Managing operations across the supply chain pdf download

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Managing Operations Across the Supply Chain Third Edition

Morgan Swink Texas Christian University

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Steven A. Melnyk Michigan State University

Janet L. Hartley Bowling Green State University

M. Bixby Cooper Michigan State University

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MANAGING OPERATIONS ACROSS THE SUPPLY CHAIN, THIRD EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2017 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014, 2011. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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ISBN 978-1-259-54430-9 MHID 1-259-54430-3

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Library of Congress Cataloging-in-Publication Data

Names: Swink, Morgan, 1959- author. Title: Managing operations across the supply chain / Morgan Swink, Texas Christian University, Steven A. Melnyk Michigan State University, Janet L. Hartley, Bowling Green State University, M. Bixby Cooper, Michigan State University. Description: Third Edition. | Dubuque, IA : McGraw-Hill Education, 2016. | Revised edition of Identifiers: LCCN 2016021249 | ISBN 9781259544309 (alk. paper) Subjects: LCSH: Business logistics. | Production management. | Industrial management. Classification: LCC HD38.5 .S95 2016 | DDC 658.5--dc23 LC record available at https://lccn.loc.gov/2016021249

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill, and McGraw-Hill does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

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The McGraw-Hill Education Series Operations and Decision Sciences

Operations Management

Beckman and Rosenfield Operations Strategy: Competing in the 21st Century First Edition

Benton Purchasing and Supply Chain Management Third Edition

Bowersox, Closs, and Cooper Supply Chain Logistics Management Fifth Edition

Brown and Hyer Managing Projects: A Team-Based Approach Second Edition

Burt, Petcavage, and Pinkerton Supply Management Ninth Edition

Cachon and Terwiesch Operations Management First Edition

Cachon and Terwiesch Matching Supply with Demand: An Introduction to Operations Management Fourth Edition

Finch Interactive Models for Operations and Supply Chain Management First Edition

Fitzsimmons and Fitzsimmons Service Management: Operations, Strategy, Information Technology Eighth Edition

Gehrlein Operations Management Cases First Edition

Harrison and Samson Technology Management First Edition

Hayen SAP R/3 Enterprise Software: An Introduction First Edition

Hill Manufacturing Strategy: Text & Cases Third Edition

Hopp Supply Chain Science First Edition

Hopp and Spearman Factory Physics Third Edition

Jacobs, Berry, Whybark, and Vollmann Manufacturing Planning & Control for Supply Chain Management Sixth Edition

Jacobs and Chase Operations and Supply Chain Management Fourteenth Edition

Jacobs and Chase Operations and Supply Chain Management: The Core Fourth Edition

Jacobs and Whybark Why ERP? First Edition

Johnson, Leenders, and Flynn Purchasing and Supply Management Fifteenth Edition

Larson and Gray Project Management: The Managerial Process Sixth Edition

Schroeder, Goldstein, and Rungtusanatham Operations Management: Contemporary Concepts and Cases Sixth Edition

Simchi-Levi, Kaminsky, and Simchi-Levi Designing and Managing the Supply Chain:

Concepts, Strategies, Case Studies Third Edition

Sterman Business Dynamics: Systems Thinking and Modeling for a Complex World First Edition

Stevenson Operations Management Twelfth Edition

Swink, Melnyk, Cooper, and Hartley Managing Operations Across the Supply Chain Third Edition

Thomke Managing Product and Service Development: Text and Cases First Edition

Ulrich and Eppinger Product Design and Development Sixth Edition

Zipkin Foundations of Inventory Management First Edition

Quantitative Methods and Management Science

Hillier and Hillier Introduction to Management Science: A Modeling and Case Studies Approach with Spreadsheets Fifth Edition

Stevenson and Ozgur Introduction to Management Science with Spreadsheets First Edition

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Dedication

To Jenni, Derek, Rachel, and Sarah, who make my life so full!

Morgan Swink

To my wife and children-Christine, Charles and Beth-for their support and patience.

To four great friends who have been “teachers” to me in my continual quest for more

knowledge-Alan Dunn, Abe Eshkenazi (CEO of APICS), and Colin Seftel (my South African friend).

To these people, this book is dedicated.

Steven A. Melnyk

To my children who make my life complete.

Bix Cooper

To Glenn and Caleb, for their love and support.

Janet Hartley

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Morgan Swink

is Professor, Eunice and James L. West Chair of Supply Chain Management, and Executive Director of the Center for Sup- ply Chain Innovation at the Neeley School of Business, Texas Christian University. He holds a BS in Mechanical Engineering from Southern Methodist University, an MBA from the University of Dallas, and a PhD in Operations Management from Indiana University. Before becoming a professor, Dr. Swink worked for 10 years in a variety of manufacturing and product development positions at Texas Instruments Incorporated. He has co-authored three books and published over 75 articles in a variety of academic and managerial journals. Dr. Swink is formerly the Co-Editor in Chief for the Journal of Oper- ations Management and past president of the Decision Sci- ences Institute.

Steven A. Melnyk

is Professor of Operations Man - agement at Michigan State University. Dr. Melnyk obtained his undergraduate degree from the University of Windsor and his doctorate from the Ivey School of Business, the Uni- versity of Western Ontario. He has co-authored 17 books focusing on operations and the supply chain and has published 90 refereed articles in numerous international and national jour- nals. He is Associate Editor for the Journal of Business Logis- tics. He also is a member of the editorial advisory board for the Production and Inventory Man- agement Journal, the Journal of Supply Chain Management, and the International Journal of Pro- duction Research. Dr. Melnyk is co-editor (North America) for the Journal of Humanitar- ian Logistics and Supply Chain Management. Dr. Melynk has consulted with over 60 com- panies. He has also served as a member of the APICS Board of Directors (2014–2016) and the APICS leadership team (2015).

Janet L. Hartley

is Professor and Director of the Supply Chain Management Institute of the Department of Management at Bowling Green State University. She received her BS in Chemical Engineer- ing from the University of Missouri-Rolla, and the MBA and PhD degrees in Business Administration from the Uni- versity of Cincinnati. Prior to graduate school, she developed new products and designed new manufacturing processes for the Clorox Company. She has published over 28 articles on supply management and supply chain management. She serves as an associate editor for the Journal of Operations Man- agement, Journal of Business Logistics, and Journal of Sup- ply Chain Management.

M. Bixby Cooper

is Associate Professor in the Department of Supply Chain Management at Michigan State University. He received his BS in Business Adminis- tration from the University of North Carolina, MBA from the University of Virginia, and PhD from the University of Alabama. Prior to joining Michigan State, he served on the faculty of Winthrop University and Louisiana State University. He is an active researcher and co-author of several books on distribution and logistics. Dr. Cooper has consulted with numerous organizations including Kellogg, Johnson and Johnson, Mead Johnson, Westinghouse, Novartis, Dayton Hudson (Target), Kerr-McGee, VF Industries, and Siemens.

About the Authors

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We continue to live in dynamic and exciting times. The recent 20 years have seen many changes that have affected nearly every aspect of business-including operations man- agement. In this third edition of our book, we continue to reflect key shifts in operations management, including transitions:

• From a focus on the internal system to a focus on the supply chain In today’s highly competitive busi- ness environment, organizations must leverage the capabilities of their suppliers and customers. Opera- tions managers must look beyond the “four walls” of the firm and take an integrated supply chain perspec- tive of operations.

• From a local focus to a global focus As Thomas L. Friedman pointed out,1 the world is indeed flat. Business solutions generated in Argentina are used to meet needs in the United States, and parts built by suppliers located in China are used to assemble cars in Canada. Commercial needs have overcome, to a large part, national borders, presenting new opportu- nities and challenges for operations managers.

• From an emphasis on tools and techniques to an emphasis on systems, people, and processes To be successful, operations managers must think more broadly than just the application of analyti- cal tools and techniques. They must take a systems view to address important managerial issues such as designing processes, working with people, managing information flows, and building interorganizational relationships.

• From myopic pursuit of profit to a holistic pursuit of sustainability. Pressures on businesses have risen to the point that they can no longer ignore or give only lipservice to social and environmental issues. Operations managers have to balance the profit motive with the need to protect and even strengthen both people and the planet.

Managing Operations Across the Supply Chain pro- vides a global, supply chain perspective of operations man- agement for students in introductory courses in operations management and in supply chain management courses that do not require an operations management prerequisite. While the book is primarily written for undergraduates,

it also can be used effectively in MBA courses. There are several features that help to differentiate this book in its view of operations management:

• Broader Treatment of Operations Management While many operations management textbooks have revised or added a chapter to address supply chain issues, we developed our book from the ground up to effectively integrate operations management and the supply chain. The primary focus of the book is opera- tions management, but we provide a “supply chain” perspective. Operations management cuts across a firm’s boundaries, bringing together its internal activ- ities with the operations of customers, suppliers, and other partners around the world. We clarify the func- tional roles of operations, supply management, and logistics while examining the integrative processes that make up the supply chain. One unique aspect of the book is that we examine both the upstream (sup- ply-side) and downstream (demand-side) aspects of the supply chain, including a discussion of marketing and customer relationships.

• Balanced Treatment The book balances the quanti- tative and qualitative coverage needed to equip opera- tions and supply chain managers for the challenges and opportunities they face. It describes and applies analytical tools that operations managers use to sup- port decision making. However, we also address the important managerial issues such as systems, people, and processes that are critical in a supply chain context.

• Use of Integrative Frameworks The various ele- ments of operations management are introduced and developed using an operations strategy framework that brings together three critical elements: (1) the key customer, (2) the value proposition, and (3) capabilities. Furthermore, the students are introduced to operations management in a structured way that begins with the “big” picture of operations strategy, proceeds to the foundations of operations manage- ment, integrating relationships, planning for inte- grated supply chain operations, and then ending with a discussion of how to manage the system looking to the future.

Preface

1Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century (New York: Farrar, Straus, and Giroux, 2006).

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Preface vii

• Use of Integrating Themes Three key themes are highlighted throughout the book: global issues, relationships, and sustainability. Because most organizations have supply chains that reach beyond a single country, we examine global issues associated with operations and supply chain management. Organizations must collaborate with customers and suppliers to accomplish many operations activities. Thus, the book show-cases how to build, maintain, and benefit from cross-functional and interorganizational relationships. To reduce costs and be competitive, organizations today must adapt sustainable business practices. We expect sustainability to increasingly become a key metric for operations and supply chain management performance. Accordingly, we have dedicated an entire chapter to sustainability, while also incorporating it throughout the book.

• Real, Integrated Examples The book brings operations and supply chain management to life through opening vignettes, Get Real highlights, and rich examples throughout the book.

Managing Operations Across the Supply Chain offers a new, global, supply chain perspective of operations management-a treatment that embraces the foundations of operations management but includes new frameworks, concepts, and tools to address the demands of today and changing needs of the future. The book is organized into five major sections:

• Part 1 Supply Chain: A Perspective for Operations Management provides an overview of operations management as a field, and describes the strategic role operations has in business from the perspective of supply chain management.

• Part 2 Foundations of Operations Management discusses foundational process concepts and principles that govern all operational activities. This section examines concepts such as product/process innovation, quality, lean, and inventory fundamentals.

• Part 3 Integrating Relationships Across the Supply Chain deals with the primary functional relationships between internal operations management activities and other operational functions both inside and outside the firm. This section describes customer relationship management, supply management, and logistics management.

• Part 4 Planning for Integrated Operations Across the Supply Chain discusses planning approaches and technologies used at different levels of operations decision making. Key topics such as demand planning, forecasting, sales and operations planning, inventory management, and materials requirements planning are examined.

• Part 5 Managing Change in Supply Chain Operations discusses how operations managers use projects, change programs, and technologies to shape a sustainable future for operations and supply chain management.

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We would like to express our appreciation to the people who have provided assistance in the development of this textbook. We express our sincere thanks to the following individuals for their thoughtful reviews and suggestions:

Samuel Chinnis, Guilford Technical Community College Madeleine Pullman, Portland State University John R. Grandzol, Bloomsburg University Dennis McCahon, Northeastern University Edward D. Walker, Valdosta State University Brian Jacobs, Michigan State University Narendra K. Rustagi, Howard University Andrew Borchers, Lipscomb University Sandra Obilade, Brescia University Rick Bonsall, McKendree University Helen Eckmann, Brandman University Nicoleta Maghear, Hampton University Kelwyn D’Souza, Hampton University Bruce A. Meyer, Bowling Green State University Jeanetta Chrystie, Southwest Minnesota State University Jeff Brand, Marquette University

We also want to express our sincere thanks to the follow- ing individuals for their exceptional contributions: William

Acknowledgments

Berry, Professor Emeritus, Queens College, and David Weltman, Texas Christian University, for accuracy check- ing; Frank Novakowski, Davenport University, and Jody Wolfe, Clarke University, for developing learning resource videos; and Rene Ordonez, for updating the instructor powerpoints and developing guided examples.

We want to thank the outstanding McGraw-Hill/ Irwin production and marketing team who made this book possible-including Britney Hermsen, marketing manager; James Heine, managing director; Harvey Yep and Kristin Bradley, content project managers; Sandy Ludovissy, buyer; Doug Ruby, digital content development director; Egzon Shaqiri, designer; and Ann Marie Jannette and Beth Thole, content licensing specialists.

A special thanks to our outstanding editorial team. We greatly appreciate the support, encouragement, and patience shown by Camille Corum, our product developer. Thanks for keeping us on track! Our brand manager, Dolly Womack, provided excellent guidance and leadership throughout the process. We truly appreciate it!

Morgan Swink Steven A. Melynk Janet L. Hartley

M. Bixby Cooper

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The following section highlights the key features of the text and accompanying resources, which have been developed to help you learn, understand, and apply operations concepts.

CHAPTER ELEMENTS Within each chapter, of the text, you will find the following elements. All of these have been developed to facilitate study and learning.

Chapter Opener Each chapter begins with an opening vignette to help set the tone for the material that fol- lows. Learning objectives provide a quick introduction to the material students will learn and should understand before moving to the next chapter.

Opening Vignette Each chapter opens with an introduction to the important operations topics covered in the chapter. Students need to see the relevance of operations management in order to actively engage in learning the material.

Walkthrough

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LO1-1 Explain what operations management is and why it is important.

LO1-2 Describe the major decisions that operations managers typically make.

LO1-3 Explain the role of processes and “process thinking” in operations management.

1 Introduction to Managing Operations Across the Supply Chain

LEARNING OBJECTIVES

LO1-4 Explain what the supply chain is and what it means to view operations management using a “supply chain perspective.”

LO1-5 Identify the partners and functional groups that work together in operations management.

LO1-6 Define the planning activities associated with managing operations across the supply chain.

After studying this chapter, you should be able to:

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A pple often receives praise for its user-friendly and aesthetically pleasing product designs. But a less well-known contributor to Apple’s success is its prowess in managing oper- ations across its supply chain. This is the world of manufacturing, procurement, and logistics in which the chief executive officer, Tim Cook, excelled, earning him the trust of Steve Jobs. Apple has built a closed ecosystem where it exerts control over nearly every piece of the supply chain, from design to retail store.

This operational edge is what enables Apple to handle massive product launches without having to maintain large, profit-sapping inventories. It has allowed a company often criticized for high prices to sell its iPad at a price that very few rivals can beat, while still earning a 25 percent margin on the device. Some of the basic elements of Apple’s operational strategy include:

• Capitalize on volume. Because of its buying power, Apple gets big discounts on parts, manu- facturing capacity, and air freight.

• Work closely with suppliers. Apple engineers sometimes spend months living out of hotel rooms in order to be close to suppliers and

It Takes More than Cool Products to Make

Apple Great manufacturers, helping to tweak the indus- trial processes and tools that translate prototypes into mass- produced devices.

• Focus on a few product lines, with little cus- tomization. Apple’s unified strategy allows it to eliminate complexity and cost, while maximizing volume-based economies in its supply chain.

• Ensure supply availability and low prices. Apple makes big upfront payments to suppliers to lock in their capacity and to limit options for competitors.

• Keep a close eye on demand. By selling through its own retail stores, Apple can track demand by specific store and by the hour; then it adjusts sales forecasts and production plans daily to respond quickly to demand changes.

Apple designs cool products. But its enormous profit margins—two to four times the profit mar- gins of most other hardware companies—come in large part from its priority and focus on operations management.

© Paul Faith/Press Association via AP Images

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x Walkthrough

Key Terms Key terms are presented in bold and defined in the margin as they are introduced. A list of chapter key terms is also available at the end of the chapter.

Student Activity Students are asked to do a personal activity that illustrates the concept being presented or covered, thereby helping them learn to apply the concepts and understand them more deeply.

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This book, Managing Operations Across the Supply Chain, will help you to study “opera- tions management” using a “supply chain” perspective. This perspective means that we will examine operational activities that take place within firms as well those that cross firms’ boundaries, involving suppliers and customers of all types. This larger network of organizations makes up a firm’s supply chain.

The Apple story illustrates the value of this broad perspective of operations manage- ment. The combination of excellence in both internal product design operations and exter- nal supply chain operations management makes Apple a dominant player in its industry. Operations management by definition spans a large number of activities that take place both inside and outside the business firm.

A BROAD DEFINITION OF SUPPLY CHAIN OPERATIONS MANAGEMENT Operations management is the management of processes used to design, supply, pro- duce, and deliver valuable goods and services to customers.

Operations management includes the planning and execution of tasks that may be long-term (yearly) or short-term (daily) in nature. An operations manager interacts with managers in other business functions, both inside and outside the operations manager’s own company. Operations management thus spans the boundaries of any single firm, bringing together the activities of internal operations (i.e., internal to a given company) with the operations of customers, suppliers, and other partners around the world. Opera- tions located around the globe are becoming more tightly interconnected all the time. The supply chain concept can be used to describe connections among business partners.

A supply chain is the global network of organizations and activities involved in (1) designing a set of goods and services and their related processes, (2) transforming inputs into goods and services, (3) consuming these goods and services, and (4) disposing of these goods and services.

Think about all the different organizations located in different companies that are involved in converting raw materials into a delivered finished product. Dozens of organiza- tions are involved in producing and delivering even a simple product like bottled water. Together, supply chain organizations perform all the value-creating activities required to innovate, plan, source, make, deliver, and return or dispose of a given set of products and services.1 Other terms sometimes substituted for supply chain include demand chain, extended enterprise, supply network, or supply web. All of these terms reflect the idea that a supply chain involves connections and relationships among organizations that play vari- ous roles for a given set of products.

Operations management activities located throughout a supply chain create and enhance the value of goods and services by increasing their economic value (e.g., low- ering delivered cost), functional value (e.g., improving product quality or convenience), and psychosocial value (e.g., improving product aesthetics and desirability). The following statements help define and describe operations management:

• Operations management is mainly concerned with how resources will be developed and used to accomplish business goals.

• Operations management is about designing, executing, and improving business processes.

• Operations management deals with processes that transform inputs, including materi- als, information, energy, money, and even people, into goods and services.

• Within a supply chain context, operations management brings together four major sets of players: the firm, customers, suppliers, and stakeholders.

operations management The management of processes used to design, supply, produce, and deliver valuable goods and ser- vices to customers.

supply chain The global network of organizations and activities involved in designing, transform- ing, consuming, and disposing of goods and services.

1Supply Chain Council, Integrated Supply Chain Performance Measurement: A Multi-Industry Consortium Recommendation, Supply Chain Council Report #5566, p. 1.

LO1-1 Explain what operations management is and why it is important.

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to the movie production company. A second-tier supplier provides inputs to the first-tier supplier, and so on. Each tier of the upstream supply chain could involve multiple suppli- ers for the same items or services. Also, a single supplier might pro- vide inputs for multiple tiers of the supply chain. For example, the director in Figure 1-3 provides inputs to both the casting company and the movie production company.

Downstream stages of the supply chain are made up of layers of partners and custom- ers commonly referred to as echelons. A single echelon might contain partners in locations all over the world. For example, there are usually many distributors for a given movie. These distributors can be thought of as suppliers of distribution services to the movie production company. The downstream supply chain can also be broken into different chan- nels of distribution; theaters, direct/home delivery, and retail DVD/Blu-Ray sales are three channels shown in Figure 1-3.

Many different types of operations managers are needed in a movie production com- pany. Supply managers help to identify and negotiate contracts with supply sources such as casting companies, directors, producers, equipment suppliers, film suppliers and so on.

echelon A downstream stage of supply or consumption.

FIGURE 1-3 Partial Supply Chain Network for a Movie Production Company

Financial Underwriters

Resource and Technology Supply Chain

Screen Writers

Talent Agencies

Casting Company

Director Product Supply Chain

Upstream Product Supply Chain

Tier 4 Tier 3 Tier 2 Tier 1 Echelon 1 Echelon 2

Downstream Product Supply Chain

Film/Digital Tape Manufacturer

Raw Materials Suppliers

Stock Film/Tape Wholesaler

Production Company Distributors

Direct Home Delivery

DVD/Blu-Ray Sales/Rental

Theaters

Film Maker / Producer

Props Supplier

Equipment Supplier

Costume Supplier

Find a description of digital moviemaking technology on the Internet. Which of the stages and organizations depicted in Figure 1-3 are likely to be most affected by a shift to a completely digital process? How will the structure of the overall supply chain be changed?st

ud en

t activity

Numbered Examples Numbered examples are integrated into chapters where analytic techniques are introduced. Students learn how to solve specific problems step-by-step and gain insight into general principles by seeing how they are applied.

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(defined as a percentage) by asset turnover. The net profit margin measures the percentage of each dollar that is kept by the firm as net profit. The asset turnover measures how efficient management was in using its assets. For example, an asset turnover of 4 indicates that for every $4 of sales, management invested only $1 in assets. The net profit margin and asset turnover capture different aspects of performance. Net profit margin is influenced by issues such as sales volume, operating costs, and expenses. Asset turnover reflects issues such as the amount of inventory needed (a key concern of operations managers, and one of the major assets con- trolled by operations). In general, the higher the ROA, the better the level of performance.

The SPM is useful for evaluating both operational and marketing-based plans and actions and answering “what-if” questions such as: What if we reduced fixed expenses by 10 percent? What would be the overall impact on ROA? To answer this question, we would enter the dollar values of operational changes in the categories shown on the right side of the SPM. The calculations in the SPM then reflect the impacts of these changes on finan- cial measures shown on the left side of the SPM (which are of interest to top managers). Consider the following example of this type of analysis.

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. However, the marketing director feels that the prices these customers are willing to pay will pro- vide 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 mar- ket, 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?

EXAMPLE 2-1

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

The strategic profit model is well suited for this type of analysis. A gross margin of 30 percent seems attractive. However, to make a good decision we need to factor in other required changes. By entering the data into the SPM (as can be seen in Figure 2-4), we find that expected ROA is 12.2 percent—less than the 25 percent hurdle rate. Conse- quently, we would recommend that the marketing request be rejected.

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Walkthrough xi

Figures and Photos The text includes photographs and graphic illustrations to support student study and pro- vide interest and motivation.

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and loss. The first is the tradi- tional measure of performance— monetary profit; the second is an assessment of its “people account”—how socially responsi- ble the firm has been throughout its operations; and the third is the company’s “planet account”— how environmentally responsible

the firm has been. Together, these three Ps (Profit-People-Planet) capture the total impact of a firm’s business.

Capabilities: Strengths and Limitations of Supply Chain Operations The third element of delivering value, as identified in Figure 2-2, is capabilities. Capabilities are unique and superior operational abilities that stem from the routines, skills, and processes that the firm develops and uses. As we stated earlier, it is difficult for an operations system to simultaneously deliver high levels of performance on many dif- ferent dimensions. Thus, it is important to develop capabilities in the few areas that are of greatest strategic value for the firm.

It is difficult to describe capabilities directly without describing them in terms of outcomes such as quality, flexibility, and so on. Usually, abilities to deliver superior per- formance come from investments and developmental efforts in one or more of the follow- ing areas:

• Processes—specialized routines, procedures, and performance measurement systems that guide operational activities.

• Planning systems—access and development of sources of information, and use of proprietary decision support systems and processes.

• Technology—proprietary usage of hardware or software that enables the firm to do things differently and/or better than competitors.

• People and culture—skills, associated training programs, and cultural norms for the company that produce better motivation and performance. The impact of culture must be recognized at both a corporate and at a national level.

• Supply chain relationships—unique and exclusive relationships with customers and suppliers that are unmatched by competitors.

The Seven Cycles operation discussed in the Get Real box presents a good example of how both company culture (philosophy) and special technologies can create unique capabilities.

Sometimes certain capabilities become so unique and valuable to a firm that they are considered to be “core,” that is, central to the very existence of the firm. Core capabilities are the skills, processes, and systems that are unique to the firm and that enable it to deliver products that are both valued by the customer and dif- ficult for competitors to imitate. These are strategically critical, and often the source of a stream of new products and market opportunities. For example, over the years Honda has developed successful products in a wide range of very different markets—motorcycles, power genera- tors, cars, marine engines, lawn mowers, snow blowers, and now jet airplanes. In each market, Honda moved from being an outsider to become one of the major

capabilities Unique and superior operational abilities that stem from the routines, skills, and processes that the firm develops and uses.

core capabilities The skills, processes, and systems that are unique to the firm and that enable it to deliver products that are both valued by the customer and diffi- cult for competitors to imitate.

Examine the websites of companies such as Heineken and Sweet Leaf Tea (of Austin, Texas), or pick a company of your interest. What elements do they include in their “triple bottom line” measures?

st ud

en tactivity

Honda airplane powered by Honda jet engine. © Kyodo/Landov

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Corporate strategic planning addresses the portfolio of businesses owned by a firm. Of the three levels of strategic planning, corporate strategic planning is the broadest in scope and the least constrained. Decisions made at this level limit the choices that can be made at lower strategic planning levels.

Essentially, a corporate strategy communicates the overall mission of the firm and identifies the types of businesses that the firm wants to be in. For a large, multidivisional firm, key decisions in corporate strategy address what businesses to acquire and what businesses to divest. Corporate strategy typically covers a long time horizon, setting the overall values, direction, and goals of the firm as a whole. It also establishes how business performance will be measured and how risks will be managed.

Business Unit Strategic Planning Because products and markets differ across business divisions, a separate management team (usually headed by a president or vice president) is usually needed to run each of these semi-independent organizations, or strategic business units (SBUs). An SBU can be organized along product, market, or geographic dimensions.

Business unit strategy essentially deals with the question, “How should our busi- ness unit compete?” To answer this question, managers make choices regarding what customers and market segments they will deem critical, what products they will offer, and specifically how they will create advantages over the business unit’s competitors. These choices collectively form the business model that the unit will pursue. There are numer- ous types of business models. For example, long ago Gillette developed the “razor and blades” business model—give away the razor but make your money on the replacement blades. Many businesses follow this same type of model (printers, industrial equipment). Dell successfully applied the “direct sales” business model in computers—sell computers directly to the end consumer. A “loyalty” business model rewards customers for con- tinuing to deal with the firm. This model has been widely implemented in the airline industry (through the frequent flier program) and in the retail trade (e.g., as in Best Buy’s “Reward Zone” program). Changes in technologies, competitors, and markets can at the same time destroy the viability of an existing business model while giving rise to new ones. Consider, for example, how customers’ growing concerns over sustainability issues have opened up the possibility of new business models that offer organic and eco-friendly products. These kinds of changes make it important for operations and business strategy managers to continually evaluate their existing business models and possible business model innovations.

corporate strategy Determines the overall mission of the firm and the types of businesses that the firm wants to be in.

strategic business unit (SBU) The semi-independent organizations used to manage different product and market segments.

business unit strategy Determines how a strategic business unit will compete.

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 man- agement capabilities it will employ.

FIGURE 2-1 Strategic Planning HierarchyEnvironment

Corporate Strategy

Business Strategies

SBU SBU SBU

Operations Strategy

Finance, Marketing, etc. Strategies

Corporate Culture 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

Get Real Boxes Throughout the chapters, readings highlight important real-world applications. They pro- vide examples of operations issues and offer a picture of the concepts in practice. These also provide a basis for classroom discussion and generate interest in the subject matter.

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in contrast, result from custom- ers’ actual experiences with the firm and its operations manage- ment processes. They represent the gap between what the firm delivers and what customers expect. Second, order winners, order qualifiers, and order los- ers vary by customer. An order winner to one customer may be an order qualifier to another. Third, these traits vary over time. An order winner at one time may become an order qualifier at another point in time. As can be seen in the Get Real box about the Bosch CS20 circular saw, being able to identify and act on order winners offers the firm a critical strategic advantage.

Value Propositions and Competitive Priorities To attract key customers, the firm must formulate and implement a value proposition, a statement of product and service features that the firm offers to its customers. A value proposition needs to be both attractive to customers and different from what is offered by the firm’s competitors. For example, Walmart’s value proposition has been to offer every- day low prices on a wide variety of products. The value proposition is critical because it not only defines how the firm competes, it also determines the types of products that the firm will (and will not) offer.

A well-designed value proposition has four characteristics:

1. It offers a combination of product features that customers find attractive and are will- ing to pay for.

2. It differentiates the firm from its competition in a way that is difficult to imitate. 3. It satisfies the financial and strategic objectives of the firm. 4. It can be reliably delivered given the operational capabilities of the firm and its sup-

porting supply chain.

value proposition A collection of product and service features that is both attractive to customers and different than competitors’ offerings.

Think about a recent purchase you made. What were the order-winning traits that influenced your decision? What traits were necessary for you to even consider buying one product over another?

st ud

en tactivity

Bosch CS20: Finding a New Order Winner by Changing the Way Customers Cut Straight Lines

GET REAL

Managers at Bosch Power Tools faced a challenging problem— how to design and deliver a better circular saw. Such saws are found in nearly every handyman’s workshop, and over the years their designs had become fairly standard. Conse- quently, there were few features except price to differentiate competing products. Bosch managers looked at circular saws from an outcome perspective. They saw that many of the cir- cular saws on the market did a poor job of helping users attain a simple but critical outcome—cutting straight lines. Customers were frustrated because the lines were inevitably covered up by either sawdust or by the footplate of the saw itself. Bosch’s solution? First, it installed a powerful fan to vacuum dust off of the cut line. Second, it replaced the steel footplate with an acrylic one that allowed users to see the line as they cut. The result: an award-winning product that cus- tomers want to buy.2

2For more information about this innovative product, see: www.newwoodworker.com /reviews/bcs20rvu.html.

© Richard Hamilton Smith/Corbis

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xii Walkthrough

Logos Logos are included throughout the text to point out relevant applications of relationships, sustainability, and global issues.

Since most organizations have supply chains that reach beyond a single country, we examine global issues associated with operations and supply chain management.

relationships

global

sustainability

Organizations must collaborate with customers and suppliers to accomplish many operations activities. Thus, the book showcases how to build, maintain, and benefit from cross-functional and interorganizational relationships.

To reduce costs and be competitive, organizations today must adopt sustainable busi- ness practices. In fact, we expect sustainability to become a key metric for operations and supply chain management performance.

END-OF-CHAPTER RESOURCES For student study and review, the following items are provided at the end of each chapter:

Chapter Summary Chapters contain summaries that provide an overview of the mate- rial covered.

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This chapter has introduced the operations strategic planning process within the context of supply chain management. In discussing this process, the following points were made within this chapter:

1. Strategic planning defines the specific types of value that the firm will deliver to its customers. It takes place at three levels. Corporate strategy identifies the busi- ness units to be included in the firm. Business unit strategy defines how the business will compete. Operations strategy identifies the priorities, capabilities, and resource deployments needed to support the business strategy and associated value proposition. These three levels of strategic planning should be integrated, with planning taking place from the top down, while execution takes place from the bottom up.

2. Operations strategic planning is driven by the business model—an integrative, sys- tematic view of how the SBU generates value. This planning process begins with the critical customer. It translates the demands of this customer into meaningful terms, using the concepts of order winners, order qualifiers, and order losers.

3. The business model and operations strategy bring together three critical elements: key customers, value propositions, and operations capabilities. The fit between these ele- ments defines the effectiveness of the strategy.

4. Competitive priorities address product-related issues (quality, lead time, cost) and longer term process-related issues (innovation, flexibility, sustainability, and risk management).

5. In developing the future capabilities of the supply chain, operations managers must know what their firm’s existing core competencies are (because these must be protected).

6. Extending strategy development to multiple functions and supply chain partners, oper- ations managers must make critical strategic decisions about what is to be done, with what resources, when activities are to take place, and who is responsible.

7. Critical to strategic success is the ability of the firm to effectively integrate and main- tain fit among the desires of key customers, the firm’s value proposition, and its opera- tional capabilities.

8. Strategic assessment tools like the strategic profit model (SPM) and supply chain operational reference model (SCOR) help link and integrate strategic plans, opera- tions strategies, operational actions, and performance.

CHAPTER SUMMARY

KEY TERMS

business model 27 business unit strategy 27 capabilities 36 core capabilities 36 corporate strategy 27 cost 33 customers 29 fit 37

flexibility 35 functional strategy 28 innovation 34 key customer 29 lead time 33 operations strategy 26 order losers 30 order qualifiers 30

order-to-delivery lead time 33

order winners 30 quality 32 risk management 35 strategic business unit

(SBU) 27 strategic profit model

(SPM) 40

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Walkthrough xiii

Key Terms Key terms are highlighted in the text, and then repeated at the end of the chapter with page references.

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This chapter has introduced the operations strategic planning process within the context of supply chain management. In discussing this process, the following points were made within this chapter:

1. Strategic planning defines the specific types of value that the firm will deliver to its customers. It takes place at three levels. Corporate strategy identifies the busi- ness units to be included in the firm. Business unit strategy defines how the business will compete. Operations strategy identifies the priorities, capabilities, and resource deployments needed to support the business strategy and associated value proposition. These three levels of strategic planning should be integrated, with planning taking place from the top down, while execution takes place from the bottom up.

2. Operations strategic planning is driven by the business model—an integrative, sys- tematic view of how the SBU generates value. This planning process begins with the critical customer. It translates the demands of this customer into meaningful terms, using the concepts of order winners, order qualifiers, and order losers.

3. The business model and operations strategy bring together three critical elements: key customers, value propositions, and operations capabilities. The fit between these ele- ments defines the effectiveness of the strategy.

4. Competitive priorities address product-related issues (quality, lead time, cost) and longer term process-related issues (innovation, flexibility, sustainability, and risk management).

5. In developing the future capabilities of the supply chain, operations managers must know what their firm’s existing core competencies are (because these must be protected).

6. Extending strategy development to multiple functions and supply chain partners, oper- ations managers must make critical strategic decisions about what is to be done, with what resources, when activities are to take place, and who is responsible.

7. Critical to strategic success is the ability of the firm to effectively integrate and main- tain fit among the desires of key customers, the firm’s value proposition, and its opera- tional capabilities.

8. Strategic assessment tools like the strategic profit model (SPM) and supply chain operational reference model (SCOR) help link and integrate strategic plans, opera- tions strategies, operational actions, and performance.

CHAPTER SUMMARY

KEY TERMS

business model 27 business unit strategy 27 capabilities 36 core capabilities 36 corporate strategy 27 cost 33 customers 29 fit 37

flexibility 35 functional strategy 28 innovation 34 key customer 29 lead time 33 operations strategy 26 order losers 30 order qualifiers 30

order-to-delivery lead time 33

order winners 30 quality 32 risk management 35 strategic business unit

(SBU) 27 strategic profit model

(SPM) 40

Discussion Questions Each chapter has a list of discussion questions. These are intended to serve as a student self-review or as class discussion starters.

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supply chain operational reference model (SCOR) 43

sustainability 35 SWOT 28 timeliness 33

time to market 33 triple bottom line 35 value proposition 31

1. Why should the firm never outsource its core capabilities? What happens if the firm is approached by a supplier who is willing to supply goods and services based on these core capabilities at a significantly lower price? What should the firm do?

2. Apply the corporate/SBU/functional planning hierarchy introduced in this chapter to your university/college or business. What would be the equivalent to corporate plan- ning? SBU planning? Functional planning?

3. How would you define capabilities within a school or business? 4. When can a consumer be a critical consumer? In other words, when does it make

sense to focus on consumers such as retail stores, distributors, or buyers, rather than on the end consumer?

5. A critical concept introduced in this chapter was that of the value proposition. Explore two competing products (e.g., RIM’s BlackBerry and Apple’s iPhone). Identify the underlying value propositions present in these products and describe how these propo- sitions are evident in the resulting products.

6. Core capabilities are critical issues in operations management. Are there any instances in which a firm’s core capabilities can be a liability rather than an asset?

7. Fit is critical to the development and maintenance of a successful operations strategy. Suppose that we are faced with a firm in which there is a lack of fit between the out- comes desired by the critical customer, the value proposition, and the firm’s capabili- ties. What options are available to the firm in the short term when dealing with this lack of fit? What is the impact of the lack of fit? What are the implications of the firm trying to improve the fit?

8. Suppose that you are the owner of a pizzeria that is located near a university or col- lege. How could you use the concepts of order winners, order qualifiers, and order losers to help develop and implement an attractive business model?

9. Why should metrics be regarded as primarily methods of communication? Think about the relationship between a metric, the strategy, and the task being carried out by an operations person.

10. A metric consists of three elements: the measure, the standard (what is expected), and the reward. Why are all three elements critical? What happens to the effectiveness of a metric when one of these three elements is missing?

11. What is the impact of sustainability on the business model? How does it affect issues such as the order winners, order losers, and order qualifiers? How does it affect the identification of the critical customer? When addressing this question, look up such products as Chrome or Timbuk2 for bags or Teva or Timberland for shoes.

12. As North American firms increasingly turn to product innovation, the management and protection of intellectual property becomes an important issue. Discuss how intel- lectual property considerations can affect the following areas in supply chain strategy:

a. Supplier relationships b. Supplier contracts c. Supplier location d. Attractiveness of vertical integration

DISCUSSION QUESTIONS

Solved Problems Solved problems are provided to illustrate problem solving and the main concepts in the chapter. These have been carefully prepared to enhance student understanding as well as to provide additional examples of problem solving.

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13. In this chapter, you were introduced to Huffy Bicycles. You were also told that the key customers were store managers and purchasing managers. Now, assume that Huffy decided to target first parents and then children as its critical customers (using the information provided below). What impact would this shift in critical customer have on you—that is, how would you design the resulting operations management system (including the supplier base)?

Critical Customer Order Winners Order Qualifiers

Parent Acquisition price Durability (has to be passed down) Ease of maintenance (does not cost much to maintain over the summer)

Safety Availability

Child Style (colors) Can be easily customized Newness (I have the first one on the block) Imitation (it is what I see others having on television)

Availability Maintenance

14. Using a SWOT analysis, can the operations management system be a strength? Can the operations management system be a weakness? Provide examples.

Suppose you have been asked to determine the return on net worth for Great Northwest Canoe and Kayak, a small manufacturer of kayaks and canoes, located near Seattle, Wash- ington. For this task, you have been given the following information:

SOLVED PROBLEM

Categories Values

Sales $32,000,000 Cost of goods sold $20,000,000 Variable expenses $ 4,000,000 Fixed expenses $ 6,000,000 Inventory $ 8,000,000 Accounts receivable $ 4,000,000 Other current assets $ 3,000,000 Fixed assets $ 6,000,000

1. What is the return on assets for Great Northwest Canoe and Kayak?

Solution:

To address this question, we must first calculate net profit margin and the asset turnover. This can be done using the structure for the SPM found in Figure 2-3.

Gross Margin = $32,000,000 − $20,000,000 = $12,000,000 Total Expenses = $6,000,000 + $4,000,000 = $10,000,000 Net Profit = Gross Margin − Total Expenses = $2,000,000 Net Profit Margin = Net Profit / Sales 6.25%

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xiv Walkthrough

Problems Each chapter includes a set of problems for assignment. The problems are intended to be challenging but doable for students.

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Current Assets = Inventory + Accounts Receivable + Other Current Assets = $15,000,000 Total Assets = Current Assets + Fixed Assets = $21,000,000 Asset Turnover = Sales / Total Assets = 1.52

Return on Assets = Net Profit Margin × Asset Turnover = 6.25 × 1.52 = 9.5

2. What areas should we as operations managers focus on if our goal is to improve ROA?

Solution:

We can see that the largest asset under our control is inventory. By reducing inventory we can improve the ROA. (It is left up to the student to prove this. One way of doing this is to examine the impact on ROA of a $1 million reduction in inventory or a $1 million increase in inventory.)

Categories Values

Sales $32,000,000 Cost of goods sold $20,000,000 Variable expenses $ 4,000,000 Fixed expenses $ 6,000,000 Inventory $ 8,000,000 Accounts receivable $ 4,000,000 Other current assets $ 3,000,000 Fixed assets $ 6,000,000

1. Given the following information:

PROBLEMS

a. What is the net profit margin for this firm? b. What is the asset turnover? c. What is the return on assets? d. What is the size of the total assets used by the firm? 2. For the prior question, management wants to double the return on assets, without

affecting sales, cost of goods sold, variable expenses, fixed expenses, or fixed assets. Rather it wants to focus on either inventory or accounts receivable.

a. Can management focus on either inventory reductions or accounts receivable reductions alone?

b. How can it achieve this objective? c. Do you see any downsides in pursuing this objective through a focus on inven-

tory/accounts receivable reductions? 3. You are the operations manager for a small kayak and canoe manufacturer (Valley

Kayaks) located on the Pacific Northwest (Oregon). Lately your company has expe- rienced product quality problems. Simply put, the kayaks that you produce occasion- ally have defects and require rework. Consequently, you have decided to assess the impact of introducing a total quality management (TQM) program. After discussing the potential effects with representatives from marketing, finance, accounting, and quality, you arrive at a set of estimates (contained in