discussion question

Discussion Question 3 ~ DueTuesday 9/20

Why should a firm never outsource its core capabilities? What happens if the firm is approached by a supplier who is willing to supply good and services based on these core capabilities at a significantly lower price? What should the firm do? (125-150 words)

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Swink_MOAS_4e_Ch02_PPT.pdf

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Chapter 2

Operations and Supply Chain Strategy

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Learning Objectives

2-1 Describe how operations strategy fits within a firm’s overall strategic planning process.

2-2 Describe the need for “fit” between the key customers, value propositions, and operations capabilities—the essential elements that define an operations strategy.

2-3 Describe customer-desired outcomes in terms of order winners, order qualifiers, and order losers.

2-4 Explain what product-related and process-related operational competitive priorities are and how they are related to competitive advantage.

2-5 Explain how strategic performance can be assessed both operationally and financially by using the strategic profit model.

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Learning Objective 2-1

Strategic Planning: Operations Strategy Defined

Operations Strategy:

A set of competitive priorities coupled with supply chain structural and infrastructural design choices intended to create capabilities that support a set of value propositions targeted to address the needs of key customers

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Learning Objective 2-2

Levels of Strategic Planning (1 of 2)

Figure 2-1 Strategic Planning Hierarchy

Environment Corporate Culture

Corporate Strategy

Business Strategies

SBU SBU SBU

Operations Strategy

Finance, Marketing, etc. Strategies

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Learning Objective 2-2

Levels of Strategic Planning (2 of 2)

Strategic Questions

Corporate: What business(es) should we be in?

Business: How do we compete?

Functional: How do we best support the SBU strategy?

• Structure

• Infrastructure

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Learning Objective 2-1

Levels of Strategic Planning: Corporate Strategy

Corporate Strategy: overall mission and target businesses. Typically covers:

• Long time horizon

• Overall values, direction, and goals

• Acquisitions and divestitures

• Performance metrics

• Risk management

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Learning Objective 2-1

Levels of Strategic Planning: Strategic Business Unit

Strategic Business Unit (SBU): semi-independent organization for different products or markets

• Identification of customer or market segments

• Appropriate competitive priorities

• Constrained by corporate strategy

• More detailed

• Shorter time horizon

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Learning Objective 2-1

Business Models Defined

Business Model:

The combination of the choices determining the customers an SBU will target, the value propositions it will offer, and the supply chain/operations management capabilities it will employ.

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Learning Objective 2-1

Business Model Formulation: SWOT Analysis (1 of 3)

SWOT Analysis: Identification of customer or market segments

• Stands for Strengths-Weaknesses-Opportunities- Threats

• A strategic planning technique to help firms identify opportunities where they can develop a sustainable competitive advantage and areas where the firm is significantly at risk.

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Learning Objective 2-1

Business Model Formulation: SWOT Analysis (2 of 3)

Positive: Internal Strengths

• What advantages do we have?

• What do we do better than anyone else?

• What is our unique value proposition?

• What do our customers see as our strengths?

• What are our unique resources?

Negative: Internal Weaknesses

• What could we improve?

• What should we avoid?

• What do our customers see as major weaknesses?

• What factors within our control prevent our ability to develop a competitive advantage?

• What limits our ability to pursue new strategies and opportunities?

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Learning Objective 2-1

Business Model Formulation: SWOT Analysis (3 of 3)

Positive: External Opportunities

• What trends are we well positioned to take advantage of?

• What new technologies are we well positioned to exploit?

• What new markets are opening up?

• What changes in social patterns and population profiles might provide opportunities for us?

Negative: External Threats

• What obstacles do we face?

• What are competitors doing that could adversely affect us?

• Are there any changes in technology that could hurt us?

• What new governmental regulations or standards pose difficulties for us?

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Learning Objective 2-1

Levels of Strategic Planning: Functional Strategy

Functional Strategy: determines how functions support business unit strategies

• Actions that support corporate and SBU strategies

• Management of critical resources

• Key metrics

• Identification of capabilities

• Coordination of activities

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Learning Objective 2-2

Developing an Operations Strategy (1 of 2)

Figure 2-2 The Three Critical Elements of Operations Strategy

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Learning Objective 2-2

Developing an Operations Strategy (2 of 2)

• Key Customer: critical to firm’s success and receives firm’s focus

• Value Proposition: tangible and intangible “benefits” that customers expect from a firm

• Capabilities: what a firm does well; defines types of problems a firm can proficiently address

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Learning Objective 2-3

Assessing Customer Wants and Needs

• Order Winners: Flexibility (for example, a better performance or lower price)

• Order Qualifiers: Affordable price, high level of quality, and reasonable delivery estimates

• Order Losers: Poor performance on product traits causes the loss of either current or future business

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Learning Objective 2-3

Value Proposition

• Statement of product and service features that the firm offers to its customers.

• Needs to be both attractive to customers and different from what is offered by the firm’s competitors.

Characteristics of a well-designed value proposition

1. Features that customers value and will pay for

2. Differentiates from competitors and is difficult to imitate

3. Satisfies financial and strategic firm objectives

4. Reliably delivered using the firm’s capabilities and supply chain

5. Consistent with the firm’s social and core values

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Learning Objective 2-4

Product-Related Competitive Priorities

How customer’s problem is “solved” communicated in terms of the quality, timeliness, and cost of the product “solution.”

• Quality: fitness for consumption in terms of meeting customer needs and desires

• Timeliness: delivery or availability when customer wants

• Cost: expenses incurred in acquiring or using the product

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Learning Objective 2-4

Dimensions of Product-Related Competitive Priorities

Table 2-2 Dimensions of Product-Related Competitive Priorities

Quality Timeliness Cost

Performance (superior attributes)

Reliability (on-time) Purchase (price)

Features (unique attributes) Speed (lead time) Transaction (acquisition costs)

Conformance (no defects) Availability (always in-stock) Maintenance/repair

Reliability (long time to failure)

Operating (cost of consumables)

Durability (long useful life) Salvage/disposal

Aesthetics (appeal)

Service/support (ancillaries/intangibles)

Perceived quality (image)

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Learning Objective 2-4

Competitive Priorities: Quality

Quality: How “fit” is your product according to your customers’ needs?

• Performance

• Features

• Conformance

• Reliability

• Durability

• Aesthetics

• Service/support

• Perceived quality

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Learning Objective 2-4

Competitive Priorities: Timeliness (1 of 2)

Timeliness: Is your product delivered to your customers when they want it?

• Reliability

• Speed

• Availability

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Learning Objective 2-4

Competitive Priorities: Timeliness (2 of 2)

Lead Time: The amount of time between the beginning and the end of a set of activities

• Time to market lead time: total time it takes for a firm to conceive, design, test, produce, and deliver a new or revised product

• Order-to-delivery lead time: time that passes from the instant the customer places an order until the customer receives what they ordered

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Learning Objective 2-4

Competitive Priorities: Cost

Cost: How much does it cost to acquire and use your product?

• Purchase

• Transaction

• Maintenance/repair

• Operating

• Salvage/disposal

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Learning Objective 2-4

Process-Related Competitive Priorities: Innovation and Flexibility

How the firm’s supply chain operations run over time

• Innovation: radical and incremental changes in products and processes

• Flexibility: ability to respond efficiently to changes in products, processes, and competitive environment

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Learning Objective 2-4

Process-Related Competitive Priorities: Risk Management

Risk Management: anticipating and dealing with unexpected events

Sources of supply chain risk:

• Natural events

• Social factors

• Geo-political issues

• Economic issues

• Technological issues

• Safety and security

• Cyber security

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Learning Objective 2-4

Process-Related Competitive Priorities: Sustainability

• Sustainability: maintaining operations that are profitable and nondamaging to society or the environment

• The Triple Bottom Line: corporate performance measurement that focuses on a firm’s overall impact measured in terms of profit, people, and the planet

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Learning Objective 2-4

Activity

Seven Cycles Mission Statement:

“Our mission at Seven Cycles is to enhance your cycling experience through the optimum fit, function, performance, and comfort of your bicycle. We’ve built our business on understanding what you really want and value in a bicycle and delivering precisely that, accompanied by a level of service unparalleled in the industry.”

Based on their mission statement, identify Seven Cycles’ order winners, order qualifiers, and order losers.

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Learning Objective 2-4

Capabilities Defined

• Capabilities: unique and superior abilities based upon the firm’s routines, skills, and processes

• Core Capabilities: enable firm to meet customer expectations and are difficult for competitors to imitate

• Fit: alignment with capabilities, value proposition, and desires of critical customer

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Learning Objective 2-4

Capabilities: Key Areas

Key areas for capability-building investment and development efforts:

• Processes

• Planning systems

• Performance measurements

• Technology

• People and culture

• Supply chain relationships

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Learning Objective 2-4

Operations Strategy Deployment

Strategy Deployment Activities:

• Execution: to carry out plans and initiatives in order to deliver the realized value to customers

• Feedback/Measurement: to assess, communicate, and manage performance in ways that capture lessons learned and focus attention on areas needing improvement

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Learning Objective 2-4

Strategic Areas in Operations Management: Structure

From Table 2-3 Strategic Decision Areas in Operations Management

Decision Domain

OM Issues Considered

Other Functional Groups

Capacity Amount, timing, type Finance, Marketing

Facilities Size, location, specialization

Finance, Marketing

Technology Hardware, software, IS Finance, Engineering, IT, HR

Supply chain network

Supply network, customer network

Finance, Engineering, Marketing, Sales

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Learning Objective 2-4

Strategic Areas in Operations Management: Infrastructure

From Table 2-3 Strategic Decision Areas in Operations Management

Decision Domain

OM Issues Considered

Other Functional Groups

Workforce Skills, training, policies, etc.

Human Resources

Production planning and control

Procedures, workflow, costs, controls, metrics, etc.

Finance, Human Resources

Product/process innovation

Improvements, NPI, intellectual property, etc.

Engineering, Human Resources

Organization and management

Centralization, hierarchy, relationships, metrics, etc.

Human Resources, Marketing

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Learning Objective 2-5

Developing an Operations Strategy

Figure 2-3

Strategic

Profit Model

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Learning Objective 2-5

Strategic Profit Model: Example (1 of 4)

Suppose that the director of marketing has approached you, as a member of the top management team, with a suggestion that appears very attractive. The proposal begins by noting that because demand is down, the firm (and its supply chain) has much unused capacity. Happily, the marketing group has identified a new potential customer segment. Unlike existing customers (who are price sensitive and who buy large quantities of fairly standard products), these new customers will likely order smaller quantities more frequently. The new customers are also likely to want to make last-minute changes to order sizes, due dates, and product mix. Your current operating system is not really set up to accommodate such changes.

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Learning Objective 2-5

Strategic Profit Model: Example (2 of 4)

However, the marketing director feels that the prices these customers are willing to pay will provide gross margins (30 percent, as compared to the 10–15 percent currently being given by existing customers) that should be high enough to offset any operational problems. The chief financial officer has stated that, in order to enter any new market, it must be expected to generate at least a 25 percent return on assets (ROA).

Given the information provided below, would you recommend accepting the marketing director’s proposal?

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Learning Objective 2-5

Strategic Profit Model: Example (3 of 4)

Category Estimated First Year Impact

Comments

Sales $420,000

Cost of Goods Sold $294,000 30% gross margin

Variable Expenses $45,000 Need more for small batch shipping and expediting

Fixed Expenses $40,000 More inspections needed

Inventory $200,000 Need safety stock to ensure timely delivery

Accounts Receivable $120,000 Customers tend to pay on longer cycles

Other Current Assets $0 No change

Fixed Assets $15,000 Need special fixtures and tooling

Example 2-1

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Learning Objective 2-5

Strategic Profit Model: Example (4 of 4)

Figure 2-4 SPM Analysis

for Example 2-1

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OM and SC Strategy Summary

1. Strategic planning happens at multiple levels.

2. Strategic planning begins with the customer.

3. OM strategy brings together critical customers, value propositions, and operations capabilities.

4. Competitive priorities address product and process issues.

5. Future capabilities depend on existing core competencies.

6. Strategy involves multiple functions and SC partners.

7. Must be fit between the elements of #3 above.

8. Strategic assessment tools are needed.

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