2.1 Operations strategy
The focus of operations strategy in an organization is to understand and achieve the ability to consistently deliver products and services to meet customer needs and the business’s overall plans. Objectives typically focus on the areas of quality, cost, flexibility, and speed. Operations strategy corresponds to the overall business strategy, especially as it relates to meeting customer needs and the market direction of procurement, conversion, and delivery of products and services. Operations strategy must be consistent with the firm’s functional strategies, including those of marketing and finance.
2.1.1 Transformation processes
Manufacturing, service, and supply chain transformation processes use resources to convert inputs into some desired output. Inputs can be a raw material, a customer, or a finished product from another system. Transformation processes include, but are not limited to, the following categories.
Physical. Manufacturing processes, for example, are where physical material is converted to finished products.
Location. Transportation of a product is an example of a location transformation. These are common in supply chains and also in factories and warehouses.
Exchange. An example is found in retail, where a customer exchanges money for an item.
Storage and redistribution. These are processes where an item is stored and made available for immediate delivery, for example, in a warehouse or distribution center.
Physiological. An example of this type of transformation process is a hospital, where sick patients are the inputs and healthy patients are the desired outputs.
Informational. Informational processes are where data is stored, transferred, analyzed, and made available for various purposes.
2.1.2 Competitive priorities
Operational competitive priorities often are devised to create advantages in the marketplace. These priorities are driven by business plan objectives and customer preferences of products and services. Typically the top drivers include high quality, low cost, and high customer service through convenience, speed, and flexibility.
2.1.3 Order winners and order qualifiers
These are product or service highlights seen as valuable by the customer. Order qualifiers are screening criteria that must be fulfilled before a firm’s products or services can even be considered as possible candidates for purchase. Order winners are unique characteristics or combinations of characteristics that result in a competitive advantage and obtaining (winning) an order from the customer.
2.1.4 Activity-system maps
Activity-system maps are diagrams showing how a company’s strategy is delivered through a set of tailored activities. They help the major operational processes of the firm align with operational priorities. Competitive advantage stems from the way the firm’s activities reinforce one another.
2.1.5 Operations alignment with corporate strategy and the supply chain
Execution of operations strategy is critical to the execution of business goals. The business plan typically is focused on financial objectives, market and product objectives, technology, and growth. Operations must align these goals with processes such as speed, flexibility, cost and quality. Typically, trade-offs must be considered, such as speed of delivery versus cost.
2.1.6 Economies of scale/economies of scope
Large companies can take advantage of economies of scale due to their ability to spread significant investments in resources, such as plants and equipment, over larger volumes of finished goods and services, lowering the incremental portion of cost over higher-volume production. When higher volumes are not necessarily the same items but share common resources, combined production creates economies of scope. For example, larger organizations often have more negotiating power with their suppliers, and third-party logistics organizations often have better success negotiating freight costs than smaller manufacturers.
2.1.7 Considerations in adding capacity
Important factors to consider when adding capacity include maintaining system balance, frequency of capacity additions, and the use of external capacity. In a perfectly balanced system, the output of each stage matches the input of the next stage, in such areas as movement of material in a plant, flows from suppliers to plants through distribution centers to customers, and service calls processing from a call center. In practice, it often is difficult to maintain this system balance, and sometimes it is even undesirable. Ways of dealing with imbalance include scheduling temporary downtime, scheduling overtime, leasing equipment, and subcontracting.
When dealing with the frequency of capacity additions, it is important to consider the costs of large versus small chunks of capacity, and the cost of excess capacity that is carried as overhead until used.
2.1.8 Understanding constraints
Constraints management centers on understanding the weakest link in the process flow—typically the link with the least capacity or the bottleneck operation. This relates to both internal processes and the supply chain. From a strategy standpoint, constraints often impact the ability to reach customer service goals, pricing targets, and quality expectations.
2.1.9 Sustainability, ethics, and social responsibility
Business requires trust and integrity between partners in the supply chain. Sustainability relates to the degree of concern for the environment, including use of renewable resources and minimization of harmful waste.
Ethics relates to alignment with legal and moral codes of conduct in all activities of the firm. This can be particularly challenging in a global company, as legal and moral codes may differ significantly across cultures and geographies. In some cases there may be prescribed processes to help ensure ethical dealings, such as those embodied in the Sarbanes-Oxley act of 2002 in the United States.
Social responsibility relates to the areas of sustainability and ethics as they pertain to the communities where the organization does business. It further extends into how the organization supports its communities and encourages its workers to follow suit. (See section 2.3.)
2.1.10 Operations metrics
Operations metrics are a quantitative indicator for process change, showing improving, maintaining, or declining performance. There are two levels of measures within operations functions: top-level key performance indicators that indicate if a process is starting to get out of control; and diagnostic measures used for problem solving, process improvement, and data analysis.
.1 Balanced scorecard
The balanced scorecard theory drives action from strategy by developing specific areas of focus and feedback. Operations controls the flow of inputs and outputs of an organization and is involved in the scorecard through its impact on financial, customer, and internal business processes. Specific aspects of the balanced scorecard theory include the following.
Revenue growth and mix. Operations management has a major impact on the growth of the firm through capacity considerations and new product and service introduction.
Cost reduction and productivity. Operations often owns the biggest share of cost reduction in the business. Cost of sales—made up of material, labor, and overhead—typically represents a large component of costs in the organization.
Asset utilization and investment strategy. Operations typically controls the major capital investments in the organization, including plants, equipment, and inventory.
Benchmarking is the act of comparing one operation or process with another. This can be performed against similar operations but can be especially effective if done against best-in-class operations, regardless of the market. For example, benchmarking quality at a tool manufacturer against aerospace standards, or benchmarking product introduction against the electronics market.
.3 Best practices
Best practices are techniques, methods, processes, activities, or other actions in conducting business that are most effective at delivering a particular outcome. By seeking out relevant best practices and driving improvements against these examples, gains typically can be made more quickly.