OPSM 901: Operations Management

1. Koç University Graduate School of Business EMBA Program OPSM 901: Operations Management Session 1: The Process View Process Positioning Strategic Fit Zeynep Aksin zaksin@ku.edu.tr

2. Key Principle of course: 1. The Strategic Role of Ops “A company’s operations function is either a competitive weapon or a corporate millstone. It is seldom neutral.” [Skinner ‘69]

3. Operations as a Competitive Weapon • Dell Computers Innovative Supply Chain Strategy (direct model) • Southwest Airlines Leader in lowfare flights, by elimination of all waste • Zara More on this later today.. • Vestel Durable Goods Distribution optimization leads to increased customer satisfaction as well as lower costs

4. Key Principle of Course: 2. The Process View of Ops UL Sup. WH KA Ind. Markets WH Sana KA: 64 days Groceries:132 days Shelf life: 120 days! . . . Sub. WH 76 days collection time Groceries Markets Sales cost: 4% Trade rebate: 12% Logistics: complex 1997: 35000/76000 tons Sana and Aymar collected

5. Consumer centric-efficient SC Warehouse stock level 12% - 8% UL Make-to-order 120000-140000/180000 outlets 36 days collection time Distributors Groceries Market KA Sana KA: 2 weeks Consumer Sales cost: 6% Trade rebate: 5.2% Logistics: simple

6. Process Management Information structure Network of Activities and Buffers Inputs Outputs Goods Services Flow units (customers, data, material, cash, etc.) Labor & Capital Resources Operations & the Process View: What is a Process?

7. Organization Chart

8. customer customer suppliers Process

9. Life is a process.. • Projects: one time processes • Eating lunch at the cafeteria • EMBA program • Your career • Your life

10. What is Operations Management? • Management of business processes • How to structure the processes and manage resources to develop the appropriate capabilities to convert inputs to outputs. • What is appropriate?

11. All Managers are Operations Managers • All managers must transform inputs into outputs • Example: Accounting Manager • Inputs: data, information, labor • Transformation: application of accounting principles and knowledge • Outputs: accounting reports, knowledge of performance, ... • All managers have an “operation” to run

12. What defines a “good process”? Performance: Financial Measures • Absolute measures: • revenues, costs, operating income, net income • Net Present Value (NPV) = • Relative measures: • ROI, ROE • ROA = • Survival measure: • cash flow

13. Performance Measurement • Basing performance measurement only on financial ratios may be deceiving in that it does not capture continuous improvement and innovation • The Balanced Score Card (BSC) system was developed by R. Kaplan ve D. Norton in 1992 (HBS 1,1992.) • The objective is to give managers measurements that reflect both financial and operational performance in a balanced way

14. Balanced Score Card (BSC) • BSC, complements financial measures with • Customer satisfaction • Process • Throughput times • Defect rates, etc. • Learning and development related measures that help to reflect future financial success

15. Objective Measurements Targets Initiatives BSC Financial How should our shareholders view us so that we can claim financial success Customer Processes Vision and Strategy Which processes should we perfect to be seen as successful by our customers and shareholders How should customers view us so that we attain our vision Learning and Development How can we sustain learning and development to adhere to our vision

16. Firms compete on product attributes. This requires process capabilities. • Price (Cost) P • Quality Q • Customer service • Product quality • Time T • Rapid, reliable delivery • New product development • Variety V • Degree of customization “order winners” To deliver we need “capabilities”

17. Performance Measures

18. Process Capabilities are affected by Process Structure and Management • Process structure or architecture: • (1) inputs and outputs • (2) flow unit (“jobs”) • (3) network of activities & buffers • quantity & location • precedence relationships • (4) resource allocation • capacity & throughput • (5) information structure • Operations Planning & Control • Organization

19. Fit between Strategy and Processes • Processes must fit the operations strategy of the firm: Competing on -Cost (Southwest Airlines) -Quality (Toyota) -Flexibility (HP) -Speed (McDonalds) all require different process designs and different measures to focus on. Corporate StrategyKey Performance Indicators Operations StrategyProcess Design& Improvement

20. Existing Desired Measures Product Attributes P, T, Q, V Feasible Business Strategies Desired Business Strategy Strategy Gap? Capability Gap? Desired Capabilities Existing Capabilities Marketing, …, Financial Strategy Operations Strategy Process Attributes C, T, Q, Flex Operational Structure: Processes & Infrastructure Desired Oper’l Structure: Processes & Infrastructure Process Gap? Linking the strategic role & process view: Strategic Operational Audit

21. Value/ Responsiveness A B operations frontier C High Low Cost Strategy vs. Operational Effectiveness: The Operations Frontier as the minimal curve containing all current positions in an industry High Low

22. Increasing Customer Value Value Değer Artırımı High Operations Frontier A B C Low High Low Cost

23. Lowering Costs Value HIgh Operations Frontier A B Lowering Costs C Low High Low Cost

24. Some process classifications and terminology…

25. Low complexity, high divergence

26. High complexity, low divergence

27. High complexity, high divergence

28. Classifying by degree of judgement complexity vs. divergence what is done? how is it done?

29. Classification of Processes by process architecture • Project • Job Shop • Batch • Line Flow • Continuous Flow Job Shop Flow Shop

30. The Job Shop Process • Process Layout • One of a Kind Build • (To Customer Order) • Absence of Rigid Flow Pattern • Usually High Product Mix

31. Process Layout Lathe#1 Lathe#2 Drill Press #1 Paint Machine Lathe#3 Packaging Machine #1 Finish Production Drill Press #2 Lathe#4 Packaging Machine #2 Product #1735B: Start of Production

32. The Flow Line Process • Product Layout • Discrete Parts • Rigid Flow Pattern • Product Mix of Standard Products

33. Product Layout Product #1735B Start Production Drill Press #1 Lathe Packaging Machine #2 Drill Press #2 Paint Machine Finish Production

34. Classification of Processes: by Positioning Strategy • Functional Focus: • Product Focus: Product1 A B Product2 C D = resource pool (e.g., X-ray dept, billing) Product1 A D B Product2 C B A

35. Classification of Processes: by Customer Interface Raw Material Components Semifinished Finished Make-to-Stock Assemble-to-Order SUPPLIER CLIENT Make-to-Order Engineer-to-Order Order Forecast

36. Shouldice HospitalVideo Case

37. Medical Simple hernias Optimized process Check-ups and follow-up Social Club Med like experience Co-production at individual and cohort level A network for life Shouldice Business Model

38. Shouldice Patient Experience Low, both real and opportunity COST Low recurrence, satisfaction with experience QUALITY Fast operation and recovery SPEED The process rules; only simple hernias FLEXIBILITY

39. Shouldice: prepares for the simplest Hernia complexity Comparison to General Hospital General Hospital: prepares for the most complex

40. A product/process matrix High customization Low volume High unit margin High standardization High volume Low unit margin Product Process Flexible job Rigid line flow Industrialization

41. Shouldice as a lean enterprise Womack and Jones (2000) From Lean Production to Lean Enterprise, HBR March-April 1994

42. Shouldice Process Life Cycle • Birth of the Shouldice formula • Process selection, design, and improvement • Innovation at the interfaces • Process overtaken (when?)

43. Focus at Shouldice: the results • Breakthrough service • High customer and employee satisfaction • Industrial approach

44. Process Flexibility High JOB SHOP Jumbled Flow. Process segments loosely linked. (Commercial Printer, Architecture firm) BATCH Disconnected Line Flow/Jumbled Flow but a dominant flow (Heavy Equipment, Auto Repari) Opportunity exists. Costs LINE FLOWS Connected Line Flow (assembly line) (Auto Assembly, Car lubrication shop) Continuous, automated, CONTINUOUS rigid line flow. Out-of-pocket Process segments tightly FLOW Costs linked. Low (Oil Refinery) Product Variety Low High Low Standardization High Standardization Commodity Products Few Major Products One of a kind Low Volume Many Products High volume Matching Process Choice with Strategy: Product-Process Matrix

45. Marks & Spencer vs. Zara

46. Why is profitability in textile so low, when margins are so high? Perfect forecast Excess demand Excess stock Expected demand Actual demand

47. Zara Business Concept Integrated fashion delivery: Fashion at low cost Low Cost • Focus on getting it approximately correct • Define a fast process • Solve the material constraint • Constrain designers • Optimize the offer • Offer follow-up (next batch) and create customer flows Fashion • Store experience • Copy fashion • Involve the customers and his group • Create a network/brand

48. Zara Customer Offer:Product/Process Attributes • Cost: • Low monetary cost • Low time cost “The Zara experience” • Quality: • Raw Material: poor/OK • Knit: poor • Look: grand • Customer satisfaction: fashion at low price • Time: • Fast copying of leading styles • Fast delivery in own stores • Limited editions • Variety/Flexibility: • Limited product variety: only what is on display • Every customer is participating in the process • Customer defines the next batch

49. Classical textile business process:12 month lead time Design Purchase RM Mfg Dist Sell Discount

50. Zara Business Process: 5 day lead time . 1.Scan fashion shows 2.Simplify hits & Library of designs Purchase RM 3.Final design of Next batch Mfg Dist Shopping Experience 2.Shoppers and store mgrs. PULL next design Designers adapt