Operations Management Productivity and Operations Strategy Lecture 2

Globalization and Firm Strategy

• Globalization's role in a firm's success and its connection to strategy.
• Operations management strategy should support the firm's competitive strategy.

Shift from Traditional Manufacturing to Supply Chain Management

• Transition from traditional manufacturing to supply chain management.
• Reasons behind this shift.

Ford's Vertical Integration (1927)

• Ford company as a vertically integrated factory.
• Owning and managing the entire supply chain, from suppliers to retailers.
• Example: Netflix moving towards vertical integration by creating original content.
• Ford's production units in different cities producing various components.
• Components sent to Ford assembly unit via Ford transportation.
• Distribution through Ford dealers.
• Ford owned and managed all processes, transportation, and distribution.

Shift to Delegation and Outsourcing

• Increased market competition led companies like Ford to delegate production.
• Delegating to experts (e.g., Michelin for tires).
• Focus on core competencies.
• Delegation and outsourcing defined as supply chain management.

Benefits of Supply Chain Management

• Advanced skills: Utilizing contract manufacturer or supplier skills.
• Focusing on core competencies.
• Cost savings: No need to invest in facilities or equipment.
• Suppliers having access to low-cost, high-quality raw materials.

Risks of Outsourcing

• Lack of control: Losing control over product production.
• Intellectual property loss: Divulging formulas or technologies to suppliers.
• Apple keeping design in-house.
• Loss of flexibility: Suppliers working with multiple companies, leading to uncertain lead times.

Global Operations

• Success of firms dependent on global operations.
• Manufacturers finding the best suppliers worldwide.

Boeing's Global Strategy

• Aircraft market being global.
• Boeing outsourcing production and design.
• Boeing working with General Electric and Rolls Royce for efficient engines.
• Engines designed and produced by Rolls Royce in England.
• Upper center fuselage and horizontal stabilizer by Alenia in Italy.
• Collaboration with Japanese, Chinese, and Swedish companies too.
• Aerospace industry's supply relationships are more stable than electronics.
• Fewer ethical issues compared to competitive products like smartphones (e.g., Apple vs. Samsung).

Globalization Examples

• Globalization means domestic production and exporting are no longer viable for profitability.
• Investing in globalization strategies is crucial.
• Zara's strategies for being competitive: responsive to trends, affordable prices.
• Sony working with experts in Thailand and Malaysia.
• Volvo producing S40 on a shared platform in Belgium with Mazda and Ford.

Zara's Strategy Explained

• Responsive to changing trends with affordable prices.
• Most production occurs after sales season starts.
• Enables stopping production of less demanded items.
• Designs provided in Spain and Portugal stores.
• After a few weeks, understanding customer tastes and delegating predictable demand to Asian suppliers.
• Design by Zara, labor-intensive activities outsourced to Asia.
• Central and efficient distribution system.
• 24-hour delivery for European stores, 48 hours for American and Asian stores.

Zara's Efficient Distribution System

• Outsourcing production to less costly locations in Asia.
• Low inventory levels in stores.
• Frequent shipping (at least twice a week) to avoid being out of stock.
• Centralized distribution system: knowing what's going on in different stores.
• Using all modes of transportation: trucks, trains, and airplanes.
• Loading trucks in the evening and dispatching at night.

Growth of World Trade

• Increasing over time since the 1960s.

Implications of Globalization

• Contributes efficiency and adds value.
• Complicates operations manager's job.
• Difficult to manage product quality produced by a third party.
• Risk of intellectual property loss.
• Loss of flexibility.

Reasons for Globalization

• Reasons vary from tangible to intangible.
• Six main reasons for globalization according to the textbook:
  • Reducing costs
  • Improving the supply chain
  • Providing better goods and services
  • Understanding markets better
  • Learning from competitors and improving operations
  • Attracting and retaining global talent

Tangible Reasons to Globalize

• Reducing Costs
  • No need to invest in production equipment.
  • Benefit from outsourcing to low-wage countries.
  • Different carbon emission costs based on government regulations.
• Improving the Supply Chain
  • Locating facilities in countries with unique resources.
  • Metal companies relocating to mining regions.
  • Auto styling studios migrating to South California.
  • Perfume essence manufacturers in Grasse, France.
• Providing Better Goods and Services
  • Increase customer satisfaction.
  • Reduce response and delivery time.
  • Coca Cola opening bottling factories in every market.

Intangible Reasons to Globalize

• Understanding Markets
  • Interaction with foreign customers and suppliers.
  • Learning about opportunities for new products and services.
  • Suppliers having a better idea about new markets.
  • Selling older product versions in developing countries (e.g., computers in Africa).
• Learning to Improve Operations
  • Learning from competitors.
  • Apple asking Chinese suppliers for production input.
• Attracting and Retaining Global Talent
  • Offering more employment opportunities.

Competitive Advantage and Strategy

• Firms need to be competitive in the global market.
• Mission, strategy, and operations management.

Examples

• Mercedes Benz mission: to be the best.
• Competitive strategy: producing high-quality products.
• Dell mission: to be the most successful computer company.
• Competitive strategy: offering a wide variety of products.

Defining Strategy

• Long term plan to achieve the mission and remain competitive.

Operations Strategy

• Aligned to firm's competitive strategy.
• Long term plans related to products, processes, cost, and delivery times.
• Mercedes Benz operations strategy: reliability.
• Toyota's strategy: low cost through lean operations.
• Dell's strategy: flexibility and responsiveness.

Competitive Capabilities

• Differentiation
• Cost leadership
• Responsiveness

Differentiation Examples

• Apple: innovative design.
• Dell: broad product line.
• Caterpillar: after-sales services.
• Hard Rock Cafe: unique experience.

Cost Leadership Examples

• Canada Post vs. FedEx: affordability.
• Porter Airlines: effective capacity use.
• Toyota: inventory management and just-in-time production.

Responsiveness Examples

• Flexibility (HP)
• Reliability and on-time delivery (FedEx)
• Quickness and development speed (Apple, Pizza Hut)
• Variety (Dell, Amazon.com)

Measuring Productivity

• Assessing how good the system is working over time.
• Measuring productivity of the system.
• Efficiency in transforming inputs to outputs.

Productivity and Profit

• Productivity improvement leads to greater profits.
• Operations managers seek to increase productivity.

Productivity Formula

• Basic productivity formula: $\text{Outputs} / \text{Inputs}$
• Improvement by reducing inputs or increasing output.
• Starbucks improving productivity: game of seconds.
• Hiring analysts to save time and improve responsiveness.
• Stopping signatures, changing ice scoop size, new espresso machines.
• Increased annual revenue per store by $200,000.

Defining Productivity

• Productivity: $\frac{\text{Value of outputs (services or products)}}{\text{Value of input resources}}$

Productivity Growth

• Productivity growth: $\frac{\text{Current productivity} - \text{Previous productivity}}{\text{Previous productivity}}$

Types of Productivity Measures

• Single factor productivity
• Total productivity

Single Factor Productivity

• Labor hours per ton of steel.
• Capital invested.
• Energy consumed.
• Example: 1,000 tons produced with 250 labor hours.
• Labor productivity: $\frac{1000}{250} = 4$ units per labor hour.

Multi Factor Productivity

• Considering all inputs with monetary units.
• Example: 1,000 tons of steel, labor, raw materials, electricity, capital, etc.

Summary of Productivity Measurements

• Partial measurements: Specific input like labor, machinery, capital, or energy.
• Multi factor measurements: Labor and machine, labor and capital, etc.
• Total productivity: Value of goods/services divided by value of all inputs.

Productivity Examples

Collins Title Example

• Evaluating labor and multi factor productivity.
• Staff of four, 8 hours per day, $640 per day.
• Overhead expense: $400 per day.
• Processes and closes 8 titles per day.
• New system: 14 titles per day, overhead expenses $800 per day.
• Labor productivity old system: $\frac{8}{32} = 0.25$ titles per labor hour.
• Labor productivity new system: $\frac{14}{32} = 0.43$ titles per labor hour.
• Multi factor productivity old system: $\frac{8}{640 + 400} = 0.0077$ titles per dollar.
• Multi factor productivity new system: $\frac{14}{640 + 800} = 0.0097$ titles per dollar.
• Increase in labor productivity: 75%.
• Increase in multi factor productivity: 26%.

Modern Lumber Inc Example

• Producing apple crates, 240 crates per 100 logs.
• Each log requires 3 labor hours.
• Hiring a buyer to increase production.
• New production: 260 crates per 100 logs, additional 8 labor hours.
• Current production: $\frac{240}{100 \times 3} = 0.8$
  $\frac{\text{Crates}}{\text{Labor Hour}}$
• Additional buyer increase production to 260 increase to 8 hours
• Hire a professional buyer: if this is the case he can increase his production to 2.60 crates per 100 luxe, however, his labor hours will increase by 8 hours per day. Now the question is would be the impact by hiring a professional buyer on productivity? major increase per labour hour if the buyer is hired
• New System after buying: $\frac{260}{(100 \times 3) + 8} = 0.844$
  $\frac{\text{Crates}}{\text{Labor Hour}}$
• Increased % in productivity = $\frac{0.844 - 0.8}{0.8}$
  $\frac{\text{Crates}}{\text{Labor Hour}}$
• Percentage increase 5%