Operations Strategy

1. Operations Strategy There’s nothing here to take by storm; to strategy we must conform. Johann Wolfgang von Goethe (Faust,1808)

2. Competitive Strategy • Principle 1 (Value Maximization) The goal of strategy is to maximize the long run NPV of the organization. • It is not a pure NPV defined for shareholders, it also takes into account stake holders (social responsibilities), as well as environmental impact (sustainability). • Competitive strategy (Business Unit Strategy). Relates a company to its environment. Strengths and weakness of the company (the system) to be related to opportunities and threats in the environment • Chooses an attractive competitive position  by offering a high customer value proposition.

3. Competitive Strategy: Environmental Scanning (Opportunities and Threats) • Competitor activities • Complementor activities • Changes in consumer needs and preferences • Technological changes • Economic trends (GNP, unemployment, inflation, interests, taxes, tariffs) • Legal, political, and environmental issues

4. Competitive Strategy: Competing Edges of the System (Strengths and Weaknesses) • Human Resources (cheap labor, skilled labor, etc.) • Technology, Facilities, and Equipment • Financial Resources • Customers • Product and Services • Suppliers (low material cost, reliable suppliers) • Management Practices (low overhead)

5. Competitive Strategy is Followed by Financial, Marketing, and Operations Strategy

6. Organizational Resources • Organization is a bundle of real recourses. • Real Resources • Tangible real resources: human resources (people) and capital resources (property, plant and equipment). • Intangible resources: relationships with suppliers or customers, reputation and brands, technology and know how. • To pay for the real resources, sell pieces of paper; financial resources; securities.

7. Operations Strategy: Resource View 1. How many resources should we invest in? The capacity, in aggregate and per main resources. 2. When should we increase/reduce resources over time? The availability of capacity and the timing of capacity 3. What kinds of resources? HR or CR? The trade-off between capital and human (unsupervised operations). What degree of flexibility? from single-task (hard- targeted towards producing a specific product) to multi-task (flexible- to produce a continuum of products)? 4. Where should the plants be located and what is their roles in the supply chain – each location is responsible for what parts or products. What is the topology connecting these nodes of supply chain? - FedEx: hub-and-spoke, Car companies: tiered or tree. What are the modes of transportation in the network? T? R? A? W? Are the processes standardized or localized; e.g., should Mercedes Benz processes in be similar to the German processes?

8. Operations Strategy: Process View • The process view  how resources perform activities and add value. By starting with inputs (customer demands) and ending with outputs (served customer demands), the process view is compatible with a customer-centric view of the world. • From this customer-centric view, value stream mapping defines value from the perspective of the customer: a value-added activity is an activity that benefits the customer. • The process view: a horizontal view of the organization that cuts through functional silos ( finance, accounting, production, marketing sales, etc). It represents inter-functional relationships as well as the external interfaces with customers and suppliers.

9. Operations Strategy: Process View 1. Sourcing decisions: make or outsource?, supply network (how many suppliers and how to manage them?), vertical integration. 2. Which technologies ? Four types of technology: • Product technology: Is the product designed in modules or as an integral system? Does the design take into account manufacturability and reusability? • Process technology: The transformation process and methods. The physical layout (job shop vs. flow shop) and material (unit load) flow pattern. • Coordination and IT: Centralized vs. distributed planning and control? planning systems (e.g., ERP), communication technology (e.g., Internet, RF).

10. Operations Strategy: Process View • Transportation technology: material handling in the plant and transportation network throughout the supply chain. Also includes how insurance policies are moved between the different processing steps. 3. How do we match demand and supply? Demand planning and forecasting, tactical capacity allocation and revenue management; airlines and hotels. 4. How and when do we improve and innovate in products and processes? R&D, continuous improvement, learning and knowledge management.

11. Values • Values are a third factor that affect what an operation (or an organization) can and cannot do. • Values are the standards by which employees set priorities at every level. Some priorities are programmed into a process but many are not. Ex. whether an order or customer is attractive, whether a suggestion to improve a product or process is attractive, whether an investment is worth making. • As organizations become more complex, consistent values are powerful mechanisms for employees to make independent but consistent decisions. • Values constitute the organization’s culture

12. Operations Strategy: Competency View The competency view characterizes the abilities of the organization's resources, processes, and values. Competencies determine the set of outputs that the operation will be particularly good at providing. 1.Cost, including input costs and resource costs. Is important in low margin markets. 2. Flow time. Responsiveness (short flow time) is important due to changes in customer preferences and technologies. Both Flow time and reliability in flow time (standard deviation). 3. Quality. Quality refers to the degree of excellence of the product and process. It has product dimensions such as performance and features and process dimensions such as durability and reliability (retaining high quality over time). Is a key differentiator in luxury and high precision businesses. 4. Flexibility. Ability to change type and volume of the operations.

13. The Competency View of Operations • Competencies determine the set of outputs that the operation will be particularly good at providing. • A premier management consulting company is good at providing high quality customized advice. • An efficient operation such as Mc­Donald's is good at delivering inexpensive food quickly, but from a standard and limited menu with a well-defined quality level. • Zara is good at quickly delivering a large selection of new designs at a reasonable cost.

14. The Competency View of Operations • Foundations of competencies change over time; they start in resources, gradually migrate to processes, and eventually reside in values. • Most of what gets done in start-up companies is attributable to inputs and resources. Losing a person can be detrimental. • As activities become more recurrent, processes are defined. Alcoa started with low price of electricity, then developed Aluminum smelter processes and exported the processes. • As it becomes clear which business needs should be given highest priority, values emerge. With hundreds of new recruits and departures per year, top management consulting companies remain successful because their processes and values are so strong that project staffing changes have little impact.

15. A Framework For Operations Strategy 1. Organization  Customer value proposition for each market segment? 2. Operations  Prioritize competencies for each market segment? 3. Which resources and processes best provide that competency prioritization? For each targeted customer segment, how the resources (sizing, timing, type, and location) and processes (supply, technology, demand, and innovation management) are configured?

16. A Framework for Operations Strategy Max NPV Competitive Strategy Competencies Operations Strategy Resources (Asset Portfolio) Processes (Activity Network) Sizing How much capacity to invest in? Timing When increase or reduce resources? Type What kinds of resources are best? Location Where should resources be located? Supply When outsource & how manage suppliers? Technology Coordination, product, process transportation Demand How match demand to available supply Innovation How and when to improve and innovate?

17. Focused Strategy, Focused Operations • Focused Strategy: Committing to a limited, congruent set of objectives in terms of demand (product, market) and supply (input, technologies, and volumes). • Aravind Eye Hospital, 100 cataract surgeries a day, operational excellence, 40% gross margin, 70% of patients pay almost nothing, and the hospital does not depend on donations. • A focus process is not limited to a few products. • Focused process: one whose products all fall within a small region of the 4 dimensional product space.

18. Plant Within Plants (PWP) • PWP: The business strategy is diverse. But the entire business is divided into several mini-plants each with focused processes. One PWP may focus on low cost, the other on quick response. • To sustain competitive advantage, a firm must ensure that its competitors are not able to imitate its chosen position. An sculpture not a block. • Supporting the strategic position with multiple mutually reinforcing activities creates a sustainable competitive advantage. It is harder for competitors to imitate an array of interlocked activities.

19. Market Driven, Technology Driven Strategies • This "top-down and outside-in" ensures that operations reflect the intended market position. Market driven strategy creates a customer-driven organization. • In “a bottom-up and inside-out”, the building blocks of strategy are not products and markets, but processes and resources. The value proposition offered to customers seeds in the operational capabilities. The technology driven strategy creates a resource-driven organization.

20. Market Driven, Technology Driven Strategies • Organizations must maintain alignment by adopting both perspectives. In order to satisfy a new customer need, the firm may need to build new competencies, processes, and resources. Those operational capabilities may later be used to invent new products and services that may create new markets. • Honda's abilities and knowledge in high-performance engine technology has been the driving force in deciding which markets to enter and which products to offer.

21. Tailor Operations; Strategic Fit • Tailoring  fitting the operational system to competitive strategy. • Frederick Winslow Taylor (the father of scientific management); there is a "one best way" to configure any operation. • No, the best operations configuration depends on the Strategy + Market. • Strategic Operational Audit Does operations competencies fit with competitive strategy? Where can improvements be made? • Top-down and bottom-up perspectives simultaneously and can be performed in three steps.

22. The Strategic Operational Audit • Understand your customer & your competitive strategy  CVP the current operational system; resources, processes, and competencies.   • Apply the resource & process views (bottom-up)  the value propositions the current competencies can support. Apply the market (top-down) to specify the competencies, the best-aligned processes and resources, needed to execute the current strategy.   • The gaps between the current state and where we should be to ensure strategic alignment. Gap reducing actions to improve strategic alignment. • These actions involve changing the competitive strategy and/ or changing the operations strategy.

23. Strategic Operational Audit Deliverable Value Propositions Value Proposition Strategy Gap? Market view Resource view Competencies Needed Competencies Competency Gap? Resources & Processes Needed Resources & Processes Resource & Process Gap?

24. Zara: Resource View • High vertical integration  ownership allows tight coordination. A design center, some manufacturing facilities (also outsources locally), two major DCs, and 90% of 724 retail stores. • The design capacity of 11K new styles/yr by over 200 professionals is in line with the timely fashion (design to rack of 3 weeks). • Owns two central warehouses in Spain. The recent 123,000 m2 DC has a capacity of 80K garments/hr. Direct access to highway and RR and proximity to airport favors fast handling of international cargo.

25. Zara: Resource View • Vertical integration  high ratio of tangible fixed assets to sales of 34%. The average capacity utilization is 50%, many facilities are single shift. • The supply network centered in Spain (25% from the rest of Europe and 25% from the rest of the world). The proximity of suppliers  inputs are received quickly  fast speed-to-market. Local facilities are used to produce the products with most demand uncertainty and time-sensitivity, off-shoring for basic products with more predictable demands. Industries exercising (fast response times + high demand volatility) experience low capacity utilization

26. Zara: Process View; Technology • Postpone the dyeing of fabric: almost half the raw materials are purchased undyed. • Short lead time for product with high variability in their demand. Local manufacturing processes have short setup times and run in small batches, while off­shore manufacturing of more predictable demand can have longer lead times. • Distribution is highly centralized to reduce the number of stocking points and the associated handling time and so that one store's upside demand fluctuations can offset another's downside.

27. Zara: Process view; Technology • The hub and spoke system uses the appropriate transportation mode (truck, RR, or air) depending on the store location and the time-sensitivity. Frequent deliveries with short lead times. It maximizes the flexibility of inputs and increases responsiveness while controlling working capital (inventory). • IT enables the daily information flow between store managers (requesting products and providing customer feed­back) and design and production (sharing information on upcoming products).

28. Zara: Process View; Demand • Intentionally short style campaigns that are likely to run out of stock create a scarcity image. Customers visit stores frequently and are likely to buy what is available at that moment because that particular product may no longer be available next time. The combination of short campaigns and limited inventory reduces markdowns and leftovers.

29. Zara: Process View; Innovation • Fast new product design is a key enabler of Zara's strategy. Ideas inspired by urban hot spots, fashion shows, and store customers are transmitted to the creative teams. Design style platforms are created ahead of the season and are modified just before production based on feedback from retailers regarding the most recent fashion. This postponement of design styling requires fast and efficient information transfer.

30. Zara: Process View; Innovation • A firm believer that people, cultures and generations share a special sensitivity for fashion. Standardizes a majority of its designs but allows some adjustments to local taste. Zara originally insisted on a standard set of sizes for all countries but had to add smaller sizes for Japan and larger ones for the U.K. and Ger. • Has tailored the 8 drivers of its operations strategy to its fast-fashion, cheap-chic value proposition.

31. Should Every Retailer Adopt the Zara Model? • Zara's operational system is not a panacea. Sweden's Hennes & Mauritz AB competes with Zara. It produces much fewer new styles per year with a much slower design-to-rack time of 16 weeks. •  Without the stringent speed requirement, H&M has more leeway in configuring its operations; more outsourcing and higher capacity utilizations resulting in much lower fixed capital. The lower safety capacity and responsiveness is replaced by higher safety stock to buffer demand uncertainty.

32. Should every retailer adopt the Zara model? • The Zara model is not used in other industries such as toy, cell phone, or auto manufacturing. Zara model requires: 1. High customer willingness to pay for speed-to-market. 2. Short product life cycles with high demand uncertainty. 3. Low cost of excess capacity with low importance of scale economies. 4. Low cost of stockouts and distribution relative to inventory holding. • Great operations strategies are tailored to each company's competitive strategy. While companies may share some elements, a complete tailored operations system is unique