Bozarth & Handfield, Chapter 2 (3/26/02) Chapter 2 Outline: Operations and Supply Chain Strategies Dell Computer Corporation Introduction Elements of the Business Strategy Strategic Planning Mission statement Business strategy Targeted customers Sustainable competitive advantage Core competencies The role of supply chain partners in the business strategy Operations and Supply Chain Strategies Customer value Five performance dimensions Trade-offs among performance dimensions Order winners and qualifiers 1
Transcript
Bozarth & Handfield, Chapter 2 (3/26/02)
Chapter 2 Outline:
Operations and Supply Chain Strategies
Dell Computer Corporation
Introduction
Elements of the Business
Strategy
Strategic Planning
Mission statement
Business strategy
Targeted customers
Sustainable competitive advantage
Core competencies
The role of supply chain partners in the business strategy
Operations and Supply Chain Strategies
Customer value
Five performance dimensions
Trade-offs among performance dimensions
Order winners and qualifiers
Alignment of operations, supply chain, and business strategis
Core competencies in operations and supply chains
Chapter Summary
Discussion Questions
Exercises
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Elizabeth A. Morgan, 01/03/-1,
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Elizabeth A. Morgan, 01/03/-1,
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Chapter 2
Operations and Supply Chain Strategies
Dell Computer Corporation
Sure, operations and supply chains are important, but can firms gain their main
competitive advantage through superior performance in these areas? Charles Fine of
MIT certainly thinks so. Take the case of Dell Computer Corporation1:
Dell Computer has no propriety technology propelling it to such stratospheric
growth and profitability. In fact, nearly all the components going into Dell's
computers are available off-the-shelf. Yet Dell has succeeded by timing its
purchasing, production, and distribution activities so well that the company holds
no finished goods inventory and minimal inventory of parts, yet is still able to
assemble and ship orders in less than 24 hours . . . [Dell's] primary advantage is
its preeminent supply chain design, augmented with precise supply chain
management.
Dell’s operations strategy is based on a build-to-order production system. This means
that Dell only assembles computers once they have actual customer orders. Yet Dell is
still able to maintain five to six day lead times to its customers. On the supply chain
side, Dell buys only the latest technology components, and then just a few days or even
1 The Primacy of Chains, Supply Chain Management Review, Spring, 1999, pp. 79-91.
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hours worth at a time. Not only does this minimize their inventory holding costs, it
reduces Dell’s exposure to potentially obsolete parts inventories. (Imagine the poor
computer manufacturer who has 100 days worth of a particular computer chip when the
latest version comes out!) Dell also taps into the supply chain to outsource its after-sales
service as well as delivery of computers2.
Dell is one in a long line of organizations that has succeeded by implementing
superior operations and supply chain strategies. Of course, there is no assurance that
these strategies will always work for Dell. After all, IBM, Apple, and Compaq
Computers were all considered “leaders” in the PC industry at one time or another. But
in the PC world, Dell Computers is on top – at least for now.
Introduction
Discussing operations or supply chain management without someone mentioning the
word “strategy” is almost impossible. But what does that term really mean? What
constitutes an operations or supply chain strategy, and how does it support a firm’s
overall efforts? In this chapter, we will start by introducing some key concepts in
business strategy. We will describe how businesses actually create strategies, and then
position operations and supply chain strategy within that larger process.
The second half of the chapter is devoted exclusively to operations and supply
chain strategy. We will discuss the three main objectives of operations and supply chain
strategy, and consider some of the decisions managers face in developing and
2 “The power of virtual integration: An interview with Dell Computer’s Michael Dell”< Joan Magretta, Harvard Business Review, March-April, 1998, pp. 73-84.
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implementing their strategies. Throughout this discussion we will stress the key role
operations and supply chains play in creating value for the customer
Elements of the Business
Before we jump into our main discussion, let’s take a moment to consider the business
elements that make up the typical organization. These elements include business
processes, resources, information systems, and policies and procedures. Business
processes address the question of how work is organized and managed across the
organization. Operations and supply chain activities account for just a fraction of these
business processes. Others include selling, financing, and hiring and training, just to
name a few. Resources can include people, capital (buildings, equipment, or cash),
intellectual property (patents and copyrights), and even intangible “know-how” needed to
make the processes work. As you might suspect, many such resources are found in
abundance in the operations and supply chain areas.
Information systems provide the data that are needed to plan, control and
coordinate organizational processes, both within the firm and between the firm and its
supply chain partners. Imagine the information systems a large retailer must put in place
just to assure that goods will get from suppliers to the stores. Finally, policies and
procedures are the rules and steps organizations follow in executing their business
processes. These policies and procedures ensure that the firm’s actions will take place as
smoothly and consistently as possible.
To make these ideas more concrete, think about the business elements at a typical
university. There are literally hundreds of business processes in a university that cover
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everything from feeding and housing students, assigning parking spaces, building and
maintaining facilities, to performing basic research. (Oh yeah, universities also do some
teaching as well.) The university’s resources include professors and support personnel,
classroom buildings, laboratories, and dormitories, as well as any patents and copyrights
the university may own. Its information systems allow students to register for classes,
track their grades, and access web-based instructional material; they also help university
personnel to track payrolls, accounts payable, and other financial information. Finally,
the university’s policies and procedures guide admissions and hiring decisions, tenure
reviews, the assignment of grades, and the administration of scholarships and research
grants. Schools even have policies and procedures that guide how students get tickets to
football and basketball games!
For a business to compete successfully, all of these elements must work together.
Because some of these elements can take years and millions of dollars to develop,
businesses need to ensure that their decisions are appropriate and consistent with one
another. Thus the need for strategy.
Strategy
Strategies are the mechanisms by which businesses coordinate their decisions regarding
business processes, resources, information systems, and policies and procedures.
Strategies can be thought of as long-term game plans. What is considered "long-term"
can differ from one industry to the next, but generally the phrase covers several years or
more. Operations and supply chain strategies are an attempt to coordinate decisions
about business elements at the operations and supply chain levels.
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Strategies can be explicit and well-documented, or they can be identifiable only
from the firm’s actions. Like any game plan, strategies represent a balance between
responsiveness and rigidity. Though strategies should be updated as markets or
technologies change, a firm should not change its strategy overnight, for little or no
reason.
As Figure 2.1 suggests, most organizations have more than one level of strategy,
from upper-level business strategies to more detailed and lower-level functional
strategies. (When organizations have multiple distinct businesses, they often distinguish
between an overall corporate strategy and individual business unit strategies.) Business
strategies usually focus on the needs of a particular set of customers or products, while
functional strategies translate a business strategy into specific actions. For example, an
operations strategy might address the manufacturing or service processes needed to make
a specific product, while a supply chain strategy might specify how suppliers will be
selected and how the products will be distributed. Other functional strategies would cover
marketing, finance, and human resources, to name a few.
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Figure 2.1: A Top-Down Model of Strategy
Mission Statement
•Reason for existence•Core values•Domain
Business Strategy
•Targeted customers / markets•Areas of sustainable competitive advantage / core competency•Role of supply chain partners•Time frames & performance objectives
Operations & Supply Chain Strategies
•Translate business strategy into operations &•supply chain actions•Provide value to targeted customers / markets•Develop supporting core competencies in operations & supply chain practices
Business strategies should always be linked to functional strategies. Consider
Microsoft. For years, part of Microsoft's business strategy has been to dominate the
world-wide market for PC-based business software. To that end, Microsoft’s product
development strategy emphasized the development of general-purpose office software
that was comprehensive yet easy to use. In the mid-1990s, however, Microsoft shifted its
business strategy in response to the burgeoning Internet market. As a result, the
company adjusted its product development strategy, introducing its own Internet browser
and “bundling” it in with its Windows operating system. While these actions have
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caused some of Microsoft’s competitors to cry foul, they can nonetheless be traced back
to a shift in business strategy.
Strategic Planning
Strategic planning has its origins in warfare. Famous generals such as Alexander the
Great, Napoleon, and Julius Caesar followed a common approach to strategic planning,
which included defining their objectives, evaluating their own and their opponents’
strengths and weaknesses, and then deciding how best to achieve their objectives – in
their case, how to win the battle. Business leaders follow essentially the same model. In
fact, even today, many managers read books such as The Book of Five Rings for
inspiration on leadership and strategic planning.
Let’s return to the model of strategy shown in Figure 2.1. Note that the strategy-
making process begins with a broad mission statement, from which a general business
strategy is derived. From the business strategy, more specific functional strategies are
derived. Thus strategic planning is generally a top-down process, although core
competencies at the functional level (a concept we will talk about later) can “feed back”
into the development of business strategies.
In most cases, only the board of directors can develop or change the mission
statement, while the executive team (the CEO, the president, and so forth) is responsible
for the business strategy. Even though functional strategies are approved by the executive
team, they are developed and executed by functional-level managers, such as the vice
presidents of manufacturing, purchasing, and logistics.
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The model in Figure 2.1 shows how the mission statement, business strategy, and
functional strategies are related to one another. Managers should be able to pick any
specific strategic action at the functional level (for example, "Develop a European
source for raw material X") and trace it back to the business strategy ("Increase our
European business presence") and ultimately to the firm’s mission statement ("Become a
world-class competitor in our industry"). When the different levels of the strategic
planning process fit together well, an organization is said to have good strategic
alignment.
Mission Statement
The mission statement explains why an organization exists; describes what is important
to the organization, called its core values; and identifies the organization’s domain. If it
is prepared correctly, a mission statement can provide managers with invaluable guidance
in developing the strategies to follow. Consider the mission statement for one non-profit
hospital (italics added):
The mission of the Finch Health System is to improve the health status of the
people of mid-Michigan by providing quality, compassionate, comprehensive and
cost-effective health services that are accessible to all. As a non-profit, community
governed, comprehensive integrated health system this will be accomplished by:
Providing excellent and responsible patient care;
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Serving as a recognized leader and as a valued partner in developing and
delivering a full continuum of services;
Improving health status through public education, professional education,
research, public advocacy, and health plans;
Being accountable for the value of our services to all patients, health plan
members, physicians, health care purchasers, and communities;
Living our values of excellence, service, people, responsibility, innovation
and teamwork.
This mission statement is effective because it states how the organization will be
governed; what range of services will be offered, and to whom (the domain); and what is
really important to the organization (core values).
Business Strategy
Once an organization has settled on its mission, managers can turn their attention to
developing the business strategy. Much has been written on what a business strategy
should accomplish3. To keep things simple, we will focus only on those parts of a
business strategy that are directly relevant to the development of successful operations
and supply chain strategies. These include:
3 For a comprehensive discussion of this topic, see Strategic Management and Business Policy, Thomas Wheelen and David Hunger, Prentice-Hall, 2002.
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Clearly identify the firm's targeted customers, and broadly indicate what the
operations and supply chain functions will need do to provide value to those
customers.
Identify and support the development of core competencies in the operations and
supply chain areas. Core competencies represent one way in which firms can build a
sustainable competitive advantage.
Set time frames and performance objectives that managers can use to track the firm's
progress toward fulfilling its business strategy.
If prepared correctly, a business strategy can provide helpful guidance in fleshing out
the more detailed functional strategies. To illustrate, suppose Finch Health Systems’
business strategy were to include the following statements:
Put in place Finch-owned health care facilities that include trauma, pediatrics and
geriatrics.
Locate these facilities so that no patient in Kent, Montcalm, or Ionia counties has to
travel more than 30 miles to reach a Finch facility.
Partner with local health services organizations to provide in-home health care.
Within four years, become the primary health care provider to 20% of the targeted
population.
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Notice how this business strategy fits within the general guidelines provided by the
mission statement. Still, it does not list specific actions – such as construction, staffing,
and even hospital equipment selection – that must take place in order to meet the 4-year
goal of a 20% market share. Note too that this business strategy indicates how Finch will
partner with outside companies to serve the targeted customers. How the organization
will use the supply chain is a often a key part of the business strategy.
In describing the objectives of a business strategy, we introduced some new terms:
targeted customers, sustainable competitive advantage, and core competencies. Let’s
take a few minutes to describe just what these terms mean.
Targeted Customers
Customers are not homogeneous. Rather, most markets can be divided into groups of
customers who have distinctive needs, called market segments. To develop successful
operations and supply chain strategies, managers must understand who makes up the
targeted market segment and what they value.
For example, WolfByte Computers, a manufacturer of PCs, might try to cut their
product costs to win the business of price-sensitive buyers. However, cutting costs might
mean using lower-quality components and less skilled service personnel. And such a
decision might actually make WolfByte PCs less attractive to performance-minded
buyers.
Suppose, in fact, that WolfByte wants to target customers who demand high
quality products, short lead times, and/or high quality after-sales support. If WolfByte’s
overall business strategy is directed toward these customers, then its operations and
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supply chain decisions should be consistent with their needs. WolfByte might hire and
train skilled employees to handle customers’ technical questions, and pay extra money
for top-of-the-line components. The point is, companies are more likely to make logical
and consistent operations and supply chain decisions if they focus on the needs of a
specific targeted market. Companies that do not have a clear target will shoot
everywhere, and will miss the mark much of the time.
Sustainable Competitive Advantage
As important as the needs of targeted customers are, organizations also need to consider
how they stack up against their competitors. Going back to our example, WolfByte may
do an excellent job serving performance-minded PC buyers. But if another firm offers
identical products and after-sales support, what is WolfByte's competitive advantage?
In short, businesses should strive to provide their customers with sources of value
that competitors cannot easily mimic. When a firm's competitive advantage cannot be
easily duplicated by the competition, it is said to be sustainable. A sustainable
competitive advantage gives the firm the appearance of "owning" the market, and
forces competitors into a reactive posture.
Core Competencies
Some of the most important sources of sustainable competitive advantage are core
competencies—organizational strengths or abilities, developed over a long period, which
customers find valuable and competitors find difficult or even impossible to copy.
Honda, for example, is recognized for having core competencies in the engineering and
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manufacture of small gas-powered engines. Those core competencies have helped
Honda to conquer numerous markets, including the markets for motorcycles, cars,
lawnmowers, jet skis, and home generators.
Core competencies can take many forms and even shift over time. IBM, for
example, used to be known as a computer hardware company. Nowadays, IBM's core
competency is arguably its ability to provide customers with integrated information
solutions and the consulting services needed to make them work. As a recent magazine
article noted, “Good IT staffers re hard to find, but IBM Global Services alone has
150,000. That makes IBM the world’s largest IT services provider.”4 You can imagine
how hard it would be for other firms to try to duplicate IBM’s advantage. Last, we
should note that core competencies are by no means limited to operations and supply
chain activities. Some firms succeed through superior marketing, financial, or even IT
efforts.
The Role of Supply Chain Partners in the Business Strategy
In some cases, the ability of firm to manage its supply chain partners may in itself be
considered a core competency. This is certainly the case for Dell Computer Corporation,
who practices what Michael Dell calls “virtual integration.” While not all organizations
are as dependent on their supply chain partners as Dell, current industry trends suggest
that more and more organizations are focusing on developing only a few core
competencies, and outsourcing everything else. This type of strategy puts a premium on
an organization's ability to select good partners and coordinate the flow of information
4 “The future of IBM”, David Kirpatrick, Fortune Magazine, 2/18/02, pp. 60-8.
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and material between partners. It also creates risks, especially if the organization’s
selected core competencies fall out of favor in the future. In fact, insourcing /
outsourcing decisions are becoming so important to firms that we deal with it in detail in
Chapter 8.
Operations and Supply Chain Strategies
Now that we have some understanding of how business strategies “set the boundaries”
for lower-level functional strategies, let’s turn our attention to operations and supply
chain strategies. The need for sound operations and supply chain strategies is very clear.
For one thing, operations and supply chain activities often account for the lion’s share of
the firm’s resources. These resources can include:
Materials in the form of purchased goods, work in progress, or even finished items
that are ready to sell (Chapters 12, 13, and 14).
People, including direct labor, managers, and administrative staff.
Equipment and Facilities, such as machinery, retail stores, distribution centers, and
manufacturing plants (Chapters 4, 5 and 7).
This list doesn’t even touch on the other business elements that must be put in place
to pull all these pieces together. Imagine the confusion operations and supply chain
managers would face if they did not have some way to relate their decisions in these
areas to the firm’s overall business strategy.
In this book, we will distinguish between a firm’s operations strategy, which is
internally focused, and its supply chain strategy, which is externally focused. That is,
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operations strategies deal with business elements within the four walls of an
organization. Supply chain strategies, in contrast, deal with business elements that link
the organization to its outside supply chain partners. For example, process choice is
often a key part of an operations strategy, while purchasing and logistics, because of their
strong linkages to outside firms, fall under the supply chain strategy. Some activities,
such as materials management and planning and control systems, have characteristics that
make them fall under both the operations and supply chain strategies.
At the risk of over-simplifying, executing successful operations and supply chain
strategies really boils down to choosing and implementing the right mix of these
elements. At this point in time, you might have only a rough idea of what goes into this
mix. Nevertheless, we can still discuss what makes some operations and supply chain
strategies effective, while others flounder. Effective operations and supply chain
strategies accomplish three things:
1. They ensure that the firm's operations and supply chains excel on the performance
dimensions that are valued by the firm's targeted customers.
2. They ensure that the firm’s operations and supply chain decisions are strategically
aligned with the firm’s business strategy.
3. They help develop core competencies in the firm’s operations and supply chains.
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Customer Value
As we noted in Chapter 1, operations and supply chains help firms to provide products or
services that someone values. But how should we define value? To begin, most
customers evaluate products and services based on multiple performance dimensions
such as functionality, delivery speed, after-sales support, and cost. The organization that
provides the best mix of these dimensions will be seen as providing the highest value.
To illustrate, suppose you want to buy a personal computer for use with your
school assignments. To keep the task simple, you decide to evaluate your choices on
four dimensions:
1. Functionality. How much memory does each computer have? How fast are the
processor and modem? How much disk space does each computer have?
2. Delivery speed. How quickly can you receive the computer?
3. After-sales support. Will the manufacturer help you to resolve any technical
problems? Will you be able to get help 24 hours a day, or just at certain times?
4. Cost. What is the total cost to own the computer?
If you were to rate the importance of each of these dimensions on a scale from 1 to 5
(“completely unimportant” to “critical”), you might come up with the following ratings:
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Dimension Importance to you
Functionality 3
Delivery speed 1
After-sales support 2
Cost 4
Armed with these ratings, you head to the campus store to see what might be
available. The store carries two different PCs, one made by WolfByte Computers and
the other by Dole Microsystems. How closely do these two PCs match your ratings on
the four dimensions that are important to you? WolfByte’s PC costs $1500, but it has a
faster processor and modem, can be delivered the same day, and includes around-the-
clock technical support for a full year. Dole Microsystems’ PC sells for half the price,
but it is not nearly as fast, requires a week for delivery, and comes with only a month of
technical support. If you were to rate the performance of each of these PCs on your four
dimensions, you might come up with the following:
Dimension
Importance to
you
WolfByte
Performance
Dole Microsystems
Performance
Functionality 3 4 2
Delivery speed 1 5 3
After-sales support 2 4 2
Cost 4 2 4
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To find which PC provides the greater value, you can calculate a value index for each
PC. The formula for the value index is:
Value Index = (Importance of dimension I) * (Performance on dimension I).
For WolfByte, the value index equals (3*4 + 1*5 + 2*4 + 4*2 = 33); for Dole
Microsystems, (3*2 + 1*3 + 2*2 + 4*4 = 29). So even though the WolfByte computer
is more expensive, its performance on the other three dimensions make it a better value
for you.
Five Performance Dimensions
Operations and supply chains can have an enormous impact on many performance
dimensions. Experience suggests that there are five performance dimensions that are
particularly relevant to operations and supply chain activities. These are:
1. Quality
2. Delivery
3. Flexibility
4. Cost
5. After-sales support.
Let’s look at each of these performance dimensions in depth.
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Quality. The concept of quality is a broad one that can be subdivided into the following
categories:
Functionality. What are the characteristics or features of a product or service that
determine how well it works? Products with many features or services that provide
superior performance are often thought of as being of “higher quality.”
Conformance. Was the product made or the service performed to specification?
Examples of conformance quality include degree of purity, the weight of a product, and
the amount of time it takes to perform a service.
Reliability. Will a product work for a long time without failing or requiring
maintenance? Does a service operation perform its tasks consistently over time?
Durability. Can a product withstand adverse conditions, such as temperature extremes or
rough handling? What is its "expected life"?
Safety. Was the product or service designed to be safe?
Serviceability. If necessary, can the product can be easily repaired or serviced?
Aesthetics. Does the product or service appeal to the senses? Fresh-baked cookies or a
shiny paint job are obvious examples.
The relative importance of these quality dimensions will differ from one customer
to the next. One buyer may be more interested in reliability and serviceability, another in
performance and aesthetics. To compete on the basis of quality, a firm’s operations and
supply chain must consistently meet or exceed customer expectations or requirements on
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the most critical quality dimensions. Quality will be discussed in detail in Chapters 13
and 14.
Delivery. Delivery performance has two basic characteristics: speed and reliability.
Delivery speed is the elapsed time from the receipt of an order to final delivery.i A firm
with superior delivery speed can "deliver more quickly than its competitors or meet a
required delivery date when only some or even none of the competition can do so".ii
Typical strategies for improving delivery speed include streamlining the order entry
process, holding inventory at key points in the supply chain (in stores or regional
warehouses), maintaining excess capacity with which to meet “rush” orders, and using
faster transportation.
Delivery reliability refers to the ability to deliver products or services on time. Note
that a firm can have long lead times yet still maintain a high degree of delivery
reliability. Typical measures of delivery reliability include the percentage of orders that
is delivered by the promised time and the average tardiness of late orders.
Delivery reliability is especially important to companies that are linked together in a
supply chain. Consider the relationship between a fish wholesaler and its major
customer, a fish processing facility. If the fish arrive too late, the processing facility
may be forced to shut down. On the other hand, fish that arrive too early may go bad
before they can be processed. Obviously, these two supply chain partners must
coordinate their efforts so that the fish will arrive within a specific time “window,”
usually a few hours.
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Today, many firms are requiring increasingly tighter delivery windows.
Whereas in the past, a delivery was considered to be on time if it was made within a few
days of the promised date, the acceptable time frame is now as little as two hours --
even for goods that are not perishable. One automobile manufacturer charges suppliers
a penalty fee of $10,000 for every minute deliveries are late. That practice may seem
extreme until one considers that late deliveries may shut down an entire production line.
Another measure of delivery reliability is the accuracy of the quantity shipped. For
example, Sam's Club demands 95 percent accuracy in stock deliveries from suppliers. If
suppliers ship more than the quantity ordered, they are still considered to be in error.
Some firms will consider a partial shipment to be on time if it arrives by the promised
date, but others will accept only complete shipments, delivered within the scheduled
window.
Flexibility. Many operations and supply chains compete by responding quickly to the
unique needs of different customers. Both manufacturing and service firms can
demonstrate flexibility. A full-service law firm, for instance, will handle any legal issue
a client faces. (Some law firms specialize only in real estate transactions or divorce
settlements.) And a full-service hotel will go to great lengths to fulfill a guest’s every
need. A staff member at the Ritz-Carlton in Dearborn, Michigan, once noticed a guest
standing outside the gift shop, waiting for it to open. The employee found out what the
guest wanted, picked it up when the shop opened, and waited outside a conference hall
to deliver it to the guest. Many manufacturers distinguish among several types of
flexibility, including:
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Mix flexibility, or the ability to produce a wide range of different products.
Changeover flexibility, or the ability to begin production of a new product with minimal
delay.
Design flexibility, or the ability to change the design of a product to accommodate
specific customers.
Volume flexibility, or the ability to produce whatever volume the customer needs.
As you might imagine, different types of flexibility may require different operations and
supply chain solutions. Firms must decide which types of flexibility are important to
their customers and adjust their operations and supply chain efforts accordingly.
Consider the case of Solectron, a company that buys components and manufactures
goods for many original equipment manufacturers (OEMs)iii in the electronics industry.
Because the electronics industry is notorious for short product life cycles and
unpredictable demand, Solectron must be able to adjust the mix, volume, and design of
the products it produces quickly. Solectron’s supply chain partners must be equally
flexible. For instance, Solectron might order 10,000 units of Product A on Friday for
delivery on Monday, then call back on Monday and ask the supplier to take back the
10,000 units and deliver 8,000 units of Product B instead!
Flexibility has become particularly valuable in new product development. Some firms
compete by developing new products or services faster than their competitorsiv, a
competitive posture that requires operations and supply chain partners that are not only
flexible, but willing to work closely with designers, engineers, and marketing personnel.
A well-known example is the “motorcycle war” between Honda and Yamaha, which
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took place in the early 1980sv. In eighteen months, Honda introduced 81 new
motorcycle models to the Japanese market, while Yamaha introduced just 34. The
ability to quickly produce "fresh" models gave Honda with a significant competitive
advantage. More recently, Intel’s CEO noted that the company tries to introduce a new
chip about once every two years—a pace designed to keep competitors in perpetual
catch-up mode.vi Chapter 3 includes a detailed discussion of how operations and supply
chains can support new product development.
Cost. Cost is always a concern, even for companies that compete primarily on some
other dimension. In fact, in some industries, competition is so intense that firms are
experiencing unrelenting pressure to reduce costs, even as their performance improves
in other ways. Because operations and supply chain activities often account for most of
an organization’s costs, they are natural targets in cost reduction efforts. Cost is such an
important performance dimension that we will return to it throughout this book.
Afer-sales support. After-sales support can be a critical performance dimension,
especially if the purchased good or service has a high price tag or is critical to
customers’ success. For example, some of the advanced Enterprise Resource Planning
(ERP) software packages being sold today can cost companies hundreds of thousands of
dollars – and that’s just for the license! Any firm investing in such a complex and
expensive IT system is almost certainly going to expect a high level of after-sales
support. At the individual level, your decision to buy a new car may depend in part on
your previous experiences with the service department at the dealership.
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Trade-offs among Performance Dimensions
Take a moment to think about the differences between a world-class sprinter and a
marathon runner. The sprinter is built for explosive speed off the line, while the
marathon runner is built for paced distance running. Both athletes are in peak condition,
yet neither would dream of competing in both types of event.
The same is true in business. In a competitive marketplace, no firm can sustain an
advantage on all performance dimensions indefinitely. Excellence on some dimensions
may conflict with excellence on others, preventing any one firm from becoming the best
on all. In such cases firms must make trade-offs, emphasizing some dimensions at the
expense of others. Nearly all operations and supply chain decisions require such trade-
offs. To make logical and consistent decisions, then, operations and supply chain
managers must understand which performance dimensions are most valued by the firm's
targeted customers, and act accordingly.
Consider some of the trade-offs Delta Airlines might face in scheduling flights
between Raleigh and Orlando. More flights mean greater flexibility but higher costs.
Similarly, larger, more comfortable seats would improve the quality of the service, but
would also raise costs and reduce the number of passengers a plane can carry. Delta
managers know that business flyers will pay a premium for flexibility and comfortable
seats, but casual flyers (such as families on their way to Disney World) will be more
price-sensitive.
Now suppose a competitor of Delta’s decides to offer flights between Raleigh and
Orlando. Given this move, Delta's flight schedule and seat design take on added
importance. If managers choose frequent flights and larger seats, costs may climb higher
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than the competitor's; if they choose fewer flights and smaller seats, flexibility and
quality may suffer. Delta’s managers must decide whose needs - those of business flyers
or casual flyers - will guide their operational decisions.
Order Winners and Qualifiers
Some managers use the concepts of order winners and order qualifiers to determine the
relative importance of different performance dimensions5. Order winners are
performance dimensions that differentiate a company's products and services from its
competitors'. Firms win the customer's business by providing superior levels of
performance on order winners. Order qualifiers are performance dimensions on which
customers expect a minimum level of performance. Superior performance on an order
qualifier will not, by itself, give a company a competitive advantage.
The industrial chemical market will illustrate the difference between order
winners and qualifiers. Buyers of industrial chemicals expect a certain level of purity
(i.e., conformance quality) before they will even consider purchasing a chemical from a
particular source. Since all potential sources must meet this minimum requirement,
purity is incredibly important. Once the purity requirement has been satisfied, however,
other performance dimensions -- cost, delivery, and flexibility -- will be used to
determine the "best" source. From the supplier’s perspective, then, product quality is the
order qualifier; cost, delivery, and flexibility are order winners.
Now suppose we have two suppliers, A and B, that are competing head-to-head in
this industry. Figure 2.2 illustrates how the order winner / qualifier logic can be used to
5 Terry Hill, Manufacturing Strategy: Texts and Cases (Homewood, Ill.: Dow Jones-Irwin, 1989).
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Bozarth & Handfield, Chapter 2 (3/26/02)
evaluate the two suppliers. Supplier A meets the minimum requirements on all four
performance dimensions. Supplier B, however, has purity levels below the minimum
requirement. So even though Supplier B is superior to A on two performance
dimensions, Supplier B would be dropped from consideration since it fails to “qualify”
on one of the dimensions.
Figure 2.2: Performance of two chemical suppliers vis-à-vis customers’ order-
winners and qualifiers
Understanding what the relevant order qualifiers and order winners are helps
operations and supply chain managers to formulate strategy in three ways. First, it helps
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ConformanceQuality
Are thechemicalspure?
Delivery
How quicklycan thechemicals bedelivered?
Cost
How muchdo thechemicalscost?
Flexibility
Can weplace smallorders forthe chemicals?
99% pure
A
B
Qualifier Level(Minimum
Requirements)
Performance
B
B
A
A
A
B
Order Qualifiers Order Winners
2 days
3 days
$20 per liter
$30 per liter
Minimum ordersize of 50 liters
Minimum ordersize of 100 liters
99.9%pure
98% pure
Bozarth & Handfield, Chapter 2 (3/26/02)
identify potential problem areas, as well as strengths. Second, it clarifies the issues
surrounding decisions on trade-offs. Finally, it helps managers to prioritize their efforts.
Take a look again at Supplier B. Supplier B must immediately address its quality
problems if it wants to compete at all. After that, the company might look for ways to
protect or even increase its delivery and cost advantages. Furthermore, if improving
purity involves increasing costs (for example, new equipment), Supplier B should
understand what the appropriate trade-off is!
Alignment of Operations, Supply Chain, and Business Strategies
To illustrate how a firm’s operations and supply chain strategies might be aligned with its
overall business strategy, let's revisit Dole Microsystems and WolfByte Computers.
Suppose that as part of its business strategy, Dole decides to target price-sensitive buyers
who want adequate but not functionality, delivery, and after-sales support. In contrast,
WolfByte decides to focus on buyers who want excellent functionality, delivery, and
after-sales support. Table 2.1 shows how managers might begin to align their operations
and supply chain strategies with the business strategies of these two distinctive
companies.
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Table 2.1: Aligning operations, supply chain, and business strategies
Dole Microsystems WolfByte Computers
Business strategy Assemble, sell, and support PCs targeted at price-sensitive buyers who require adequate but not exceptional performance, delivery, and support.
Assemble, sell, and support PCs targeted at buyers who are willing to pay for excellent performance, delivery, and customer service
Supply chain strategy
Buy components from the lowest-cost suppliers who meet minimum quality and delivery capabilities.
Use 3-day ground shipment to keep costs low
Buy components from state-of-the-art suppliers. Price is important, but not the critical factor.
Use overnight air freight to minimize lead time to customer
Operationsstrategy
Keep minimum levels of inventory in factories to hold down inventory costs.
Hire and train support staff to provide acceptable customer service level.
Keep enough inventory in factories to meet rush orders and shorten lead times.
Hire and train support staff to provide superior customer service.
Notice how the operations and supply chain decisions outlined in Table 2.1 seem
to naturally flow from the different business strategies. Table 2.1 vividly illustrates how
operations and supply chain decisions that are appropriate in one case may be
inappropriate in another. Purchasing low-cost components, for example, would make
i
ii
iii
iv
v
vi
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Bozarth & Handfield, Chapter 2 (3/26/02)
sense for Dole, given its business strategy, but would run counter to WolfByte's emphasis
on high functionality.
Core Competencies in Operations and Supply Chains
Finally, operations and supply chains are ideal area in which to develop core
competencies, precisely because they are so difficult and expensive to manage. Consider
how Lowe’s, a large hardware retailer, uses its supply chain to build a sustainable
competitive advantage (see Figure 2.3). Lowe’s uses large distribution centers (called
DCs) to coordinate shipments between suppliers and retail stores. The DCs receive large
truckload shipments from suppliers, a strategy that allows Lowe’s to save on item costs
as well as transportation costs. Employees at the DCs then remix the incoming goods
and deliver them to individual stores, as often as twice a day.
But that isn’t all; the DCs use computer-based information systems to closely
coordinate incoming shipments from suppliers with outgoing shipments to individual
stores. In fact, more than half the goods that come off suppliers’ trucks are immediately
put onto trucks bound for individual stores, a method known as cross-docking. The
result is that both the DCs and the retail stores hold minimal amounts of inventory, yet
Lowe’s receives the cost breaks associated with large shipments from suppliers.
Why has Lowe’s spent millions of dollars developing this distribution system?
One reason is that it helps to keep costs low and the availability of goods high –
performance dimensions its targeted customers value highly. But just as important,
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Lowe’s distribution system has emerged as a core competency that will serve the
company well, even as the marketplace changes.
Figure 2.3: Building core competencies at the operations and supply chain level:
Lowe’s distribution system
We mentioned earlier in the chapter how core competencies at the functional
level can “feed back” into the business strategy. This is often referred to as a closing the
loop. Figure 2.4 illustrates the idea. Firms like Dell, Lowe’s, Honda and others have
developed significant core competencies at the functional level. It makes sense, then,
for top managers look for ways to exploit these strengths. More generally, by closing the
loop, top managers assure that the business strategy adequately considers the current
capabilities – both good and bad -- within the functional areas.
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Regional Distribution CenterLarge shipments in ...
… and the rest immediately shipped (“cross-docked”)to the stores
… some to inventory ...Mfr. X
Mfr. Y
Mfr. Z
Bozarth & Handfield, Chapter 2 (3/26/02)
Figure 2.4: “Closing the loop” between business strategy and functional area
strategies
Mission Statement
•Reason for existence•Core values•Domain
Business Strategy
•Targeted customers / markets•Areas of sustainable competitive advantage / core competency•Role of supply chain partners•Time frames & performance objectives
Operations & Supply Chain Strategies
•Translate business strategy into operations &•supply chain actions•Provide value to targeted customers / markets•Develop supporting core competencies in operations & supply chain practices
