. PRODUCTION TECHNOLOGIES AND PROCESSES • equipment • automatiion • interconnectedness • scale • flexibility

5. WORK FORCE AND MANAGEMENT • wage policies • security • skill levels

6. INFORMATION TECHNOLOGIES • use and level of investment • parity or differentiation

77. SUPPLY CHAIN AND MATERIALS SUPPLY CHAIN AND MATERIALS • logistics facilities and methods • inventory policies • vendor relations • production planning

8. ORGANIZATION AND INCENTIVES • structure • reporting levels • degree of centralization • role of staff role of staff • control/reward systems • costing systems

9. BUSINESS PROCESSES • product generation

• interfaces • interfaces • responsibilities • vendor development

• order fulfillment• service and support • quality management, flexibility, and

other cross-cutting capabilities



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A UL URE OF ON INUOUS RO ESS IM ROVEMEN

8 SAMPLE MANUFACTURING STRATEGY TEXT MANUFACTURING VISIONMANUFACTURING VISION MANUFACTURE WORLD-CLASS QUALITY AUTO COMPONENTS IN THE PRESCRIBED VOLUMES, ON SCHEDULE, AT THE LOWEST COSTCOST

MANUFACTURING MISSION ACHIEVE WORLD-CLASS STATUS (BY THE YEAR 20xx) IN ACHIEVE WORLD CLASS STATUS (BY THE YEAR 20xx) IN QUALITY COST, TIME, AND FLEXIBILITY WITH PEOPLE WHO HAVE A SHARED VISION AND OBJECTIVES THAT ARE BASED ON A CULTURE OF CONTINUOUS PROCESS IMPROVEMENT

PERFORMANCE METRICS 1. QUALITY: PRODUCT& PROCESS 2. COST/PRODUCTIVITY 3. TIME 4. FLEXIBILITY



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9 SAMPLE MANUFACTURING STRATEGY FRAMEWORK (CONTINUED)

PROCESSES

-TECHNOLOGY -CAPABILITY -CONTROLCONTROL -FLEXIBILITY -STD. OPER. PROCS.

VALUE CHAIN

INTERNAL -PROCUREMENT/SUPPLY -ENGINEERING -MARKETING/SALES DESIGN OFFICE -DESIGN OFFICE

-FINANCE -LABOR RELATIONS

PEOPLE

-SKILLS, TRAINING, HIRING PRACTICES -KNOWLEDGE, EXPERTISE, EMPOWERMENT -PARTNERSHIP W/ ACCOUNTABILITY PARTNERSHIP W/ ACCOUNTABILITY -FLEXIBILITY -ENVIRONMENT

EXTERNAL -WORLD-CLASS BENCHMARKS -CUSTOMERS & DEALERS -SUPPLIERS GOVERNMENT-GOVERNMENT

-UNIVERSITIES



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Value Chain Dynamics as an OOperati tions Strattegy LensSt L

Outsourcing Value Chain Value Chain ArchitecturesT Architectures R dRoadmappingTraps i

(motivating strategic (refining strategic (implementing strategic value chain desigg )n) value chain design) value chain design)g )

PolicyPersonal DynamicsTechnology Corporate Integral vs. Modular Open vs. Dynamics

(Commercial Closed Aircraft) (Communications) BusinessNational Dynamics



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Regulatory Policy

Corporate Strategy

Dynamics yDynamics

DynamicsIndustryStructureD i

CustomerTechnology& Innovation

D i DynamicsPreferenceDynamics

Dynamics

BusinessCycle

Dynamics

CapitalMarketInterdependent sectors

d DynamicsDynamicsrepresented as intermeshed gears



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The Strategic Impact of Value Chain Design:(Wh(Who llet Inttel Insid ide?)?)t I l I

1980: IBM designs a product, a process, & a value chain1980: IBM designs a product, a process, & a value chain

Consumers/ Distribution OEM SubsystemUsers Channel(s) Suppliers

IBM Intel Inside Intel Inside

Microsoft

A phenomenally successful product design A disastrous value chain design (for IBM)

Intel

The Outcome:



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LESSONS FROM A FRUIT FLY: THE PERSONAL COMPUTERTHE PERSONAL COMPUTER

11. BEWARE OF INTEL INSIDE BEWARE OF INTEL INSIDE.(Regardless of your industry)

22. TACTICAL MAKE/BUY: TACTICAL MAKE/BUY:IT MAY BE A LITTLE BIT CHEAPER OR FASTERTO OUTSOURCE VERSUS INSOURCE.

3. STRATEGIC SOURCING: VALUE CHAIN DESIGN CAN DETERMINE THE FATE OF COMPANIES AND INDUSTRIES, AND OF PROFIT AND POWER.

4. THE LOCUS OF VALUE CHAIN CONTROLCAN SHIFT IN UNPREDICTABLE WAYS.



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Vertical Industry Structurewith Integral Product/System Architecturewith Integral Product/System Architecture

Computer Industry Structure, 1975-85

IBMIBM DEC BUNCHBUNCH Microprocessors

Operating Systems

All Al

Al

Peripherals

Applications Software P

rodu

ll Prod

ll Prod

Network Services

Assembled Hardware

ucts

ducts

ducts

(A. Grove, Intel; and Farrell, Hunter & Saloner, Stanford)



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ac

Intel Mac TI etc

Intel Mac TI etc

etc

etcetc

15 Horizontal Industry Structure

with Modular Product/System Architecturewith Modular Product/System Architecture

Computer Industry Structure, 1985-95

Microprocessors

Operating Systems Microsoft Mac Unix

Intel Moto AMD etc

Peripherals

Applications Software

Unix

HP Seagate etcEpson etc

Microsoft NovellLotus etc Network Services

Assembled Hardware

Microsoft NovellLotus

AOL/Netscape EDS etcMicrosoft

HP D ll tIBMC

etc

HP Dell etcIBMCompaq (A. Grove, Intel; and Farrell, Hunter & Saloner, Stanford)



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16THE DYNAMICS OF PRODUCT ARCHITECTURE, STANDARDS,AND VALUE CHAIN STRUCTURE:

“THE DOUBLE HELIX”“THE DOUBLE HELIX”

MODULAR PRODUCTHORIZONTAL INDUSTRY

OPEN STANDARDS

INTEGRAL PRODUCTVERTICAL INDUSTRY

PROPRIETARY STANDARDSNICHE

COMPETITORSINNOVATION &

HIGH-DIMENSIONAL SUPPLIER

INNOVATION & TECHNICAL ADVANCES

INCENTIVE TOINTEGRATE

PRESSURE TO DIS-INTEGRATEORGANIZATIONAL

DIMENSIONALCOMPLEXITY MARKET

POWER

INTEGRATERIGIDITIES PROPRIETARY

SYSTEM PROFITABILITY

E l IBM A t E b /B i N ki S ll Fi

Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”

Examples: IBM, Autos, Embraer/Boeing, Nokia, Small Firms



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17 What Drives Clockspeeds? technologygy/innovation ppush,, customer ppull,,

system complexity, and regulation

Consumer

Handset or PC Applications

Handset or PC Handset or PC Platforms

Communications EquipmentEquipment

and Networks

Semiconductor Components Semiconductor

Manufacturing Equipment



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18 ALL COMPETITIVE ADVANTAGE IS TEMPORARYIS TEMPORARY

Autos: Ford in 1920, GM in 1955, Toyota in 2000 Computing: IBM in 1970, Wintel in 1990, Apple in 2010 World Dominion: Greece in 500 BC, Rome in 100AD, G.B. in 1800 Sports: Red Sox in 2007, Celtics in 2008, Yankees in 2009

The faster the clocksppeed,, the shorter the reiggn



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Value Chain Evolution in a Fast-Clockspeed World: 19

Study the Industry Fruitflies

Evolution in Evolution inthe natural world:FRUITFLIESFRUITFLIES

evolve faster than MAMMALS

evolve faster than evolve faster than REPTILES

THE KEY TOOL: THE KEY TOOL:

Cross-SPECIES BenchmarkingBenchmarking of Dynamic Forces

Evolution in Evolution inthe industrial world:INFOTAINMENT is faster than MICROCHIPS is faster than AUTOS evolve faster than AIRCRAFT evolve faster than AIRCRAFT evolve faster than MINERAL EXTRACTION

THE KEY TOOL: Cross-INDUSTRYBenchmarkingg of Dynamic Forces



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“Gear Model” to support Roadmapping ofValue Chain Dynamics (VCD)

Corporate

Value Chain Dynamics (VCD)

Regulatory Policy

StrategyDynamics

yDynamics Industry

StructureD i

CustomerPreference


D i DynamicsDynamics Dynamics

BusinessCycle

Dynamics





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21 Innovation along the Value Chain:How (& why) do Autos & Electronics Differ?How (& why) do Autos & Electronics Differ?

Sales/Marketing /Distribution Production Core

Technology C /Consumers/ Product S b tSubsystem SuppliersSuppliers

Users Concept Suppliers

Minivan, Lean Hybrid Aluminum AUTOS Add-ons Internet SUV, Production Enggine,, Bonding,g,AUTOS SUV

Crossover Active Carbon Fiber, Suspension CAD tools

iPod, X-Box, Palm,Palm,

Digital Photog. C Html

ELEC- Napster, Amazon, Office, Manufacturing C++ Hard disk drive, Contract H l Microprocessor,

TRONICS Apple I Dell Mobile Phone Photolithography



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Innovation Dynamics can be RADICAL (disruptive) or INCREMENTAL (sustaining)RADICAL (disruptive) or INCREMENTAL (sustaining)

nce Maturity

How to measure

orm

an

Takeoff Disr ption

How to measure performance?

How to know where you are

Perf

o Disruption y on the “S”?

Where in the value chain?

Ferment Worse before better?

Timewww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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Disruptive Process Innovation in Autos vs. Disruptive Product Innovation in Electronics

ceP

erfoo

rman

Lean Production

Mass Production Process Innovators --Ford

Dell--Dell --Wal-mart Craft Production --Southwest Air --Toyota Toyota

Timewww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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24

Creative Artists ContentNetworksApplications

THE CASE OF APPLE iPod/iPhoneArtists

ContentP bli h

Closed to non-MP3, non-Apple f

Closed to all but one carrier per

ppClosed to non-Apple apps; then explosive A St

Content

Publishers

iTunes

formatsregion; slowly opening

App Store Growth

Marketing

Content

homepage App Stores

Content

ContentSales iTunes

iTunesRetail StoresContent

Distrib.

C & HW

Listening accessories

Stores

Content & HWConsumption

iPod/ iPhoneOpen, then

license



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25

What makes an innovation disruptive? Performance Push an overwhelmingly superior technology/process (penicillin, mass production)

Customer PullCustomer Pull new customers care about different measures of performance ( )(wireless phones, personal computers)

Orgganizational Comppetencies incumbents cannot do what the innovators can (Dell supply chain, Southwest Air)



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26


Regulatory Policy

Corporate Strategy

Dynamics yDynamics




Dynamics

BusinessCycle

Dynamics





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t t t

27 CUSTOMER PREFERENCE DYNAMICS:

P&G Value Propposition:Premium Products at Premium Prices

Controlling the Channel Through Closeness to Customers: consumer research, pricing, promotion, product development

Customers Retailer

P&G Retailer

R t il

P&G

Retailer

WhWhat iis ththe rolle of brandd names vs. product ffeatures??f b d Laundry Detergent; Mobile Phones; Motorcycles



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28CUSTOMER PREFERENCE DYNAMICS:

Walmart Value Proposition:

Controlling the Channel Through Closeness to Customers: Chain Proximity

pLarge Selection of Products at Very Low Prices

Controlling the Channel Through Closeness to Customers: Chain Proximity

Consumers WalMartRetailer

Retailer P&GRetailer

P&G

Private LabelsPrivate Labels

Walmart Brands

Vertical Growth on the Double Helixwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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29

Brand vs. Brand vs. Channel vs Channel: Competing on fast clockspeed retail Competing on fast-clockspeed retail

Consumers

SonySony

Best Buy Samsung

WalMart



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30


Regulatory Policy

Corporate Strategy

Dynamics yDynamics




Dynamics

BusinessCycle

Dynamics





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31

Cisco’s End-to-End Integration f f Cfor its Fulfillment SSupply Chain

communication for communication for speed and accuracy of order information

C tComponent Suppliers &Distributors

E l i t t i Customers

Early investment in logistics supplier partnerships for speed and accuracy of

Cisco and accuracy of product flow

Contract ManufacturersEarly investment in

Internet based



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32Cisco’s Strategy for

Technology Supply Chain Design Technology Supply Chain Design (I.e., Capabilities)

1 I t t h d th t t1.Integrate tt echnollogy around the router tobe a communications network provider.

2 Leverage acquired technology with 2. Leverage acquired technology with - sales muscle and reach - end-to-end ITend to end IT - outsourced manufacturing- market ggrowth

3. Leverage venture capital to supply R&D Basic Design Principle: Acquisition Relationship with Technology Chain

Partnerswww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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u w Eff

33 Volatility Amplification in the Supply Chain:

“The Bu w p Effect”ll hip

Customer Retailer Distributor Factory Tier 1 Supplier Equipment

Information lags SOLUTIONS:Delivery lagsy g

Over- and underordering Countercyclical MarketsMisperceptions of feedback Countercyclical Technologies

Collaborative channel mgmt.Lumpiness in ordering Lumpiness in ordering (Cincinnati Milacron & Boeing)Chain accumulations



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34 Supply Chain Volatility Amplification: Machine Tools at the tip of the Bullwhip

“We are experiencing a 100-year flood.” J. Chambers, 4/16/01 80

% Chg. GDP % Chg. Vehicle Production Index % Chg. Net New Orders Machine Tool Industry

p p

60

80

ar

20

40

hang

e, Y

ear t

o Ye

a

-20

0 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991

% C

h

60

-40

-80

-60

"Upstream Volatility in the Supply Chain: The Machine Tool Industry as a Case Study," E. Anderson, C. Fine & G. Parker Production and Operations Management, Vol. 9, No. 3, Fall 2000, pp. 239-261.



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35

100.00

% C

hang

e, Y

ear-

to--Y

ear

Volatility in the Electronics & Semiconductors Supply Chain Semiconductors Supply Chain

80.00

60.00

40 00 40.00

20.00

0.00

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 -20.00 Year

-40.00

Worldwide Semiconductor Manufacturing Equipment Sales Worldwide Semiconductor ShipmentsWorldwide Semiconductor Shipments

Electronics, Computing and Communications Equipment Output GDP World GDP USA

-60.00



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36

LESSONS FROM A FRUIT FLY: CISCO SYSTEMSCISCO SYSTEMS

1 KNOW YOUR LOCATION IN THE VALUE CHAIN1. KNOW YOUR LOCATION IN THE VALUE CHAIN 2. UNDERSTAND THE DYNAMICS

OF VALUE CHAIN FLUCTUATIONS 3. THINK CAREFULLY ABOUT THE ROLE

OF VERTICAL COLLABORATIVE RELATIONSHIPS 4 INFORMATION AND LOGISTICS SPEED DO NOT 4. INFORMATION AND LOGISTICS SPEED DO NOT

REPEAL BUSINESS CYCLES OR THE BULLWHIP.

Bonus Question:Bonus Question: How does clockspeed impact volatility?



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37 INDUSTRY CLOCKSPEED IS A COMPOSITE: OF PRODUCT, PROCESS, AND ORGANIZATIONAL

CLOCKSPEEDSCLOCKSPEEDS

Mobile Phone INDUSTRY CLOCKSPEED Mobile Phone INDUSTRY CLOCKSPEED

THE Mobile Phone

THE Mobile Phone product technology THE MANUFACTURING

Mobile Phone COMPANY PRODUCTION organiizatiion

PROCESS t h lprocess technology



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38

Mobile Phone System CLOCKSPEED is a mix of Transmission Standards Software and HandsetsTransmission Standards, Software and Handsets

Mobile Phone SystemMobile Phone System TRANSMISSION SOFTWARE SOFTWARE STANDARD APPLICATIONS HAND SETslow clockspeed

medium clockspeed fast clockspeedOPERATING SERVICESSERVICES

SYSTEM fast clockspeedslow clockspeed

ISSUE: THE FIRMS THAT ARE FORCED TO RUN AT THE FASTEST CLOCKSPEED ARE THE MOST LIKELY TO STAY AHEAD OF THE GAME.



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39

Automobile CLOCKSPEED IS A MIX OF ENGINE BODY & ELECTRONICSENGINE, BODY & ELECTRONICS

AutomobileAutomobile

ENGINE BODY ELECTRONICS slow clocksppeed medium clockspeed fast clockspeed

ISSUE: MOST AUTO FIRMS OPERATE AT ENGINE OR BODY CLOCKSPEEDS; IN THE FUTURE THEY WILL NEED TO RUN AT ELECTRONICS CLOCKSPEED.



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am cs

40


Regulatory Policy

D i

Corporate Strategy

Dynamics


Dynamics

Dynamics Industry Structure DynamicsCustomer Dynamics Dynamics

Preference Dynamics

Business Cycle

Dynamics

Capital Market

D n iInterdependent sectors

d yDynamicsrepresented as

intermeshed gears



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41 Projects, Strategy, and Value ChainsClocksppeed drives

Business Strategy Cadence

CAPABILITIES enable & constrain PROJECTS; PROJECTS build CAPABILITIES

CORE PROJECT DESIGN

CAPABILITIES (New projects, new processes, new suppliers)

Leonard-Barton, Wellsprings of Knowledge www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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l t & rof t

42 Projects Serve Three Masters:

Capabilities, Customers, & Corporate Profitapab es, ustomers, orporate

CORE CAPABILITIES

PROJECT DESIGN CAPABILITIES DESIGN

(New products, new processes, new suppliers)



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43

VALUE CHAIN DESIGN: Three ComponentsThree Components

1. Insourcing/OutSourcin1. Insourcing/OutSourcing (The Make/Buy or Vertical Integration Decision)

2. Partner Selection (Choice of suppliers and partners for the chain)

3. The Contractual Relationship (Arm’s length joint venture long-term contract (Arm s length, joint venture, long term contract,

strategic alliance, equity participation, etc.)



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44 3-D Concurrent Engineering & the imperative of concurrencythe imperative of concurrency

ProcessProduct (for production Value Chain

(or Service) & delivery) (Partners/S(Partners/Suppliers)(or Service) & delivery) ppliers)

D t il d Unit Production Value LogisticsP d t/ Chain Architecture Sourcing Selection

Logistics & Coord System Information I t Selection Inventory

Relationship Integration

Detailed Design Specs M t i l

Unit Processes

Technology E i t

Production System Objectives Systems

Product/ System Architecture

Modular/ Materials Functions

Equipment y People Capacity

Integral Life Cycles

Development Fulfillment S l Ch i & Capab. Chains Supply Chain

Fulfillment Architecture Technology www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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45

IMPLEMENTATION OF PROJECT DESIGN: FRAME IT AS 3 D CONCURRENT ENGINEERING FRAME IT AS 3-D CONCURRENT ENGINEERING

PROJECT

Product (Deliverable Process

(Project Plan) Value Chain

(Partners/Suppliers)

PROJECT DESIGN

CORE

Detailed Design

Specs

Unit Proces ses

T h

Production System

Objectives Systems

Value Chain Architec-ture

Sourcing

Logistics& Coord System

Information

Product / System Architec ture CORE

CAPABILITIES Materials Functions

Techn ology Equip ment

y People Capacity

Sourcing Selection Relation-ship

Inventory Integration

ture Modular /Integral Life Cycles

Development Chain Fulfillment

S l Ch iSupply Chain



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46

Do you have to think strategicallyabout every project?about every project?

CORE CAPABILITIES

PROJECT DESIGN CAPABILITIES DESIGN

(New products, new processes, new suppliers)



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47 ARCHITECTURES IN 3-DINTEGRALITY VS. MODULARITY

I tIntegrall productt architecttures ff teature d hit close coupling among the elements

- Elements perform many functionsEl t i l i l i it- Elements are in close spacial proximity

- Elements are tightly synchronized

- Ex: jjet enggine,, airpplane wing, micropprocessor g, Modular product architectures feature

separation among the elements - Elements are interchangeableElements are interchangeable - Elements are individually upgradeable- Element interfaces are standardized - System failures can be localizedSystem failures can be localized

- Ex: stereo system, desktop PC, bicycle



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48

VALUE CHAIN ARCHITECTURE

Integral value-chain architecture features close proximity among its elements

- Proximityy metrics: Geoggrapphic,, Orgganizational Cultural, Electronic

- Example: Toyota city - Example: Ma Bell (AT&T in New Jersey)Ma Bell (AT&T in New Jersey)Example: - Example: IBM mainframes & Hudson River Valley

Modular value-chain architecture features multiple, i h bl li d d d i finterchangeable supplier and standard interfaces

- Example: Garment industry - Exampple: PC industryy - Example: General Motors’ global sourcing - Example: Telephones and telephone service



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49 ALIGN ARCHITECTURES

ACROSS SYSTEMS AND VALUE CHAINSPR

OOD

UC

T / S

YSTE

M A

RC

HIT

EECTU

RE

SUPPLY CHAIN / VALUE CHAIN ARCHITECTURE(Geographic, Organizational, Cultural, Electronic proximity)

INTEGRALINTEGRAL MODULARMODULAR

Microprocessors M d Lucent P l idMercedes & BMW vehicles

Lucent Nortel

Polaroid

Chrysler (90’s) Nokia Cisco

Dell PC’s Digital Rights/ M i Di t ib ti Dell PC s

Bicycles Music Distribution



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50

TPS Dynamics between Continuous Improvement &Continuous Improvement &

Respect for People (Stakeholders)

Motivated People Drive faster Improvement

R t

Drive faster Improvement

Continuous Improvement

Respect For

People Improvement People

P fit t h dProfits get shared to reward and incentivize alignment



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51 The Evolution of Business Ecosystems Operations (or “quantity”) Loop Ted Piepenbrock, MIT

Firm Output

Modular Integral Enterprises Enterprises

Enterprise CompetitiveCompetitiveDynamicsDynamics

EnterpriseCompetitiveCompetitiveDynamicsDynamics

15 Product markets

FirmCapital markets

Labor markets

markets

Firm

Supplier markets

Capital markets

Labor markets

Customer markets

10whichwhichdrive…drive…

Supplier markets

5

Short-term Speed

Long-term Speed & Stability

& Flexibility

Maximization of Maximization of Shareholder Value Stakeholder Surplus 1950 1960 1970 1980 1990

Enterprise ArchitecturalArchitectural

EnterpriseArchitecturalArchitecturalArchitecturalArchitecturalArchitecturalArchitectural

FormsFormsFormsForms

which generates…which generates…

l Ent

erpr

ise

Mod

ular

1

Mod

ular

2

l Mod

ular

3

Inte

gra M M

FirmFirmLong TermLong TermLong--TLong- erm-Term

PerformancePerformancePerformancePerformance

Industry create…create… Growing MarketsOutput (Economies of Scale)(Economies of Scale)

Industrial DynamicDynamicIndustrialDynamicDynamicEvolutionEvolutionEvolutionEvolution

whichwhichshapesshapesshapes…shapes…

Modd

ular

1

Mod

ulaar

2

Mod

ular

33

Stable Markets (Economies of Scope)

Growing Markets (Economies of Scale)

1900 1925 1950 1975 2000 Market Capitalization



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52 Dell Supply Chain Demand/ Supply

Management

Global \ Regional

Procurement

Demand Management

Demand Management

Continuity of SupplyContinuity of Supply

Build to customerBuild to customer

Sales

SLC

Supplier

I

Dell I

Customer

ssssspecificationsspecifications

Supplier

Customer fulfillment 2-5 days

Materials ordering cycle 10-180+ days

Modular Product Architecture enables Modular Supply Chain

s



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f f

53 HP/Flextronics vs. Dell Supply Chain

Flex Supplier

Flex I

CustomerRetailer

Supplier

Retailer fulfillmentMaterials ordering cycle Retailer Customer f lfill t

2-5 days Materials ordering cycle

10-180+ days inventory 30+ days

fulfillment 30 min

SLCSupplier

I DellI Customer Supplier

Customer fulfillmentMaterials ordering cycle 2-5 days10-180+ days

Modular Product Architecture enables Modular Supply Chain



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54

Demand-Supply Chain Management @ Dell@ Dell

� D d M Demand Managementt: � Forecast = Buy = Sell � Buy to Plan, but Build to Order

•• Inventory Velocity is a wonderful thingInventory Velocity is a wonderful thing … • Customers have immediate access to the latest

technologygy. • Suppliers get their products to market quickly

• Quality is improved with fewer touches. • Cash is generated through negative cash cycle.• Model efficiencies drive Market Share gain.



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55 Can “Dell Direct” Work for Autos?

• Appealing to OEM’s on Many Appealing to OEM s on Many Dimensions – Satisfyy customer need for Sppeed – Reduce Supply Line Inventories – Reduce mismatches and discountingg– Direct OEM-Customer Relationships (&

Data!) – Information Transparency

Adapted from Prof. J.P. MacDuffie, IMVP & The Wharton School



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56

BUT,A Car is not a Computer!!A Car is not a Computer!!

P l• Personal Computer

• ~50 componentsp • 8-10 key parts • 40 key suppliers • 24 hour burn-in • 100 design • variations • Modular

A hi • Architecture

C• Car • ~ 4000 components • 100 key subsystemsy y • 300 key suppliers • 12 month validation • 1,000,000 • variations • Integral • Architecture

Adapted from Prof. J.P. MacDuffie, IMVP & The Wharton School



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57 In/Outsourcing: Sowing the Seeds of Competence Development to develop

dependence for knowledge or dependence for capacitydependence for knowledge or dependence for capacity

Amount ofWork

Outsourcedknowledge+/or supply

Amount of Supplier

Amount ofSupplierLearning

Capability

Dependence Amount of

Work Done In-house

knowledge+/or supply

A tAmounCapability fInternal

ft oInternalLearning

Independence

+ + ++ ++ + +

+ ++ www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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58 Technology Dynamics in the Aircraft Industry:

LEARNING FROM THE DINOSAURS

++

+

+ - capability

Japanesep appeal as

subcontractors U.S. firms’ appeal as subcontractors

Boeing outsources to Japan

Japanese Industry

+ + to Japan

(Mitsubishi Inside?)Autonomy

Japanese industry

U.S.

size & size & industry

size & capability

size &



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59

SOURCEABLE ELEMENTS

PROCESS ELEMENTS

ENGINEERING

ASSY

TESTTEST CONTROLLER

I4 V6

V8 PRODUCTS VALVETRAIN

BLOCK

SUBSYSTEMS



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60

Strategic Make/Buy Decisions: Assess Critical Knowledge & Product ArchitectureAssess Critical Knowledge & Product Architecture

INDEPENDENT FORDEPENDENT FOR DEPENDENT FOR KNOWLEDGE & KNOWLEDGE KNOWLEDGE & INDEPENDENT FOR & CAPACITY DEPENDENT FOR KNOWLEDGE & CAPACITY

CAPACITY

OD

ULA

R

BEST OUTSOURCING OPPORTUNITY

A POTENTIAL

OUTSOURCING TRAP

TEM

IS M

O

OVERKILL IN

VERTICAL INTEGRATION

CAN

TRAP

ITTE

GR

AL

INTEGRATION

WORST OUTSOURCING

SITUATION

CAN LIVE WITH

OUTSOURCING

TEM

IS IN

T

BEST INSOURCING SITUATION

I

Adapted from Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”



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61 Strategic Make/Buy Decisions: Also consider Clockspeed & Supply Base Capability

DEPENDENT FOR DEPENDENT FOR INDEPENDENT FOR INDEPENDENT FOR KNOWLEDGE & CAPACITY CAPACITY ONLY KNOWLEDGE & CAPACITY

OSA

BLE

ar) Clockspeed

y Fast Slow Clockspeed

y Fast Slow Clockspeed Fast Slow

DEC

OM

PO(M

odul

uppl

iers

ew

Man

y Fast Slow

uppl

iers

ew

Man

y Fast Slow

OK Watch

it! uppl

iers

ew

Man

y Fast Slow

RA

L

Su

Fe

Clockspeed Fast Slow

Su

Fe

Clockspeed Fast Slow

it! Su

Fe

Clockspeed Fast Slo

INTE

GR

uppl

iers

ew

Man

y Fast Slow

uppl

iers

w M

any Fast Slow

pplie

rsw

Man

y Fast Slow

Adapted from C. Fine, Clockspeed, Chap. 9

Su

Fe

Su Few

Su Few



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�

•••

••• Competitive

Position:Position:• Advantage• Parity• Disadvantage

N

•••

•••

••

62

Qualitative analysis of strategic importance uses five key criteriaimportance uses five key criteria

Value chain elements with high customer

�

�

Customer Importance:

High Medium Low

� Value chain elements with high customer importance and fast clockspeed are generally strategic (unless there are many capable suppliers)

� Competitive position is seldom the Technology Clockspeed:

Fast Medium Slow Competitive

Position:

primary consideration for strategic importance, rather it serves as a “tie-breaker” when other criteria are in conflict

Capable Suppliers: Possible Decisions

Position: Advantage Parity Disadvantage

When many capable suppliers exist, knowledge may be considered commodity and development should be

Few Many

(Knowledge & Supply): development should be None

Architecture: Integral

Possible Decisions

• Insource • Outsource

outsourced

Architecture is considered a • Partner/Acquire • Partial Insource

constraint for the sourcing decision d l t l th l l f Modular

Partial Insource • Partial Outsource • Investengineering that must be kept in • Spin Off • Develop Suppliers

model, controls the level of

house for integration purposes

Criteria are applied differently for Products than for Subsystems Model developed by GM Powertrain, PRTM, & Clockspeed, Inc.



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Clocks eed:

I

l pt

i

t r lr

i i

trit

t

63

ga evannoitisPo

yPad

: A

p

¥¥

d

ttemCo

egavanas

Every decision requires qualitative and quantitative analyysis to reach a conclusionq

Knowledgge

Supply

Improve Invest & Economics Build

Hig

h

StrategicQualitative Model Importance

Qua

litatt

ive

eeVa

lu

Divest/ HarvestCustomer mportance:

¥ High ¥ Medium Outsource Investment¥ Low

Technology C ockspeed:

¥Fa s ¥M edium ¥Sl ow

CompetitivevePosition:

¥A dvantage

Loww

Low High¥Pa rity¥Di¥Di sadvantage Quantitative

ValueCapable Suppl ers:

¥N one ¥Fe w ¥Ma ny

Architecture: ¥In eg a ¥ Modula

Possible Decisions: ¥In source ¥Ou tsource ¥P artner/Acquire ¥P artial Insource ¥P artial Outsource ¥I nvest ¥S pin Off ¥D l li¥Develop SSuppliers

Engine AEVA PBIT

Revenue

Engines −. EVAEVA

AS

-IS

BIC NOPAT

AS

-IS

BIC

AS-IS BMK COGS

AS

-IS

BIC

AS

-IS

BIC

Engine BEVA

GMPT EVA

.

AS

-IS

BIC Taxes

Quantitative Model. W kiWorking Quantitative ModelCapital AS-IS . BMK CapitalNet AssetsCharge

+. (Financial)X WACC−.Transmissions

AS

-IS

BIC

AS

-IS

BM

KEVA AS-IS Fixed BMK Assets

AS

-IS

BIC

Model developed by GM Powertrain, PRTM, & Clockspeed, Inc.



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64

Value Chain Mappinggpp

Orgganizational Supply Chainpp y Chrysler Eaton

casting supplier

clay supplier

Technology Supply Chain

engines valve lifters casting

manufacturing clay

chemistry g g process

chemistry

Capability ChainSupply Chain Management

Quality assurance NVH engineering R&D

U dUnderllyiing AAssumpti tion: YYou hhave tto ddraw the maps before you can assess their dynamics.



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65

VALUE CHAIN DESIGN ISTHE ULTIMATE CORE COMPETENCYTHE ULTIMATE CORE COMPETENCY

Since all advantages are temporary, the only lasting competency is to continuously build and assemble capabilities chains.

KEY SUB COMPETENCIESKEY SUB-COMPETENCIES: 1. Forecasting the dynamic evolution of market power and market opportunitiespower and market opportunities 2. Anticipating Windows of Opportunity

33. 33-D CD Concurrent Engiineering:t E i Product, Process, Value Chain

Fortune Favors the Prepared Firm CAPABILITIES PROJECTS

Fortune Favors the Prepared Firm



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66 PROCESS FOR

VALUE CHAIN DESIGNVALUE CHAIN DESIGN

1. Benchmark the Fruit Flies 2. Map your Value Chain

Organizational Value Chain -Organizational Value Chain-Technology Value Chain-Competence Chain

3. Dynamic Chain Analysis

4. Identifyy Windows of Opportunitypp 5. Exploit Competency Development Dynamics

with 3-D Concurrent Engineering

HELIXDOUBLE

BOEING

at each node of each chain map y

CAPABILITIES PROJECTS



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67 In-depth Exercise 2: Value Chain AnalysisValue Chain Analysis

Consider these five industries or an industry of your choice:Consider these five industries or an industry of your choice: -Food -Defense aircraft -AutomobilesAutomobiles -Handheld electronic organizers/communicators -Music

At each table, pick ONE industry: What are the key dependency relationships in the value chain? WhWhatt are the opporttunities ffor outtsourciing??th itiWhat are the windows of opportunity in the chain?



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68

“Takeawayys” from the dayy

1.Value Chains are dynamic i d t t t d i-industry structure dynamics

-technology & innovation dynamicst d h l d i -customer and channel dynamics

2.Innovation happens along the value chain d i th l h i d l it lf and in the value chain model itself.

3.All advantage is Temporary 4 St t i S i i k l4. Strategic Sourcing is a key leverage

point for supply chain design. 5 S l Ch i i ti h lti l 5.Supply Chain organizations have multiple

strategic roles to play. www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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69

All Conclusions are Tempporaryy

ClockspeedsClockspeeds are increasing almost everywhereare increasing almost everywhere Value Chains are changing rapidly

value chain dynamics Assessment of

value chain dynamics

RoadmapConstruction



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71


Regulatory Policy

D i

Corporate Strategy

Dynamics Dynamics

Industry Structure DynamicsCustomer


Dynamics DynamicsPreference Dynamics

Dynamics

Business Cycle

Dynamics

Capital Market

D n iInterdependent sectors

d yDynamicsrepresented as

intermeshed gears



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72 A long, long time a go in an industry far awayindustry far away . . .



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73 Sh

are

of RR

even

ue

Freight Railroads vs. Trucks The Dynamics of Industry

Economicsand the Optimal Timing of

DeregulationRailroads

Deregulation

“In the Zone”

Too early Too late

Trucks

1880 1910 1950 1980 2000

Regulation Shocks happen; Regulation If deregulation is reins in reins in Environment constrains SLOW LATE &Environment constrains SLOW, LATE, &

“monopoly” changes; response; PIECEMEAL; then Substitutes deregulation Economic Dislocation;mayarise timing is critical Incumbent

Collapse



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t t

74 Histories: Dynamics of Regulation Regulation RegulationE iShocks Deregulation MistakesRegulation Reins in

“Monopoly”

Regulation Constrains response

Environment Changes;

Substitutes arise

Shocks Happen

Deregulation timing isCritical

Mistakes harm

incumbents,consumers &

taxpayers

RailRoads Rockefellar & Morgan”Robber Barons”

Autos & Highways

Truckingarises

Prices, Exit, Innovation

1958 vs. 1980

Weak rail capabilities;Truckingdominant

Natural Gas

”Natural” Monopoly

Oil Embargo;Fall of I

Gas Demand Explodes

Low pricesinhibit new supply

Long lagfor new sources (1978 v 1989)

Shortages;price swings;LT consumer costs of take or

Banking Bank size limited to limit power

Iran

Inflation in the 1970’s

MoneyMarket Funds

supply

DepositsShrink; Riskier i t t

(1978 v 1989)

1978 vs. 1989

pay contracts

S&L’s died; $160B+ Bailout

Telecom

limit power

AT&T ”natural”

l

Internet & Moore’s Law

Wireless Broadband VOIP

investments

TELRIC pricing;entry & exit;

Wireless, BB, & VOIP less

Wireless success;

ireline TBD monopoly Law VOIP entry & exit; access fees

less constrained than ILECs

wireline TBD



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75 Conceptual Model: The Dynamics ofRegulation and Deregulation Processes

RegulationReins in

Shocks HappenPerception

f M l Reins in “Monopoly”

of Monopoly

Regulationconstrains incumbent responseDeregulation is

TOO EARLY and not well thought out; not well thought out;

Electricity (Calif),CATV (1984)

Deregulation isRAPID, TIMELY, & COMPREHENSIVE;

Airlines(1978)Airlines(1978), Wireless (1993) Costly mistakes;

re-regulation;Try, try, again.y y g

Robust competition;Large jump in

consumer welfare

Environment changes;

Substitutes may arise

Deregulation isSLOW, LATE, &

PIECEMEAL; Railroads(1958 80)Railroads(1958-80),

Gas (1973-93),Banking (1978-99)

Economic Dislocation;Incumbent CollapseCollapse

Full, but Late, Deregulation



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•

76

Collapse of the railroads • number of Class I railroads dropped from 230 Æ 7 between 1907-

1999

• railroad mileage declined from 254 000 Æ 99 000 between 1916-railroad mileage declined from 254,000 Æ 99,000 between 1916 1999

• by the 1970s, every major Northeast railroad filed for bankruptcy

• By the 1970sBy the 1970s, 21% of track-miles were operated by bankrupt • 21% of track miles were operated by bankrupt railroads

• deferred maintenance and delayed capital expenditures amounted to billions of dollars

• rate of accidents due to track or structure defects quadrupled from 1966 to 1976

• BY 1976, 15% of track (50,000 miles) was operated at reduced BY 1976, 15% of track (50,000 miles) was operated at reduced speeds (as slow as 10 miles per hour)

• standing derailments (when a train falls over when not moving) became prevalent

• terminal facilities deteriorated



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77

Deregulation improved performance

market share. From 1996

• Inflation-adjusted rail rates have plunged 60% rates have plunged 60% from 1981-2001

• By 1999, railroads were generating 58% more ton miles than in 1979

• In the 1990s, railroads stopped the erosion of market share From 1996 through 1998, the railroad’s market share actually exceeded 40%

300

250

200

150

100

50

01964 1968 1972 1976 1980 1984 1988 1992 1996 2000

Staggers Act passed October 1980

Class I Railroad Performance: 1964-2001 (1981 = 100)

Revenue Price

Volume

Productivity

Image by MIT OpenCourseWare.



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78 “Gear Model” to support Roadmapping of

Value Chain Dyynamics ((VCD))

Regulatory Policy

Corporate Strategy

Dynamics y Dynamics

Dynamics Industry Structure D i

Customer Technology& Innovation

D i DynamicsPreference Dynamics

Dynamics

Business Cycle

Capital MarketGears differ by size/speed

DynamicsMarket

DynamicsEach has an engine & clutch



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79 Gear Teeth Dynamics

Business cycles

Technology RegulatoryPolicy

Consumer Preferences

CorporateStrategy Clockspeed

Industry/OrganizationStructure

Business Cycles

Structure


RegulatoryPolicy

TechnologyTechnology

Consumer Preferences

CorporateStrategy

Clockspeed



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80Gear Teeth Dynamics

Businesscycles

TechnologyRegulatoryPolicy


ConsumerPreferences

CorporateStrategy Clockspeed

Structure

BusinessCycles

Downturnstriggerdis-integration

downturnsstifleR&D investment

Downturntriggersoutsourcing;Search forsmoothness

Industry/Organization Structure

Integrationbuffersdownturns

Wrap services around commodities

Integration/Disintegration integrality

slows clockspeed

Regulatory Policy

Technologyinnovation

innovation

commodities

Integration/ technology

regulation slows incumbent innovation

innovation

deregulation speeds innovation

Technology

C

Attacks incumbents & supportsintegration

innovationslowdowns drive brand investment

Integration/Disintegration

branding

gyinnov drives clockspeed

innovation can obsolete regulations

ConsumerPreferences

Corporate Strategy

brandingslows disintegration

slows disintegrationproject frequency drives Capab.

fasterinnovationmoderatesdownturns

Strategy

Clockspeed

disintegrationCapability life drives project frequency

lifecustomer power drives clockspeed



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81 Mother Nature strikesThe Cell Phone Supply ChainThe Cell Phone Supply Chain

8:00 pm, Friday 17 March 2000: Lightning Strikes an ASIC semiconductor plant of Philips in Albuquerque, New Mexico, USA 8:10 ppm: Fire is extingguished. Plant will be down for months.

LESSON: RESPONSE SPEED

PhilipsChip Factory

Image by MIT OpenCourseWare

Ericsson Cell Phones

Nokia Cell Phones

Image by MIT OpenCourseWare



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82 Mother Nature strikesThe Cell Phone Supply ChainThe Cell Phone Supply Chain NOKIA ERICSSON

Shipment discrepancies Problem undiscovered for noticed within 3 days. weeks.Philips is pushed hard Philips is pushed hard. Slow chain of command. New supply sources. Slow response.New chip design. Capacity already taken.Global capacity grab.

Capacity already taken. $400M revenue loss. Exits phone manufacture.

LESSON: RESPONSE SPEED

PhilipsChip Factory



Ericsson Cell Phones

Nokia Cell Phones



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83

RFID tags pushthe boundaries of the Edgethe boundaries of the Edge

(Research Assistant: Natalie Klym)

1. DoD wartime needs will prime the pump for RFID technology and applications.

2. Walmart will add to this effect: box & pallet.3. Pharmacies will do the same for item tagging.

RFID tagg Mobile phone chip Microprocessor Mobile phone chip Microprocessor5¢ $20 10B/yr 1B/yr

$80040M/yr

What disruptions will be driven by the explosion of the edge?



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84

VALUE CHAIN MAPPING ExerciseExercise

For each business:

Key elements in the chain? Who has ppower in the chain? Who makes the profits

in the chain? Sources of power & profits Sources of power & profits (technology, brand, etc.)?

Key dynamic processes influencing chain power? influencing chain power?

Locus of innovations? Clockspeed Drivers?

Energygy Automotive Consumer Products Telecoms Financial Services Construction Health Care Food Chemicals



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a s sto s e c

o

85

Moore’s LawTransistors pper chipp

109

8 108

107

106

105

4 104

103

1970 1975 1980 1985 1990 1995 2000 2005 2010 Year

? 80786Pentium

Pro

Pentium80486

80386 80286

8086

8080

1970 1975 1980 1985 1990 1995 2000 2005 2010

8080 4004

Source: Joel Birnbaum, HP, Lecture at APS Centennial, Atlanta, 1999



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16

86

Roadmap for Electronic Devices N b f hi tNumber of chip components

1018

1016 Classical Age Quantum Age

295oK

12

1014

10

4oK

77oK

1010

1012

SIA Roadmap 2010

1995 2000

2005

4 K Quantum State Switch

106

108 Historical Trend CMOS

1995

1980

1990

1 0 1 102

104

2 3

1970

1980

101 100 10-1 10-2 10-3

Feature size (microns) Horst D. Simon



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t

+ Industry Profits Profits + Industry Profits

Electronics ModelModel Equipment Semiconductor

Industry Industry + Value Chain

- +

An Industry 87

R&D + R&D & CapEx

El i Industry R&D

- - + Semiconductor

Equipment - Industry Electronics

++++ + + + -

Electronics Prices +

+ Equipment

Prices Electronics Industry+ Innovation

-Semiconductor

W ld

Electronics Semiconductor ElectronicsEquipment + Industry ++

Industry +IndustryVolumes

© C. Fine, MIT

Volumes+ Volumes

- + -+ Equipment

Productivity WorldProductivity +GDP Applications CapitalDemand & Labor(e.g., Toys, ProductivityAutomotive) - - Transistor +

PricesPrices W f F bWafer Fab + Productivity

- (Trans/month/$) Transistor

Costs ---www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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88 The Outsourcing Trap: A Novel of Four Families

• Chinese Entrepreneur: (e.g., Morris Chang/Terry Gou) – “Benevolent Father:” Chinese coexistence; Henry Ford; HongSing Benevolent Father: Chinese coexistence; Henry Ford; HongSing

• Ultimately brokers cooperation

• Warrior Daughter: Chinese domination; aggressive growth

• Defense contractor: Three Generations – Grandfather (England), Father (USA), Grandson (affair w/Chinese daughter) – Makes avionics systems; lobbies senator; Outsource to HongSing – losing commercial business to Chinese

• 3rd tier supplier: illegal outsourcing of circuit board – Tells senators: “you made me do this”

• Navy Pilot: Crash, Investigation, SC education, “Columbo” – Visits, Toyota, Dell, Zara & aircraft supply chain

• Pilot’s sister: MIT grad; laid off; discovers entrepreneurship • Pilot’s wife: Policy analyst for Senator; • Pilot’s son: outsources homework; outsource capacity, not knowledge; p y, g

• Pilot’s daughter: business student; Zara shopper

• U.S. Senator: Loses son in crash, orders investigation U.S. Senator: Loses son in crash, orders investigation – Pork to military contractors; but cost pressures as well – How to keep good jobs in USA? – Campaign contributions from Americans & Chinese – “Caused” the death of his son – Ultimately works on collaboration with Chinese CEO & Gov’t



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89

All Conclusions are Tempporaryy

ClockspeedsClockspeeds are increasing almost everywhereare increasing almost everywhere Value Chains are changing rapidly

Assessment of value chain dynamicsvalue chain dynamics

Supply Chain StrategyDevelopment



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15.769 Operations StrategyFall 2010




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http://ocw.mit.edu


1

Boeing 787

• Issues– Strategic design of supply chain: Outsourcing/VI

decisions– Nature of relationships– Limits of outsourcing?

• Discussion– Structure of supply chain– Why did they do this?– What is their strategy?– What happened?– Discussion



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2

Partners Across The Globe Are Bringing The 787 Together

COPYRIGHT © 2008 THE BOEING COMPANY

Wing Tips

Movable Trailing Edge

Tail Fin

Horizontal Stabilizer

KOREA

AUSTRALIA

FREDRICKSON, WASHINGTON

FOGGIA, ITALY

Passenger Entry Doors

AFT Fuselage

Main Landing GearWheel Well

Center Wing Box

Landing Gear

Fixed and MovableLeading Edge

Engines

Cargo/Access Doors

Forward Fuselage

Engine Nacelles

Center Fuselage

Forward Fuselage

Fixed Trailing Edge

Wing

THE COMPANIES

FRANCE

CHARLESTON, S.C.

GLOUCESTER, UK

NAGOYA, JAPAN

NAGOYA, JAPAN

TULSA, OKLAHOMA

GE-EVENDALE, OHIOROLLS-ROYCE-DERBY, UK

Wing/Body FairingLanding Gear DoorsWINNIPEG, CANADA

SWEDEN

WICHITA, KANSAS

NAGOYA, JAPAN

GROTTAGLIE, ITALY

CHULA VISTA, CA

NAGOYA, JAPAN

NAGOYA, JAPAN

US CANADA AUSTRALIA JAPAN KOREA EUROPE

BOEING

SPIRIT

VOUGHT

GEGOODRICH

BOEINGBOEING

KAWASAKI

MITSUBISHI

FUJI

KAL-ASD MESSIER-DOWTY

ROLLS-ROYCE

LATECOERE

ALENIA

SAABMESSIER-DOWTY

48

47

46

44

43

41




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3

Summary: What factors do we consider in Vertical integration and value chain design

– Strategic

– Market

– Economic

– Product and technology



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4

Strategic Factors

• Do VI/supply chain choices fit strategy?

• Is the operation core?

• Access to capacity

• Scale, competency, and skill match



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5

Market Factors

• Market power and structure (barriers, availability of complementary assets, capital structure)

• Economies of scale

• Market reliability and feasibility of alternatives

• Asset specificity and dependency risk



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6

Economic Factors

• Factor costs and globalization

• Investment costs

• Transaction costs

• Legacy issues



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7

Product and Technology Factors

• Modularity of product architecture

• Technology differentiation

• Intellectual property



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8

Some Historical Notes

• Trends in transaction costs• Successful alternatives such as contracts

and joint ventures• Factors that in general are leading away from

integration– Information technology and e-commerce– Past advantages of tariff, pricing, scale, and oligopolies– Current advantages of focus, risk management, and

economies of scale and scope– Globalization

• BUT, there is some evidence of a fad



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9

Spectrum of Relationships

• Arm’s length

• Modified vendor relationships

• Contracts

• Collaboration

• Equity stakes

• Joint ventures

• Asset ownership

• Full ownership



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Fall 2010




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http://ocw.mit.edu

1

Professor Charles Fine

Massachusetts Institute of Technology

Sloan School of Management

Cambridge, Massachusetts 02142

September 2010

Process Design & Engineering*

Adapted from Michael Hammer*www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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2

Hammer’s Process ConceptPROCESS: an organized group of related tasks that work together to create a result of value

•Some common processes

- order fulfillment

- procurement

- product development

- quality management

cross-functional, outcome-focused

PROCESS

CUSTOMERSRESULTS

end-to-end work

Adapted from M. Hammerwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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3

Order Fulfillment:Mapping the Process & Owners

SalesDept.

FinanceDept.

MaterialsDept.

ProductionControl

Manufac-turing

Warehouse Logistics FinanceDept.

AccountsReceivable

Order

Entry

Credit

Check

Inventory

Allocation

Production

Scheduling

Assembly

Pick &

Pack

Transport.

Planning

Logistics

Shipping Billing Collections

Optimize production schedules vs. Deliver solutions on timewww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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4

Process Orientation

Process: An organized set of related tasks that come together to create a result of value(e.g., order fulfillment process, product development process)

Value-Added Work:Necessary tasks the customer will pay for(e.g., assemble the product, design improved performance, reduce cost)

Non-Value-Added Work:Necessary tasks the customer will NOT pay for(e.g., update inventory records, install MRP, balance the books)

Waste:Unnecessary tasks the customer will NOT pay for(e.g., rework improper assemblies, resolve manufacturing-sales disputes)



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5

Principles of High Performance Process

Design

•A process should be performed by as few people

as possible to minimize handoffs

•Strive for simplicity

non-value-adding work <==> complexity

•Structure in terms of alternatives rather than

exceptions triage keeps the basic flows clean



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6

The Facets of the Process Enterprise

•Essentials•A Model of the Enterprise in Process terms

•Process Owners

•Designs

•Measurement

•Teams

•Leadership

•Enablers•Process literacy

•Integration

•Coaching

•Culture

•Information Technology

•Facilities

•Human Resource Systems

•Management Systems Adapted from M. Hammerwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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7

Cisco’s Processes

Research to

concept

Concept to commit

Design to

prototype

Validate to

ramp up

Monitor to improve

Improve to EOL

Research to

market

identification

Market

identification

to plan

Campaign to lead

Lead to order

Account strategy

to relationship

Forecast to

demand

Demand to Plan

Manage to Buy

Plan to Build

Ship to Receive

Commit to deliver

service

Quote to order

entry

Order validation to

commitment

Delivery to revenue

recognition

Invoice to cash

Contract to

renewal

Issue detection

to problem

identification

Develop

solution to

resolution

Return to

replace

Closed loop

feedback

Resource managementFinancial mgmt

Fixed assets mgmt

Hire to develop/develop to retire

Vendor/Partner mgmt

Other

Business management Strategy and planning / Acquisitions

Brand / Identity mgmt

Knowledge mgmt/Intellectual Capital

Customer feedback

Metrics Review

Other

Idea to

Offering

(Pdt Dev)

Market to

Order

(Sales)

Quote to

Cash (Order

Fulfillment)

Forecast to

Delivery

(Mfg Ops)

Issue to

Resolution

(Qual Imp)

SUPPORT THE BUSINESS



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8

Recognizing a Process Enterprise• Teams are the norm

as opposed to an occasional exception

• Workers are professionals with broad roles,

responsibility, and decision-making authority

• Measurement is taken seriously

on an end-to-end basis

• Supervisors act as coaches

developing people but not managing their work

• Structure revolves around processes w/ process owners

• Teams are supported by the

-infrastructure: facilities & systems, and

-culture: customer orientation, sharing,

accountability, disciplineAdapted from M. Hammerwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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9

• Maintain the customer's perspective (create process metrics to support customer view)

• Seek out process leverage points

(what would make a very big difference --pro or con?)

• Increase the value added

(reengineer the product as well as the process)

• "Is it worth it?”

(sensitivity to tradeoff)

• Always ask "why?”

(what's the real purpose? --goal vs. mechanism)

• Keep things simple

(“complexity is the work of the devil”)

Process Design Mindset

Adapted from

M. Hammerwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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10

Reengineering Principles1. Organize around outcomes, not tasks

2. Have those who use the output of a process perform the process

3. Subsume information-processing work into the real work that produces the information

4. Treat geographically dispersed resources as though they were centralized

5. Link parallel activities instead of integrating their results

6. Put the decision point where the work is performed, and build control into the process

7. Capture information once and at the sourceRef: M. Hammerwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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11Hammer & Stanton, The Reengineering Revolution, Chapter 2, 1995

Top Ten “Mistakes” in Reengineering (recast as

“do’s”)

1. Understand the reengineering concept(s).

2. Identify your processes.

3. Understand existing processes. Don’t over analyze them.

4. “Serious” and committed leadership is critical.

5. Encourage aggressively creative ideas.

6. Use prototypes and experiments to test ideas.

7. Be fast. Be focused.

8. Everything should be on the table.

9. Implementation should be fast, improvisational, iterative.

10. Tend to the needs of your people.



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12

Worker Professional

Department Resource pool

Supervise Support

Productivity Results

Compensation Earnings

Manager Owner/coach

Executive Leader

Organization chart

From To

Process model

Job Career

Task Process

The

Process

Transition

Operating committee Process council



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Fall 2010




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http://ocw.mit.edu

ITT and Process technology

• Matching the process to strategic needs

• Sources of improvement

• Standardization and automation



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PROCESS TECHNOLOGY: IN SERVICE COMPANIES



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Concept: Match process to life cycle

Introduction Growth Maturity Decline

Ann

ual R

even

ue




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Sources of improvement: ITT example

Process technology generation A

Process technology generation ALearning

Process technology generation B

Process technology generation B

Process technology generation C

Process technology generation C

Cos

t per

uni

t

Cos

t per

uni

t

Total volume produced or delivered Total volume produced or delivered(a) Learning in a centralized process-development context (b) Learning by front-line workers in a facility

Front-line workers learning




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Factors in automation

Business issues such as flexibility and fit with strategy

Operational issues such as repeatability and precision and effect on performance drivers such as time to market (e.g Pharmaceutical)

Regulatory issues

Social issues such as technological environment and workforce implications

Labor costs

Sources of improvement and performance drivers



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Intel and copy exactly

Run multiple sites identically to lead plant

Process parameters

Equipment sets

Maintenance

Training

Specifications/documentation

Started when fab start-up yields lagged behind development fabs



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Copy exactly requires additional structure

Structure

Joint engineering teams and control boards

Senior management review

Problem is problem for entire team

Issues?



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Standardization factors

Product standardization (does it vary by market)

Stability of technology (do new technologies leapfrog or evolve)

Basis for learning (technology or worker based)

Levels of volume (eg cars in Brazil)

Ranges of technologies and impact of labor (can you use manual at low volumes)



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http://ocw.mit.edu

Genentech and capacity strategy



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Other Avastin demand (expected)

Cancer 2005 2010 2015 prob 2005 2010 2015

lung -Front 3.75 22.5 22.5 0.38 1.425 8.55 8.55

Other 0.7 5.25 5.25 0.25 0.175 1.3125 1.3125

Breast-

Front 42 42 0.38 0 15.96 15.96

other 12 12 0.5 0 6 6

Kidney-

Front 5.4 5.4 0.5 0 2.7 2.7

Other 2.7 2.7 0.25 0 0.675 0.675

Cancer Patients Patients using Avastin



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Other Avastin demand

Panc- F 4.8 4.8 0.25 0 1.2 1.2

Other 2.4 2.4 0.5 0 1.2 1.2

Other - F 7.5 15 0.25 0 1.875 3.75

Other 4 7.5 0.25 0 1 1.875

Total patients 1.60 40.47 43.22

Total kg 14.4 364.3 389

Cancer patients Patients using Avastin

2005 2010 2015 orob 2005 2010 2015



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Total demand

colorectal Other

Avastin

Other Total Plus

safety

2005 263 14 1000 1277 1609

2010 322 364 1500 2188 2756

2015 383 389 1850 2622 3303



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How do deal with variability?

Sources? Distribution?

Normal? Skewed?

How to analyze? Percentile?

85%? Cost of underage versus overage (extra capacity)



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Normal distribution is an easy way to determine the appropriate demand levels

84% of area CSL ZUnder curve 84% 1(Z=1) 90% 1.28

95% 1.6499%. 2.33

Calculate required capacity as:Average demand + z * standard deviation of demand



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Concept: Find percentile corresponding to cost balance point (critical fractile or percentile)

Demand correspondingTo critical percentile

Area equal to percentile



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What percentile?

Costs of not meeting demand are extremely large: $5,333,333 per kg!

Costs of extra capacity are large, but two orders of magnitude lower ($51,280 for a ten-year life)

Use newsvendor approach of costs of underage and overage

Co = Cost of overage, or cost of having one too many units of capacity

Cu = Cost of underage, or cost of having one too few units of capacity

Find z such that P(d<z) = Cu/(Co+Cu)

For Genentech, this is 99.05%

The high service level suggests maximum credible demand



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Note that high services greatly increase capacity!

0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1

5000

4500

4000

3500

3000

2500

Exhibit 4-24: Capacity Required as Service Level Increases

Cap

acity

(Uni

ts)

Service Level

Image by MIT OpenCourseWare.www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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Hedging strategy: Option

BuildCCP3

Both approved

Lungapproved

Neitherapproved

Lung,Breast

approved

Option?

Lung,Breast

approved

.

.

.

Largeexpansion

.

.

.



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Summary issues

Long lead times and (often) high financial impact make capacity a strategic priority

Need to address risk of overage versus underage

Variability has a major impact and is not trivial

Perhaps there is a hedging strategywww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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Fall 2010




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http://ocw.mit.edu

Applichem cost and analysis



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Volume DL/lb Indir/lb Tot lab/lb yield A cost wo pack

Mexico 17.2 1.1 1.4 2.6 94.7 92.63

Canada 2.6 4.7 6.0 10.7 91.1 93.25

Venezuala 4.1 3.1 2.7 5.8 91.7 112.31

Frankfurt 38.0 1.2 1.1 2.3 98.9 73.34

Gary 14.0 1.7 2.5 4.2 90.4 89.15

Sunchem 4.0 3.6 4.2 7.8 98.8 149.24

Labor, yield and cost data



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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.0 10.0 20.0 30.0 40.0

Dir

ec

t la

bo

r

Volume

Unit Direct labor vs volume

Series1



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Unit Indir labor vs volume

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0.0 10.0 20.0 30.0 40.0

volume

ind

irect

lab

or

Series1



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Unit Total Labor vs volume

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.0 10.0 20.0 30.0 40.0

volume

tota

l la

bo

r

Series1



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Yield versus volume

89

9091

92

93

9495

96

97

9899

100

0.0 10.0 20.0 30.0 40.0

volume

yie

ld

Series1



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Cumulative cost wo pack vs vol

0

500

1000

1500

2000

2500

3000

0.0 10.0 20.0 30.0 40.0

volume

cu

m c

ost

Series1



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Cumulative Total labor vs vol

0

10

20

30

40

50

60

70

80

90

100

0.0 10.0 20.0 30.0 40.0

volume

To

tal

cu

mu

lati

ve l

ab

or

Series1



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ModelMinimize

subject to (capacity constraints)

(fulfill demand)(produce positive amounts)

61 6

1

,...,kPxj

kkj

61 6

1

,...,jDxk

jkj

1,...,6kj, 0kjx

ckxkjj 1

6

k 1

6

dkjxkjk 1,k j

6

j 1

6

tkjxkjj 1

6

k 1

6

+ Transportation costsdutiesOperating costs +Cost:

xkj - amount in hundreds of pounds of Release ease produced in plant k and shipped to market region j

ck - cost in USD of producing 100 pounds of release ease in plant kdkj - cost of importing 100 pounds of release ease from plant k into market j

(equals full cost in plant k times duty rate of market j)tkj - cost in USD of transporting 100 pounds of release ease from plant k into

market jwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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Modeling operating costs

• Consider 3 alternatives for variable costs1. Use all the information provided as manufacturing costs 2. Use only: Raw material costs +

Direct labor, salary, and fringes +1/2 utilities cost

3. Same as two but no duties• Assume breakdown for NA market (26.4 US, 2.6 Canada, 3.0

Mexico)



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Alternative 1:Consider all manufacturing costs

• Total Costs in USD per hundred pound of product

• Output from the model (hundreds of pounds)

Mexico Canada Venezuela Frankfurt Gary Sunchem

Mexico 95 106 150 115 110 115

Canada 167 97 155 118 108 116

Venezuela 193 126 116 140 132 138

Frankfurt 133 88 128 77 91 95

Gary 175 109 165 123 103 122

Sunchem 260 167 243 183 174 154

Prod

uce

Send to market

Prod

uce

Send to marketMexico Canada Venezuela Frankfurt Gary Sunchem Cap. Used

Mexico 30000 0 0 0 32000 0 28%

Canada 0 26000 0 0 11000 0 100%

Venezuela 0 0 45000 0 0 0 100%

Frankfurt 0 0 115000 200000 36000 119000 100%

Gary 0 0 0 0 185000 0 100%

Sunchem 0 0 0 0 0 0 0%



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Alternative 2: Consider only Raw material, Direct labor, .5 utilities


• Output from the model (hundreds of pounds)

Prod

uce

Send to market

Prod

uce

Send to market


Mexico 80 91 134 100 95 100

Canada 148 78 136 99 89 97

Venezuela 172 105 95 119 111 116

Frankfurt 118 73 112 62 76 79

Gary 144 78 134 92 72 91

Sunchem 216 123 199 139 130 110

Mexico Canada Venezuela Frankfurt Gary Sunchem Cap. Used

Mexico 30000 0 0 0 32000 0 28%

Canada 0 26000 0 0 11000 0 100%

Venezuela 0 0 45000 0 0 0 100%

Frankfurt 0 0 115000 200000 36000 119000 100%

Gary 0 0 0 0 185000 0 100%

Sunchem 0 0 0 0 0 0 0%



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Alternative 3: Consider only Raw material, Direct labor, .5 utilities, but no duties


• Output from the model (million pounds)

Prod

uce

Send to market

Prod

uce

Send to market


Mexico 80 91 87 91 91 94

Canada 89 78 87 90 84 91

Venezuela 102 105 95 108 105 109

Frankfurt 72 73 74 62 73 75

Gary 82 78 83 82 72 85

Sunchem 124 123 122 124 123 110

Mexico Canada Venezuela Frankfurt Gary Sunchem Cap. Used

Mexico 30000 0 77000 0 0 0 49%

Canada 0 26000 0 0 11000 0 100%

Venezuela 0 0 0 0 0 0 0%

Frankfurt 0 0 83000 200000 68000 119000 100%

Gary 0 0 0 0 185000 0 100%

Sunchem 0 0 0 0 0 0 0%



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Alternative 1: All manufacturing costs




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Correlation

Mexico Canada Venezuela Frankfurt Sunchem

Mexico 1

Canada 0.32 1.00

Venezuela -0.83 -0.53 1.00

Frankfurt 0.56 0.59 -0.85 1.00

Sunchem 0.59 0.18 -0.48 0.63 1

Changes withexchange ratescenarios

Real Foreign Exchange Year Variations

-28.2%

5.9%

40.0%

Year

Mexico

Canada

Venezuela

Frankfurt

Gary

Sunchem



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Year-to-year exchange rate changes

Annual Variations Real FX vs USD(cost in mm USD)


1982 142.6% 1.1% -4.9% 2.7% 2.8% 7.9%

1981 0.4% -0.5% -2.8% 17.8% 10.6% 18.2%

1980 -5.1% 4.1% -3.3% 22.4% 16.1% -16.5%

1979 -4.2% -3.0% 3.4% 1.7% 12.8% 29.5%

1978 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Mexico 1981 to 1982: 23.29 to 56.50!



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Impact of exchange rates on allocations and costs: Assume costs changes similar to years following (eg 81 to 82)

Base case is 78.92. Assume 35% of materials and other costs vary

Base Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5

Expected Costs 78.92 72.33 69.39 66.63 66.58 68.03

Utilization

Mexico 28% 100% 100% 100% 100% 100%

Canada 100% 70% 70% 70% 70% 70%

Venezuela 100% 100% 100% 100% 100% 100%

Frankfurt 100% 100% 100% 100% 100% 100%

Gary 100% 21% 21% 21% 21% 21%

Sunchem 0% 0% 0% 0% 0% 0%



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Impact of exchange rates on allocations and costs: Assume costs changes similar to preceding years (eg 82 to 81)

Base Scenario 6 Scenario 7 Scenario 8 Scenario 9 Scenario 10

Expected Costs 78.92 81.13 84.38 87.71 87.96 86.79

Utilization

Mexico 28% 28% 28% 28% 28% 28%

Canada 100% 100% 100% 100% 100% 100%

Venezuela 100% 100% 100% 100% 100% 100%

Frankfurt 100% 100% 100% 100% 100% 100%

Gary 100% 100% 100% 100% 100% 100%

Sunchem 0% 0% 0% 0% 0% 0%



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Courtesy of Arnd Huchzermeier. Used with permission.



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Some summary points• Strategy issues

– Scale and cost issues– Local issues (production, presence)– Plant roles– Flexibility– Technology transfer

• Analysis issues– Use of measures (plant and system)– Role of fixed costs– Optimization or allocation analysis– Analyzing flexibility (e.g. scenario generation)



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Summary Concepts:

Facilities Strategy

and Globalization

Lecture 12



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2

Summary lecture on facilities

strategy and globalization

• Conclusions from ITT, Applichem, etc.

• Strategic and other factors

• An integrated approach

• Impacts of globalization

• New paradigms for the global environment



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3

Issues from BYD and Applichem

• Fit with strategy

• Focus of plants

• Scale and cost

• Standardization and labor costs

• Means of evaluation and plant roles

• Sourcing and allocation models

• Access to R&D



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4

Product/Market-Process Focus

• Mean of focus

– Volume

– Product

– Market

– Process Off OnVolume

Low HighVolume

Low High

Job

Batch

Line

Job

Batch

Line

- Detroit

- Saginaw

- Lima

- Detroit

- Fremont- Lancaster

- Mayesville

Example



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5

Scale Analysis

COST

VOLUME

Technology 2

Technology 1

Subcontract



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6

Volume in millions of units

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

0 2 4 6 8

Cost

per

unit

Consumer Goods Example



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7

Additional logistics

drivers

• Raw material access (e.g.wood products)

• Distributed production for heavy products

• Warehouses for commodities because of

transportation scale

• Customer service requirements



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8

Sources Destinations

Flows

Supply Chain Flow: Simple Two-

Stage LP



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9

Suppliers Plants Distribution Centers

Network for Multi-Location

Supply Chain

Customers



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10

General Manufacturing Models (shared capacity, warehouses or

two stages, fixed costs – details in extra slide)

il

k

ljj

lj

ikl

lkj

A

A

DD

D

y

x = Total flow of l from k to customer j

= Total flow of type l from i to k

= Demand of l at customer j

= Capacity at warehouse k

= Capacity at plant i for product l

l i k j




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11

Some Examples of Strategies

1. Different process steps and scale, significant logistics

– Central stage 1, decentralized stage 2

2. Significant central R&D

– Central plant for at least early life cycle

3. Significant product flexibility

– Decentralized satellite plants for some stages



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12

A General Approach

• Develop a strategy and appropriate means of focus

• Using data, benchmarking, and analysis of technology, develop

scale curves

• Identify major decision choices and service requirements

covering plant and process options

• Do the analysis



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13

Case Study: Worldwide Consumer Goods Manufacturer

• 25 product groups

• 10 production locations

• Variety of product values and weights

• Over capacity

• Lack of focus

• Significant tax issues



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14

Stage 1 Stage 2 Customer

Fixed costsVariable costs

Fixed costsVariable costsTaxes

Why Separate?

• Scale

• Capacity

• Tax laws

• Focus

• Relative technological complexity

Solution:

• Move “light” products to tax havens

• Better focus facilities by product group

Approach

• Cross sectional analysis

• Tax analysis

• Model of variable costs

• Detailed analysis of actual fixed costs

Case Study



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15

Globalization Adds Some

Additional Complexities

• Increase in worldwide exports

• Business level trends

– New technologies such lower-scale, higher-skill level

manufacturing systems including FMS systems

– JIT systems that also underscore the need for sophisticated vendor

infrastructure

– TQM and organizational learning

– Competitive factors that focus on customization, rapid product

development, and quick response

– The breakdown of intercompany barriers



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16

Globalization Complexities (cont’d)

• Macro level trends

– Large, sophisticated overseas markets with local needs

– Non-tariff barriers

– Regionalized trading economies

• Variable factor costs – Static and Dynamic differences

• Longer lead times



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17

Global Strategies Emphasize

Some Additional Factors

• Global product volumes and life cycles

• Decentralized network based on regional presence

• Infrastructure versus cost

– Work force capabilities

– Vendors

– Transportation and communication

• Extra plants and capacity to build flexibility for exchange rate

risks

• Flexibility in short, medium, and long term



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18

Exchange Rate Model

400

410

420

430

440

450

460

0 100 200 300 400

Total Capacity

Co

st

One

Two

Three

Four

Five

# of plants



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19

Facilities Strategy Given Uncertainty (adapted from Huchzermeir and Cohen)

A

B

Alternative Facilities

Configurations

N

Alternative Exchange Rate& Factor CostDistributions

Supply Chain Network Model Outcome for Each Combination

Expected Outcomes

A

B

N

K

BestConfiguration for Current Exchange Rate and Factor Costs

SwitchingCosts



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20 Courtesy of Arnd Huchzermeier. Used with permission.www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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21

Stage 1:

Business and

Operations Strategy

and Plant Charters

Strengths

Global

Market

Infrastructural

Requirements

Logistics

Costs

Internal

Constraints

Supplier

Industries

Political and

Market Issues

Factor

Costs

Cross-Sectional

Data

Stage 4:

Location and

Process Options

Stage 5:

Modeling

Stage 2:

Multiple-Technology

Scale Curves

Stage 3:

Major Network

Options

Competitive

Environment

Process

Technologies

Market Presence

and Capabilities

Five-Stage Approach to

Strategy Development



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22

Summary

• Methods for analyzing focus, scale flow, etc.

• Impact of new markets and technologies

• Global product design and flow patterns

• Flexibility

• Factor costs

• Other things we need to consider in more detail

– Outsourcing and offshoring questions in globalization

– Longer lead times



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23

For those of you interested

in details, formulation for general case

kjkjlkj

lkjikl

ljlkj

kllkj

ilikl

zzkx

xy

Dx

Afx

Ay

lj

i j

k

lj

k

,

,

where f is the unit usage of product l

is zero or one, forcing constraint

Could also have shared cap at plants. With no warehouses, define

plant variables to go to customers directly. Can add another level for

sourcing or two stages of plants.www.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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Fall 2010




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New Balance summary

• New Balance strategy and example of

integration and fit

• Differentiating by operations in a

commodity

• Competing on availability – tradeoffs with

cost

• Strategic implications of JIT and lean

operations



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New Balance strategy

• Performance and fit (availability)

• Role of workforce

• Focus on retailer

• Process flexibility

• Process proximity

• Tradeoff of manufacturing cost and

inventory



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Domestic Manufacturing

Components

4.5 weeksFG

6.4 million prs

2.5 plus

days9 weeks



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Planning and materials (and in particular lean)

are crucial strategically for two reasons

• They can fulfill specific goals (eg.

availability and responsiveness)

• They can be the focus of performance in a

specific area (e.g. JIT can be the basis of

performance goals)



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Planning for responsiveness

• Small batch sizes

• Capacity (design and production)

• Inventory positioning (postponement)

• Proximity



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Why is JIT still relevant

Amount worked on plus

Buffer is fixed

Empty cart signals

New orderwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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Why is JIT (and lean) still

relevant?• It is more than just a planning or control system

• It is a complete system of manufacturing management and has changed the basis of competition

• It affects a large number of strategic measures (quality, waste, turnover, productivity)

• It can be the basis of a change in strategy or focus on a key goal

• The historical record is clear (even today)

• The historical record relating inventory turns and cost is particularly startling.



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But what is required?

• Leveling and predictability

• Rationalization of inventory locations

• Teamwork and synchronization

• Proximity

• Focusing on flow and not inventory

• Sharing benefits and improving entire

supply chain, not making it adversarial



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The strategic impact of JIT:How does inventory affect efficiency?

+

+

++

+ +

+ ++ + + + ++ ++

++

++

+

+ +++++++

0

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16W

IP/S

ales

rat

io

Year64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96

GM Ford Chrysler Toyota Nissan Honda + Mazda

Daihatsu Fuji (Subaru) Isuzu Suzuki



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As inventory decreases, efficiency goes

up significantly

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Est

imat

ed te

chni

cal e

ffic

ienc

y re

lativ

e to

fron

tier

Year

+

+ +

+ +

++ + +

+

+

+

+

++

+ +

++

66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96

GM Ford Chrysler

+

Toyota Nissan Honda + Mazda

++

++

++

Daihatsu Fuji Isuzu Suzuki

GM

Toyota



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2© 2009 MIT Sloan School of Management

The articles suggest a number of

questions

• What do recent trends suggest for global strategies (e.g changes

in Chinese sourcing)?

• What are strategies for competing in a developed country? When

should companies offshore?

• Can a company offshore (and or outsource) completely?

• How important are operations and manufacturing to advanced

economies such as the US?

• What are the long-term macro effects – eg specific industries, US

economy in general?

• In general, what are the implications for strategy?

First, some background



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3

Some trends

• Employment in manufacturing has gone down from 50% to 14%

• A similar shift took place in agriculture.

• Can we (societies such as the U.S.) source goods from China and other locations?

This concept has been referred as the post-industrial economy.



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4

• We did not export or shift out of agriculture - -we automated it

• We linked agriculture to a large number of jobs (e.g., processing, chemicals, and logistics); the same potential for linkageexists in manufacturing

• Services are by-products of an advanced economy

Some problems with the post-industrial

economy



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Services are the largest share of work and

employment in advanced industrial

countries

0

20

40

60

80

100

Low Income

Economies

Middle Income

Economies

Industrial

Market

Economies

Agriculture

Industry

Services

Sources: US Bureau of Labor statistics, 2007 World Development Indicators, The World Bank

Services are the largest share of work and employment

in advanced industrial countries



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6

Other statistics also underscore

the importance of manufacturing

• The US still has nearly 25% of Manufacturing value added

(UNIDO)

• In general, high income economies have 73% of Manufacturing

Value added and 76% of exports (World Bank 2006 data)

© 2008 MIT Sloan School of Managementwww.bsscommunitycollege.in www.bssnewgeneration.in www.bsslifeskillscollege.in


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The other big trend: Offshoring



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Extent of Offshoring

• The extent of offshoring is enormous, particularly in the case of China

– China exported $1.2 trillion in 2009, with $296 billion to U.S. and a surplus of $273 billion (US-China business council)

– Labor cost range from 50 cents and up, with comparable differences for skilled designers and developers (China develops 5 times U.S. engineers – New York Times)

– Walmart alone has a significant part of China’s exports and GDP



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Extent of Offshoring (cont’d)

• Economists are split on how the latest trends affect developed countries:

– Many cite the economics of comparative advantage

– Increased job loss arises from improved productivity (comparison with agriculture)

– Standards rise from importing very-low-cost goods

– Standards may go down for a number of reasons:

• Wages are driven down for skilled workers (software) and could extend to a large expanse of the workforce

• Export prices may decrease due to competition

– Disruptions caused by shifting



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10

Trends in global sourcing

• Increasing costs in China

• Quality issues “Two-thirds said cheap was the chief attribute of

Chinese goods”- The Economist, Feb 21, 2009)

• Product problems, suicides etc.

• Questions about labor availability

• Emergence of new consumer markets in China and the other

BRICS.

What are the implications of these types of trends

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General Patterns of Development

• Compete on factor costs and industrialize rapidly

• Raise the standard of living and transition to higher-value

innovative products

• Move out of competitive commodities

These patterns have occurred in Japan, Taiwan, Korea,

Hong Kong, and Singapore



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So What Will Be the Future?



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And what are the long-term implications?

Country Wage Rate (USD) Wage Rate growth

rate

Year in which

wage rate = US2005 2010

Indonesia 0.58 0.77 5.9% 2134

China 0.93 1.39 8.4% 2067

India 1.45 2.03 7.0% 2076

Mexico 2.5 3.09 4.36% 2164

Thailand 2.9 3.97 6.5% 2066

Czech republic 5.4 10.86 15.0% 2018

South Korea 11.5 23.03 14.9% 2012

United states 23.2 26.76 2.9% NA

Source: Presentation of Jeff Wilke, Amazon.com



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“When to Offshore?

• Let’s consider the two extreme options

– Offshore and chase the lowest factor costs

– Always produce where demand is – a home-based strategy



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“Factor-Cost” Based Strategy

• Offshoring in general suggests a “factor-cost” based strategy

– Factor cost differences are enormous

– The larger supply chain compounds the differences

– Offshore locations are developing capabilities in higher value products

– While the full costs of global outsourcing need to be added, the differences are still often large

– The comparative advantage argument suggests focus on other industries



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When will a home-based strategy

work?



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But can a company outsource

completely?



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Grove’s question: Scalable

manufacturing companies

– And what will be the end game?

– What are the implications for specific industries

– What are the implications for public policy

– And what are the implications for company strategy



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Some final thoughts

• Whether and where to offshore

• When to stay in developed countries

• The dynamics of offshoring

• Importance of manufacturing and operations to both developed

and developing countries



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Flextronics summary

• Use of vertical integration framework for design and concept development

• Evolution – CM to higher value (industry dynamics)

• CM strategies (even in low-margin business)

– Scale

– Differentiation for customers

– Migration

• OEM dilemma (margins versus encroachment)

• Conflict (Driving market versus commodity manufacturing)

• Exclusivity question

• Limits in competing with customers



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1

15.769 wrap-up

Key trends in operations

Summary concepts

Sendoff - top ten lessons for operations

and life



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2

Some key trends in operations

Globalization

Outsourcing and offshoring

More emphasis on supply chain issues

More customization (products, services and

delivery)

Integration of products and services

Dynamics of offshoring



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3

Summary Concepts Fit and consistency (functional level, 3DCE,

and decisions)

Value Chain Dynamics

Value Chain Architecture

Operations as a driver

Competition (different modes and tradeoffs)

Globalization (new factors and new markets,

dynamics, limits)



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1

DON’S AND CHARLIE’S(TOP TEN) LESSONS FOR OPERATIONS AND

LIFE

10. DON’T GET TRAPPED BY TUNNEL VISION AND CONFORMITY.

9. SYSTEMS SHOULD BE CONSISTENT WITH THE NEEDS OF THE GOALS OF THE BUSINESS.

8. UNDERSTAND WHERE PEOPLE ARE COMING FROM IN THEIR VIEWPOINTS.

7. ANALYSIS IS A CRITICAL INPUT TO DECISION-MAKING (BUT AS HAYES STATES, ALSO REMEMBER NOT TO BE TOO RATIONAL)

6. FOSTER A CULTURE OF INNOVATION, INTERACTION AND TEAMWORK AND BE CAREFUL ABOUT CLASS DISTINCTIONS.

5. THERE ARE NO MAGIC SOLUTIONS.

4. DON’T SUFFER FROM THE ALL THINGS TO ALL PEOPLE SYNDROME.

3. IMMERSE YOURSELF IN THE CULTURE OF YOUR HOST.

2. NEVER ATTRIBUTE TO CONSPIRACY THAT WHICH CAN BE EXPLAINED BY INCOMPETENCE.

1. DON’T EVER TAKE ANYTHING TOO SERIOUSLY.



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Fall 2010




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