Heizer chapter 2
Boeing
Technological advancements
The electronic monitoring system that allows the airplane to report maintenance requirements Real time with
ground based systems
Collaboration with GE and Rolls Royce has developed efficient engine with 20% less emissions and 8%
increase in fuel/payload efficiency
Boeing 787 range 8300 Miles and cost 5 $ billion, built around the world and shipped to boeing for assembly
Always collaborating with firms that would yield a technological advantage finding engineering talents and
suppliers, to develop a culture of collaboration and integration with firms who are willing to work with a
revolutionary and very expensive product
300 suppliers worldwide 20 of them focus on inculcating new technology
Some Great Operational Strategies
Boeing is competitive because both its sales and supply chain are worldwide.
Italy’s Benetton moves inventory to stores around the world faster than its competition with rapid
communication and by building exceptional flexibility into design, production, and distribution.
Sony purchases components from a supply chain that extends to Thailand, Malaysia, and elsewhere
around the world for assembly of its electronic products, which in turn are distributed around the
world.
Volvo, considered a Swedish company, was purchased by a Chinese company, Geely. But the current
Volvo S40 is assembled in Belgium, South Africa, Malaysia, and China, on a platform shared with the
Mazda 3 (built in Japan) and the Ford Focus (built in Europe).
China’s Haier (pronounced “higher”) is now producing compact refrigerators (it has one- third of the
U.S. market) and refrigerated wine cabinets (it has half of the U.S. market) in South Carolina.
Globalization means customers, talent, and suppliers are worldwide. The new standards of global
competitiveness impact quality, variety, customization, convenience, timeliness, and cost. Globalization
strategies contribute efficiency, adding value to products and services, but they also complicate the
operations manager’s job. Complexity, risk, and competition are in- tensified, forcing companies to
adjust for a shrinking world.
Reasons for firms to go global
Improve the supply chain:
Locating facilities in country with unique resources, like labour, HR expertise, raw materials Example: Perfume
makers to France for flowers of the Mediterranean, Athletic footware to Ghunzao China for cheap labour, Auto
maker’s to South California for Expertise in modification and auto design
Reduce costs and exchange rate risks:
Reduce risk associated with currency change or dilution in exchange rates between two nations, Some countries
have less strict regulations on operations of firms and also environmental regulations are less, Low cost of
labour, less cost more investment
FTA’s Another trading group is the European Union (EU). The European Union has reduced trade barriers
among the participating European nations through standardization and a common currency, the euro. However,
this major U.S. trading partner, with over 500 million people, is also placing some of the world’s most
restrictive conditions on products sold in the EU. Every- thing from recycling standards to automobile bumpers
to hormone-free farm products must meet EU standards, complicating international trade
Cartoons more than 90% produced in ASIA and INDIA like flinstone tom & jerry , Alladin with phillipines
leading the way cost here is $130000 as compared to $160000 in Korea and $500000 in US
IMPROVE OPERATIONS:
Operations learn from better understanding of management innovations in different countries. For instance, the
Japanese have improved inventory man- agement, the Germans are aggressively using robots, and the
Scandinavians have contributed to improved ergonomics throughout the world. Another reason to have
international operations is to reduce response time to meet custom- ers’ changing product and service
requirements. Customers who purchase goods and services from U.S. firms are increasingly located in foreign
countries. Providing them with quick and adequate service is often improved by locating facilities in their home
countries.
UNDERSTAND MARKETS: Understand customer needs, demography, economic, considerations, to innovate
new products and innovate to suit these
IMPROVE PRODUCTS: Joint ventures or strategic ventures in which both the firms are benefitted and
bestowed with expertise of the other it not only reduces cost but also increase the outcome TOYOTA & BMW
for next generation of green cars, Samsung of Korea and Bosch of Germany for lithium ion batteries
ATTRACT AND RETAIN GLOBAL TALENT: Global means the work force there would also be working
with us a fresh perspective every-day and a fresh beginning
Cultural & Ethical challenges: With issues ranging from bribery, to child labour, to the environment,
managers sometimes do not know how to respond when operating in a different culture What one country’s
culture deems acceptable may be considered unacceptable or illegal in another. It is not by chance that there are
fewer female managers in the Middle East than in India. In the last decade, changes in international laws,
agreements, and codes of conduct have been applied to define ethical behaviour among managers around the
world. The WTO, for ex- ample, helps to make uniform the protection of both governments and industries from
foreign firms that engage in unethical conduct. Even on issues where significant differences between cultures
exist, as in the area of bribery or the protection of intellectual property, global uniformity is slowly being
accepted by most nations.
MISSION: Economic success, indeed survival, is the result of identifying missions to satisfy a customer’s needs
and wants. We define the organization’s mission as its purpose—what it will contribute to society. Mission
statements provide boundaries and focus for organizations and the concept around which the firm can rally. The
mission states the rationale for the organization’s existence. Developing a good strategy is difficult, but it is
much easier if the mission has been well defined functional area within the firm determines its supporting
mission. By functional area we mean the major disciplines required by the firm, such as marketing,
finance/accounting, and production/operations. Missions for each function are developed to support the firm’s
overall mission. Then within that function lower-level supporting missions are established for the OM functions
STRATEGY: With the mission established, strategy and its implementation can begin. Strategy is an organi-
zation’s action plan to achieve the mission. Each functional area has a strategy for achieving its mission and for
helping the organization reach the overall mission. These strategies exploit opportunities and strengths,
neutralize threats, and avoid weaknesses.
FIRMS ACHIEVE MISSIONS BY: 1) differentiation, (2) cost leadership, and (3) response. This means
operations managers are called on to deliver goods and services that are (1) better, or at least different, (2)
cheaper, and (3) more responsive. Operations managers translate these strategic concepts into tangible tasks to
be accomplished. Any one or combination of these three strategic concepts can generate a system that has a
unique advantage over competitors.
Competitive advantage: implies the creation of a system that has a unique advantage over competitors. The
idea is to create customer value in an efficient and sustainable way
DIFFERENTIATION: Differentiation is concerned with providing uniqueness. A firm’s opportunities for
creating uniqueness are not located within a particular function or activity but can arise in virtually everything
the firm does. Moreover, because most products include some service, and most services include some product,
the opportunities for creating this uniqueness are limited only by imagination. EX Theme restaurants, such as
Hard Rock Cafe, likewise differentiate themselves by providing an “experience.” Hard Rock engages the
customer with classic rock music, big-screen rock videos, memorabilia, and staff who can tell stories. In many
instances, a full-time guide is available to explain the displays, and there is always a convenient retail store so
the guest can take home a tangible part of the experience. The result is a “dining experience” rather than just a
meal. In a less dramatic way, both Starbucks and your local supermarket deliver an experience when they
provide music and the aroma of fresh coffee or freshly baked bread.
In the service sector, one option for extending product differentiation is through an experience.
Differentiation by experience in services is a manifestation of the growing “experience economy.” The
idea of experience differentiation is to engage the customer—to use people’s five senses so they become
immersed, or even an active participant, in the product. Disney does this with the Magic Kingdom. People
no longer just go on a ride; they are immersed in the Magic Kingdom—surrounded by dynamic visual
and sound experiences that complement the physical ride. Some rides further engage the customer with
changing air flow and smells, as well as having them steer the ride or shoot at targets or villains. Even
movie theaters are moving in this direction with surround sound, moving seats, changing “smells,” and
mists of “rain,” as well as multimedia inputs to story development.
COST: Southwest Airlines has been a consistent money maker while other U.S. airlines have lost billions.
Southwest has done this by fulfilling a need for low-cost and short-hop flights. Its operations strategy has
included use of secondary airports and terminals, first-come, first-served seating, few fare options, smaller
crews flying more hours, snacks-only or no-meal flights, and no downtown ticket offices. Effectively utilised
capacity, planes are less on ground fast turnarounds and routes are designed such as to prefer the bowing 737
planes landing and take-off operations
One driver of a low-cost strategy is a facility that is effectively utilized. Southwest and others with low-
cost strategies understand this and use financial resources effectively. Identifying the optimum size (and
investment) allows firms to spread overhead costs, providing a cost advantage. For instance, Walmart
continues to pursue its low-cost strategy with superstores, open 24 hours a day. For 20 years, it has
successfully grabbed market share. Walmart has driven down store overhead costs, shrinkage, and
distribution costs. Its rapid transportation of goods, reduced warehousing costs, and direct shipment
from manufacturers have resulted in high inventory turnover and made it a low-cost leader.
RESPONSE: Flexible response change as per market change with high variations in product demand Whether
it is a production system at Johnson Electric or a pizza delivered in 5 minutes by Pizza Hut, the
operations manager who develops systems that respond quickly can have a competitive advantage
example of being flexible responsive low cost convenient and with quality
ISSUES: Resources, capital, infrastructure, labour, technological
VALUE CHAIN ANALYSIS SWOT
EXTERNAL FACTORS: economic, regional, cultural, ethical, legal
Porters 5
forces
Microsoft has also had to adapt quickly to a changing environment. Faster processors, new computer languages,
changing customer preferences, increased security issues, the Internet, the cloud, and Google have all driven
changes at Microsoft. These forces have moved Microsoft’s product strategy from operating systems to office
products, to Internet service provider, and now to integrator of computers, cell phones, games, and television via
the cloud.
KEY SUCCESS FACTORS AND CORE COMPETENCIES: Core competencies are those which are unique to
a firm like skills, talents at a world class standard can include if a firm has upper hand in a particular stream like
cement industry the only one to supply 116 million tonnes per annum is ultratech that is it can provide volume
another is quality by apple
Key success factors are those which are essential for a company to survive like drive through facility of Mc D
Core competency consistency and quality and KSF’s are drive through & layout
Honda Motors’ core competence is gas-powered engines—engines for automobiles, motorcy- cles, lawn
mowers, generators, snow blowers, and more. The idea is to build KSFs and core competencies that provide a
competitive advantage and support a successful strategy and mis- sion. A core competency may be the ability to
perform the KSFs or a combination of KSFs. The operations manager begins this inquiry by asking:
◆ “What tasks must be done particularly well for a given strategy to succeed?”
◆ “Which activities provide a competitive advantage?”
◆ “Which elements contain the highest likelihood of failure, and which require additional
commitment of managerial, monetary, technological, and human resources?”
Only by identifying and strengthening key success factors and core competencies can an organization
achieve sustainable competitive advantage
Integrating OM with Other Activities
Whatever the KSFs and core competencies, they must be supported by the related activities. One approach to
identifying the activities is an activity map, which links competitive advan- tage, KSFs, and supporting activities
The activities fit together and reinforce each other. In this way, all of the areas support the company’s
objectives. For example, short-term scheduling in the airline industry is dominated by volatile customer travel
patterns. Day-of-week preference, holidays, seasonality, college schedules, and so on all play roles in changing
flight schedules. Consequently, airline scheduling, although an OM activity, is tied to marketing. Effective
scheduling in the trucking industry is reflected in the amount of time trucks travel loaded. But maximizing the
time trucks travel loaded requires the integration of information from deliver- ies completed, pickups pending,
driver availability, truck maintenance, and customer priority. Success requires integration of all of these
activities. The better the activities are integrated and reinforce each other, the more sustain- able the competitive
advantage.
Building and Staffing the Organization
Implementing the 10 Strategic OM Decisions
Strategic Planning, Core Competencies, and Outsourcing
As organizations develop missions, goals, and strategies, they identify their strengths—what they do as well as
or better than their competitors—as their core competencies. By contrast, non-core activities, which can be a
sizable portion of an organization’s total business, are good candidates for outsourcing. Outsourcing is
transferring activities that have traditionally been internal to external suppliers.
Outsourcing is not a new concept, but it does add complexity and risk to the supply chain. Because of its
potential, outsourcing continues to expand. 1) increased technological expertise, (2) more reliable and
cheaper transportation, and (3) the rapid development and deployment of advancements in
telecommunications and computers. This rich combination of economic advances is contributing to both
lower cost and more specialization. As a result more firms are candidates for outsourcing of non-core activities.
Outsourcing implies an agreement (typically a legally binding contract) with an external organization. The
classic make-or-buy decision, concerning which products to make and which to buy, is the basis of outsourcing.
When firms such as Apple find that their core competency is in creativity, innovation, and product design, they
may want to outsource manufacturing. Outsourcing manufacturing is an extension of the long-standing
practice of subcon- tracting production activities, which when done on a continuing basis is known as
contract manufacturing. Contract manufacturing is becoming standard practice in many industries, from
computers to automobiles. For instance, Johnson & Johnson, like many other big drug companies whose
core competency is research and development, often farms out manufacturing to contractors.
Contract manufacturers such as Flextronics provide outsourcing service to IBM, Cisco Systems, HP, Microsoft,
Sony, Nortel, Ericsson, and Sun, among many others. Flextronics is a high- quality producer that has won over
450 awards, including the Malcolm Baldrige Award. One of the side benefits of outsourcing is that client firms
such as IBM can actually improve their performance by using the competencies of an outstanding firm like
Flextronics. But there are risks involved in outsourcing.
◆ DuPont’s legal services routed to the Philippines
◆ IBM’s handing of travel services and payroll and Hewlett-Packard’s provision of IT services to P&G
◆ Production of the Audi A4 convertible and Mercedes CLK convertible by Wilheim Karmann in Osnabruck,
Germany
◆ Blue Cross sending hip resurfacing surgery patients to India
The Theory of Comparative Advantage
The motivation for international outsourcing comes from the theory of comparative advantage. This theory
focuses on the economic concept of relative advantage. According to the theory, if an external provider,
regardless of its geographic location, can perform activities more productively than the purchasing firm, then the
external provider should do the work. This allows the purchasing firm to focus on what it does best—its core
competencies. Consistent with the theory of comparative advantage, outsourcing continues to grow
Issues include financial attractiveness, people skills and availability, and the general business environment.
Another risk of outsourcing overseas is the political backlash that results from moving jobs to foreign countries.
The perceived loss of jobs has fueled anti-outsourcing rhetoric. This rhetoric is contributing to a process known
as reshoring, the return of business activity to the originating country.
Rating Outsource Providers
The factor-rating method provides an objective way to evaluate outsource providers. We assign points for each
factor to each provider and then importance weights to each of the factors.
An international strategy uses exports and licenses to penetrate the global arena. This strategy is the least
advantageous, with little local responsiveness and little cost advantage. But an inter- national strategy is often
the easiest, as exports can require little change in existing operations, and licensing agreements often leave
much of the risk to the licensee.
The multidomestic strategy has decentralized authority with substantial autonomy at each busi- ness. These are
typically subsidiaries, franchises, or joint ventures with substantial independence. The advantage of this strategy
is maximizing a competitive response for the local market; how- ever, the strategy has little or no cost
advantage. Many food producers, such as Heinz, use a multi- domestic strategy to accommodate local tastes
because global integration of the production pro- cess is not critical. The concept is one of “we were successful
in the home market; let’s export the management talent and processes, not necessarily the product, to
accommodate another market.”
A global strategy has a high degree of centralization, with headquarters coordinating the orga- nization to seek
out standardization and learning between plants, thus generating economies of scale. This strategy is appropriate
when the strategic focus is cost reduction but has little to recom- mend it when the demand for local
responsiveness is high. Caterpillar, the world leader in earth- moving equipment, and Texas Instruments, a
world leader in semiconductors, pursue global strat- egies. Caterpillar and Texas Instruments find this strategy
advantageous because the end products are similar throughout the world. Earth-moving equipment is the same
in Nigeria as in Iowa.
