Operations Strategy

Billy E. Panganiban
Operations strategy
Specifies how operations can help implement the firm’s
corporate strategy. It basically links long and short-term
operations decisions to corporate strategy.

Corporate Strategy- defines the business(es) that the

company will pursue, new opportunities and threats in
the environment, and the growth objectives that it
should achieve.
Operations strategy
Management sets corporate strategy by making three
strategic choices;
1. Determining the firm’s mission
2. Monitoring and adjusting to changes in the
environment
3. Identifying and developing the firm’s core
competencies.
Operations strategy
Mission
A firm’s mission statement answers several fundamental
questions.
• What business are we in? Where should we be ten years from
now?
• Who are our customers?
• What are our basic beliefs?
• What are the key performance objectives, such as profits,
growth, market share by which we measure success.
Production Sharing
• Production sharing was coined by Peter Drucker
• It means that a product might be designed and financed in one
country, its materials produced in other countries, assembled in
another country, and sold in yet other countries.
• The country that is the highest-quality, lowest-cost producer for a
particular activity would perform that portion of the production of
the product.
Pros and Cons of Globalization
• Pros
• Productivity grows more quickly (living standards can go up faster)
• Global competition and cheap imports keep a lid on prices
(inflation less likely to derail economic growth)
• Open economy spurs innovation (with fresh ideas from abroad)
• Export jobs often pay more than other jobs
• US has more access to foreign investment (keeps interest rates
low)
Pros and Cons of Globalization
• Cons
• Millions of Americans have lost jobs due to imports or
production shifts abroad
• Most displaced workers find new jobs that pay less
• Workers face pay-cuts demands from employers
• Service and white-collar jobs are increasingly vulnerable
• US employees lose their comparative advantage when
companies build advanced factories abroad
International Financial Conditions
• International financial conditions are complex due to:
• inflation
• fluctuating currency exchange rates
• turbulent interest rates
• volatility of international stock markets
• huge national debts of some countries
• enormous trade imbalances between countries
International Financial Conditions
International Financial Conditions
• Companies must be ready to move quickly to shift
strategies as world financial conditions change.
• Opportunities are usually available to reduce risk
• Building smaller, more flexible factories
• Using foreign suppliers for materials, parts, or
products
• Carefully planning and forecasting so that changing
conditions can be anticipated
Quality, Service, and Cost
Challenges
• Quality
• The goal of adequate quality must be replaced with the
objective of perfect product and service quality.
• The entire corporate culture must be redirected and
committed to the ideal of perfect quality.
• All employees must be empowered to act.
• A commitment to continuous improvement has to be
organization-wide.
Quality, Service, and Cost
Challenges
Customer Services must quickly develop innovative products
and respond quickly
Organizational structures must be made more horizontal to
quickly accommodate change.
• Multidisciplined teams must have decision-making
authority, responding better to the marketplace.
• Large, unwieldy companies are spinning off whole
business units making them autonomous businesses that
can compete with small, aggressive competitors.
Quality, Service, and Cost
Challenges
• Cost
• Cost-cutting measures being used include:
• Moving production to low-labor-cost countries
• Negotiating lower labor rates with unions and
workers
• Automating processes to reduce the amount of
labor needed, particularly processes that are
labor intensive.
Advanced Technologies
• The use of automation is one of the most far-reaching
developments to affect manufacturing and services in the
past century.
• The initial cost of these assets is high.
• The benefits go far beyond a reduction in labor costs.
• Increased product/service quality
• Reduced scrap and material costs
• Faster responses to customer needs
• Faster introduction of new products and services
Advanced Technologies
• US companies cannot use automated production
technology as a long-term competitive advantage.
• Automation systems are available to any company in
the world today, although the price is prohibitive for
some companies.
• Not investing, or delaying investing in this technology
could be disastrous for a company.
 Continued Growth of Service Sector
• A robust service sector helps support the manufacturing sector.
• There is much opportunity for quality improvement in US service
firms.
• Many operations managers are being employed in services.
• Planning, analyzing, and controlling approaches from
manufacturing are being adapted to service systems.
• The US service sector, like the manufacturing sector, must
streamline and improve operations if it is to survive.
Scarcity of Operations Resources
• Raw materials like titanium, nickel, coal, natural gas, water,
and petroleum products are periodically unavailable or in
short supply.
• A shortage of any necessary input to a conversion subsystem,
including skilled personnel, can be a challenge for an
operations manager.
• An important issue in the formation of business strategy is
how to allocate scarce resources among business
opportunities.
Social-Responsibility Issues
• Corporate attitudes are evolving from doing what companies
have a legal right to do, to doing what is right.
• Factors influencing this evolution include:
• Consumer attitude -- Consumers are expressing their
likes/dislikes by such means as stockholder meetings, liability
suits, and buying preferences.
• Regulation – The EPA, OSHA, Clean Air Act, and Family Leave
Act place constraints on businesses.
• Self-interests -- Companies realize that profits will be greater if
they act responsibly.
Social-Responsibility Issues
• Environmental Impact
Concerns about the global environment include:
• Landfill waste reduction
• Recycling
• Energy conservation
• Chemical spills
• Acid rain
• Radioactive waste disposal
• … and more
Social-Responsibility Issues
• Environmental Impact
• There is a need for standardizing government regulations of the
environment.
• There is a need for standardizing government regulations of the
environment.
• Otherwise, companies will gravitate to the less-regulated
countries.
• The International Organization for Standardization has developed a
set of environmental guidelines called ISO 14000.
Social-Responsibility Issues
• Product-Safety Impact
Harm to people or animals that results from poor product
design can:
• Damage a company’s reputation
• Require a large expense to remedy
• Cause governments to impose more regulations
Social-Responsibility Issues
• Employee Impact
Employee benefits and policies include:
• Safety and health programs
• Fair hiring and promotion practices
• Day-care
• Family leave
• Health care
• Retirement benefits
• Educational assistance
• … and more
Social-Responsibility Issues
• Employee Impact
Employee benefits and policies impact long-term profitability due to
their effect on:
• Employee morale and productivity
• Recruitment and retention of employees
• Demand for a company’s products
• Cost of defending against lawsuits and boycotts
SWOT: Strategic Planning Tool

Opportunity Treat

Strength

Weakness
Competitive Priorities

Response time

Quality Flexibility

Cost
Product/Service Plans
As a product is designed, all the detailed
characteristics of the product are established.

Each product characteristic directly

affects how the product can be made.

How the product is made determines

the design of the production system.
Stages in a Product’s Life Cycle
• Introduction- Sales begin, production and marketing are developing,
profits are negative.
• Growth - sales grow dramatically, marketing efforts intensify, capacity
is expanded, profits begin.
• Maturity - production focuses on high-volume, efficiency, low costs;
marketing focuses on competitive sales promotion; profits are at
peak.
• Decline - declining sales and profit; product might be dropped or
replaced.
Competitive Priorities for Services
• The competitive priorities listed earlier for manufacturers apply to
service firms as well
• Low production costs
• Fast and on-time delivery
• High-quality products/services
• Customer service and flexibility
• Providing all the priorities simultaneously to customers is seldom
possible.
Forming
Forming Operations
Operations Strategies
Strategies
• Support the product plans and competitive priorities defined in the
business strategy.
• Adjust to the evolving positioning strategies.
• Link to the marketing strategies.
• Look at alternative operations strategies.
Evolution of Positioning Strategies
• The characteristics of production systems tend to evolve as products
move through their product life cycles.
• Operations strategies must include plan for modifying production
systems to a changing set of competitive priorities as products
mature.
• The capital and production technology required to support these
changes must be provided.
Evolution of Positioning Strategies
Life Early Late
Intro. Maturity
Stage Growth Growth
Slightly Highly
Product Custom Standard
Standard Standard
Very Very
Volume Low High
Low High
Prod mode Process Process Product Product
Inventory. To-Order To-Order To-Stock To-Stock
Batch Very Very
Small Large
Size Small Large
DECISION MAKING
DECISION MAKING

• BREAK-EVEN – a condition wherein the

production of a firm is not earning but it
also mean that it also not losing .
• A condition of zero profit
Break-Even Analysis

Total Revenue = Total Cost

Break-Even Analysis

•Total Revenue = Total Cost

•where Total Revenue or
•TR = P x Q
• P represents Price and
• Q symbolizes Quantity
Break-Even Analysis
• Total Cost or TC = TFC + TVC
Break-Even Analysis
• Total Cost or TC = TFC + TVC
• TC = TFC + TVC
• Wherein TVC = VC x Q
• meanwhile
• TR = TC can be rewritten as
• P x Q = TFC + (VC x Q)
Break-Even Analysis
• A. ABC Company produces
product X. They incur Php
180,000 of fixed cost per month.
In order to produce a single piece
of product X they spends P80. If
they were able to sell product X
at Php 200 each. How many units
of product X must they sell in
order to break-even?
Break-Even Analysis
• GIVEN:
TFC = Php 180,000
VC = Php 80
Price = Php 200
Required = Q
Break-Even Analysis
• TR = TC
• 200 Q = 180,000 + 80 Q
• 200 Q – 80 Q = 180,000
• 120 Q = 180,000
• 120 Q = 180,000
• 120 120
•Q = 1,500
Break-Even Analysis
• Checking:
• TR=TC
• P 200 (1,500) = P180,000 + (P80 x
1,500)
• P 300,000 = P 180,000 + P 120,000
• P 300,000 = P300,000
Break- Even Analysis
• B. If ABC Company finds a new supplier that will
enable them to decrease their expenses in
producing a single unit of product X by 25 %
while TFC remains the same. Because of this
they decided to give a price discount to their
customers, How much could they sell product X ?
If the company will break-even at the same level
in letter A.
Break-Even Analysis
Given in letter A Given in letter B
• TFC = P 180,000 • TFC = P 180,000
• VC = P 80 • VC = P80 less
• Price = P 200 25%
• Required : Q • 80 (1-.25) = 60
• Answer : Q =
1,500 • Q = 1,500
• Required
• Price =
Break- Even Analysis
• New Given
• TFC = P 180,000
• VC = P 60
• Q = 1,500
• Required is
•P = ?
Break-Even Analysis
• TR = TC
• 1,500 P = 180,000 + ( 60 X
1,500)
• 1,500 P = 180,000 + 90,000
• 1,500 P = 270,000
• 1,500 P = 270,000
• 1,500 1,500
• P = 180
Break-Even Analysis
• Checking:
• TR = TC
• Php180 X 1,500 = Php 180,000 +(Php60
X 1,500)
• Php 270,000 = Php 180,000 + Php
90,000
• Php 270,000 = Php 270,000
 Break-Even Analysis
• C. Using the original data, ABC
Company’s TFC increases by 10
% while the variable cost
increases by 15%. How much
should they sell product X in
order to break even at 1,200
units?
Break-Even Analysis
• Given:
• TFC = P 180,000 increases by 10%
• P 180,000 ( 1 + .10) = 198,000
• Variable Cost = P 80 increases by
15%
• P 80 (1 + .15) = 92
• Q = 1,200
• Required Price
Break-Even Analysis
• TR = TC
• 1,200 P = 198,000 + ( 92 X
1,200)
• 1,200 P = 198,000 + 110,400
• 1,200 P = 308,400
• 1,200 P = 308,400
1,200 1,200
• P = 257
Break-Even Analysis
• Checking:
• TR = TC
1,200 X 257 = 198,000 + (92 X 1,200)
308,400 = 198,000 + 110,400
308,400 = 308,400
 Break-Even Analysis

• A. Company Kho produces product Y, their

Total Fixed Cost is P 50,000. In order to produce
a single unit of product Y they need P 200.
Company Kho sells product Y at P 600 each.
What is the company’s monthly break-even
point?
• B. Company Kho finds a new supplier that
enables them to decrease their variable cost
by 20% while the Monthly Total Fixed Cost
increases by 5%. How much can they sell the
product to break-even 25 units less your
answer in letter A.
Break-Even Analysis
Given
P = 600
VC = 200
TFC = 50,000
TR = TC
600Q = 50,000 + 200Q
600Q-200Q = 50,000
400Q = 50,000
Q = 125
Break-Even Analysis
• Checking
• TR=TC
• 600 X 125=50,000 +
200(125)
• 75,000 = 50,000 + 25,000
• 75,000 = 75,000
Break-Even Analysis
• Q=125-25 = 100
• TFC = 50,000 ( 1+.05) = 52,500
• VC = 200 ( 1-.2) = 160
• 100P = 52,500 + 160(100)
• 100P = 52,500 + 16,000
• 100P = 68,500
• 100P = 68,500
• 100 100
• P = 685
Break-Even Analysis
• Checking
• TR=TC
685(100) = 52,500 + 160
(100)
68,500 = 52,500 + 16,000
68,500 = 68,500