SMR Notes

Change Management

Change strategy is needed to engage people. This strategy should address how quickly the change is needed, how much planning needs to be done, and how much involvement of others is needed to make the change successful.

Why do organizations change? To survive, to stay even or ahead of the competition.

4 phases of organizational change in organization:

Denial – believing no change is necessary (that is why people need to know why the change is necessary and what would happen if the change did not occur -> sense of urgency needs to be established)
Resistance – trying to stick to the old ways because they are familiar and comfortable
Active resistance when major, visible disagreement about how to proceed (beneficial to assemble a group with enough power to lead the change)
Passive resistance (working behind scenes to sabotage the effort by not doing what is asked and making excuses for not doing so)

Positive ways to deal with resistance: educate and communicate, participate and involve, aid and assist, give and take (negotiate with resister to find a middle ground)

Exploration – realizing the possibility that new ways might be better (trial-and-error method; empowering people to make modifications to the change and showing that their input is valued help commit the employees to the change)
Commitment – believing the change is necessary and working towards making it succeed

3 levels of organizational change:

Task (empowering the individual who does the task to make the change can enable the organization to limit resistance to the change)
Process (involving cross-functional group of employees)
Organization change (managers need to be the ones responsible for driving and implementing the change)

Change produced by individuals, groups or organizations (e.g. implementation of lean manufacturing, six sigma, TQM). It’s important to celebrate short-term successes that will give the change credibility and help to stop the cynics who are trying to block the changes being made. Also when the goals that the employee is measured by are not changed to support the revised process, then the employee will revert to the process that supports his/her goals (e.g. employee is paid on a piece rate and the change effort is to make only as much as customer demand -> compensation system needs to be changed to reflect the goal of producing only what is needed)

Change Process

Change models include PDCA, DMAIC six sigma model, DMADV (design-measure-analyze-design-verify) another six sigma model used when no process or current state exists.

Process of organizational change through the use of the As-Is, To-Be model and the transition state that links them thanks to use of tool such as SWOT analysis (help to develop current state), mindmapping exercise (helpful in creating what the future state of organization will look like -> brainstorming aiming to develop organization’s vision and a visual method to connect its main thoughts to its subthoughts), and strategic learning map (gap analysis that defines what needs to be done in the transition state to achieve the future state in terms of skills, training, and education) consisting of: education and training requirements, programs needed to move forward, priorities in the learning plan, a funding plan, measures of success.

Current State defined by SWOT analysis (strengths, weaknesses-current issues, opportunities, and threats-potential issues). Thanks to SWOT organization can determine what skills are necessary to guide it through the change effort and select individuals who have those skills and make sure that those selected are in a position of authority to drive the change effort.

SWOT analysis -> current state

Mindmapping exercise -> future state

Strategic learning map -> way to move from current to future state

How to lead change

A leader may be a manager but just being a manager does not make someone a leader.

Characteristics of a manager and those of a leader complement each other. For manager to become a leader it’s important to develop an influencing approach to managing the operations instead of the traditional a command-and-control approach (today’s trend). Manager who is also a leader will let the employees make decisions on how to proceed. If this leads them away from the vision, manager who is also a leader will gently prod them back onto the right path by reminding then what their focus should be. This type of manager works by creating relationships with the employees built on trust and faith in their abilities.

Managers support the change effort while leaders lead the effort. Probably the most important role of a leader during the change effort is to create a culture of change. Accomplishing a successful change effort takes both a manager and a leader (manager can plan, organize, control and manage the change process in traditional way while leaders are needed to drive the vision of the organization by motivating and inspiring them to become involved).

Role of management in implementing strategy

Commonly used model in 5 stages of change process

Role of managers and leaders is limited to:

Initiate next phase, allocate resources required, monitor progress, remove any organizational barriers to success

Ways to gain commitment to change efforts

Tools used to prepare employees for change:

Involvement and empowerment, motivation, security (basic need, must be met if employee is going to accept change), appraisal systems, compensation recognition and reward, education and training

Strategic Issues

Strategy – becomes a driving force for organization, thanks to it organization can combat threats and exploit opportunities. Strategy is a plan to commit the necessary resources to produce products or provide services that will best exploit the distinctive competences of an organization while supporting the goals and objectives of the organization. An organization needs strategy to:

Monitor markets
Coordinate business activities with its mission and vision statements
Make decisions that use resource effectively
Align internal operations so it can eliminate waste

3 types of strategies: enterprise/corporate (overall) strategy (begins typically with vision and mission statement incl. elements needed for the organization to survive and thrive), business strategy (input is enterprise strategy for business unit level; says how organization will distinguish itself from the other organizations serving same customers with similar products and services; defines products and services, markets and way of competing; focus on one of 3 approaches: price leadership, product differentiation, customer focus), functional strategies (output of business str. becomes input here; here focusing on competitive priorities; functional strategies must be consistent with business strategy and each other; broken down into departmental strategies)

There are three generic business strategies: cost leadership, product differentiation, and focus. Cost leadership: low cost, standardized, off the shelf products and standard processes. Product differentiation: high quality products and easily adaptable processes. Focus: cost advantage or responsive delivery and customization in response to targeted market segments. The business strategy of a firm is the sum of the individual strategies of its component functions. For an organization to be aligned, all operational strategies, including the manufacturing strategy, must be derived from the business plan.

Companies must differentiate themselves by: being the low cost producer in their market; or they must be most flexible and responsive by developing processes which allow them to react quickly to marketplace changes; or they must be able to provide the high quality products in the marketplace or make it easy for customers to do business with them

Corporate social responsibility/sustainability (extended scope of strategic planning in recent years) – the concern regarding the effects of enterprise actions where the intent is to minimize the long-term negative effects of the implementing the strategy on the environment in which it operates

Factors (in the environment in which enterprise operates) considered when formulating the strategy: Economic projections, political projections, social projections. Internal factors: competitive priorities, technologies used, markets served, organization strengths and weaknesses. Next to that what is also considered is the competitive environment and the attractiveness of the industry segment.

Strategic planning is the process for developing the enterprise strategy (output is strategic plan) with 3 major perspectives: portfolio management with resources to allocate among the business units and production lines, competitive strategy (analysis of industry dynamics vs organization’s ability to compete), core competences (things that organization is particularly good at).

Elements of an Enterprise Strategy:

Corporate culture and philosophy
Basic share values of the organization
Business of the organization today, vision and milestones
Today’s environment it operates in and future environment it wishes to operate in
Needs its products fulfill and customers who need its products
Organization’s competitive strengths and weaknesses

Explicit enterprise strategy – documented one

Implicit enterprise strategy – defined by choices it makes and action it takes, to do whatever it takes to survive

Having explicit strategy still requires to have a sound strategy with 3 attributes: it’s sustainable (feasible, supportable and consistent), assumptions are defined and realistic, risks are recognized and realistic. The sound strategy includes: defined strategy time horizon, key event that support implementation of strategy, identification of a competitive advantage and how the organization plans to exploit it, alternative solutions in case the strategy needs to be revised, strategic plan that converts the plan’s inputs into value-added outputs, commitment of resources needed to implement strategy

Strategic models:

Five forces model (used to understand the attractiveness of an industry segment or strategic position of an organization). Five forces collectively determine the industry profitability potential which enables to develop an affective and feasible strategy. Same forces determine the potential profitability of the enterprise. We distinguish: rivalry among existing competitors, threat of new entrants, threat of substitute products, bargaining power of buyers, bargaining power of suppliers
Market analysis model used to represent relative strength of a product, product family, or brand in a given market. Useful when developing a strategy where every product can be a profit-maker (exploit it), consistent producer (keep it), not profitable (discard it), or unknown (improve it). Products and services can move through some or all of these phases as they move through their PLC.

The targets and objectives must be feasible and consistent with strategy and should encourage behavior that leads to successful implementation of strategy. Targets should be time-phased

Types of functional strategies: financial strategy, product development strategy, operations strategy, marketing strategy

There are 2 dimensions of uncertainty when formulating a strategy: one is rate of change in market, products and processes, the other is the environmental complexity in terms of no. of competitors, design of products, processes.

No two organizations can compete for long in the same environment with precisely the same strategy. The organization’s strategy needs to evolve and change as conditions change

Developing Strategic Plans via strategic planning process which is dynamic, interactive and takes place at all levels of management. The development of all levels of strategy tends to follow one of 4 approaches:

Overview approach identifying several key strategic focuses (for market leaders that still needs to know what market is doing and what it needs to stay on top)
Trade-off approach determining what the organization needs to do to maintain its place in the market (for organization that needs to revisit how it’s going to compete in the market)
Reductionist approach defining the root cause of why the organization is in the position it is (for organization being in a turnaround situation e.g. determining why they lose market and how can they reverse this trend)
Sequential approach which addresses competitive priorities one at a time that would help to break into the market (new entrants) or improve its place in the market

Inputs to strategic planning process: core values, capabilities, competitive environment, financial projections of organization, needs of customers, legalities or environmental regulations that affect market, background information from internal and external sources. Strategic planning process should consider: identifying the key success factors, developing business plan and balanced set of performance measurements, evaluating finished strategy. The outputs are organization’s mission and vision statements, strategic plan for all 3 levels of the organization, corresponding budgets, capital improvement plans for organization. A mission statement provides a broad statement regarding what business the firm is in.

Distinctive competences are identified during the development of strategic plan as a part of core competency analysis. These add value for the customer and are difficult for competition to imitate; split into categories: price, quality, delivery, service, product design, flexibility (also can be categorized as order winners, order qualifiers/must have to compete in the market, order losers, non-issues/non-adding value). Quality, in particular, has become harder to compete with. Quality is now an order qualifier instead of order winner. Instead of competing on quality alone, an organization can implement strategic initiatives that focus on both quality and waste reduction. It’s important to choose a subset of characteristics instead of trying to be everything to everybody. An organization’s competencies can also change over time as it develops new skills that can move its order qualifiers into order winners. With identification of what competences will improve an organization’s chances to be more competitive it sets the organization on a path to success. Distinctive competences can be either knowledge-based or process-based (e.g. no. of patents), sometimes it can upset the market or reengineer the industry (e.g. landline phones lost market to mobile phones). To delay competitors from imitating a distinctive competency they can’t know how the competency works, they don’t have either resources or the patents.

Strategic initiatives development with 2 approaches: internal focus evaluating core competencies/competitive advantages and then identifying how they can be used in the market (planning around the budget cycle and allocating resources only during budget cycle), external focus evaluating market conditions and then working backward through the value chain to the organization’s enterprise strategy (planning as issues develop in the market and allocate resources as needed -> more flexible and proactive than internally focused competitors). Examples of strategic initiatives are: introduction of TQM, six-sigma, JIT, Lean Manufacturing, continuous improvement.

Framework for decision making gives more chances to organization to successfully implement strategy. Framework can be based on philosophy that is adopted and implemented by organization i.e. ERP (quality of masterdata), Lean thinking, Six Sigma, TOC.

Project Management

Project Management process

a) Project evaluation and selection (of options)

b) Project planning – developing budget and timeframe

The statement of work (SOW) – details of what needs to be done

First page of executive summary including scope, benefits, expected results, measurements, resources, risks

The work breakdown structure (WBS) – list of all work that needs to be completed
The project schedule – milestones established and dates of completion determined

Estimate the amount of time needed for each activity

Determine the sequence of activities by creating network diagram

Calculate the overall project schedule by using the critical path method (CPM); program evaluation and review technique (PERT) or critical chain method

Depict the schedule using a Gantt or milestone charts

The responsibility matrix – who is responsible for each action items
The resource requirements – resources needed to complete project
The budget – necessary funds and what they are used for

Preliminary cost estimate

Final cost estimate

c) Project implementation – project team and project manager selection

Selecting the project manager
Forming the project team
Team dynamics
Scheduling the work
Managing the schedule and budget

d) Project closeout (reforming stage) – verifies that the team met all goals

Capital projects (needing capital investment) are evaluated on following factors:

Cost/benefit analysis
Time value of money – the future value of today’s money considering interest
Present value of future payments – calculation in opposite way to time value of money
Risk (discount rate used to determine the present value of the future cash flow)

Various methods to determine project’s value

Simple payback (project investment/cash flow per year)
Average return on investment (cash flow per year/project investment)
Net present value (difference between present value of all cash inflows and present value of all cash outflows/costs)
Internal rate of return

Justification of a project needs to determine what benefits other than financial one project will provide. These other benefits include whether it supports the company’s strategy, whether it has side benefits such as supporting another company initiative, whether it is related to another project, and whether it will provide a sustainable competitive advantage.

CPM – method of estimating the duration of activities most appropriate when there is high level of confidence in the estimated duration

PERT – probabilistic method of estimating the duration of activities using weighted averages of 3 estimates of the duration of an activity: most optimistic, most likely, most pessimistic

Estimated task time = (longest estimate + shortest estimate + 3 x most likely time)/5

For CPM and PERT there may be times when project’s resources need to be planned more closely by using resource requirements planning: unlimited resource planning (optimistic), time-limited resource planning (realistic) or resource-limited resource scheduling (pessimistic)

Critical Chain – considers not only longest chain of tasks to complete the project but also considers the demand for the common resources needed for the project

When no resource constraints then critical chain = critical path

Measuring Organizational Performance

Measurements give the organization information to help manage the business. More importantly, measurements drive behaviors that should support its competitive strategy.

Closed-loop measurement system is effective not only because it measures what needs to be measured but also gives continual feedback on the progress of the measurements so that adjustments can be made if necessary. Main role is to keep steps of the process (described below) in alignment by delivering valid and timely information to senior management so they can make better decisions on how to implement the organization’s strategy.

Organization’s Strategy -> Goals and Objectives -> Actions defined -> Establishment of measurements that should drive behaviors aligned with Actions defined (all steps with feedback loop to keep alignment)

3 parts influencing effective measurement system:

Fundamental concepts: why and what we measure? Is measurement qualitative or quantitative?
Organizational implications of measurements: selecting appropriate measurements for diff. functional levels
Strategic implications of measurements: identifying competitive advantages of the measurements selected
Ratios, Scorecards, Dashboards: understanding and using 3 tools for reporting overall organizational performance and progress towards achieving strategic objectives

How to select measurements? These should relate to what the organization would like to achieve as well as reflect what is of value to the customer but not forgetting about profitability and performance to plans. Effective measurement system is used to identify an organization’s competitive position, locate problem areas, assist the organization in updating strategic objectives and making tactical decisions to achieve the corresponding objectives, and supply feedback after the decisions are implemented. Performance alignment is the key to an effective measurement system which should consist of traditional financial measurements and tactical performance criteria. Measurements should be taken at the very least quarterly, but preferably monthly and possibly even weekly to stay on top of the organization’s performance.

Characteristics of effective measurements:

Balanced and consistent across business units
Based on what customer needs
Measure against benchmark or target value
Expressed in positive numbers (e.g. no. of orders entered correctly), with positive effect on behavior
Easy to understand use and report, supportive and linked to corporate strategy, few in number
Measure trends rather than absolute performance
Can be used to determine areas of opportunity for the organization

Example of ineffective measurement:

Increase sales on all new product introductions over last years

Example of effective measurement:

Increase sales by 25% year over year on all new product introductions released this year over the new product introductions of last year (know baseline, target, easy to graph)

Qualitative measurements – more opinion than fact, considered soft since they are relying on someone’s judgment instead of hard data. Typically used when no data are available or the data available are no longer relevant (customer- or market-related). Examples are: customer surveys (Voice of Customer), market or panel research, quality awards.

Quantitative measurements – based on data or facts, considered hard since they can be calculated based on formulas instead of relying on someone’s judgment, typically used more within the organization to measure how its process or business units are running e.g. no. of units produced per employee hour, percentage of on-time delivery, cost to budget performance.

Organizational Measurements can be broken down into 6 steps:

Individual – Relates to the efficiency of an individual

Used to reward, compensate, or recognize employee; combine both qualitative and quantitative measurements. Quantitative measure how an employee is contributing to the organization focusing on productivity of an employee

Process – Focuses on the effectiveness of the organization’s processes

Track the effectiveness of the process in supporting the goal of the organization

Operational – Stated in operational units

Frequently used to measure process improvements e.g. percentage of time saved or number of steps saved in a process

Financial – Stated in monetary units, reporting financial health of the organization.

Are the communication vehicle used for both employees and the outside world

Local – Relates to a resources, operation, process , part, or organization unit

Show the rest of organization how specific part of the business unit is doing, narrow focus to special improvements or specific processes or employees (production, quality, sales and finance)

Global – Focuses on the overall organizational performance

Show the outside world how the organization is doing as a whole, need to be consistent across the organization so that one business unit can be compared fairly and equally with another business unit (e.g. gross profit, customer satisfaction level, on-time delivery)

At times the same measurement can be categorized under multiple areas. For example, financial measurements can be global or local. Operational measurements can be process or individual. The determination of whether a measurement is local or global depends on the perspective of the individual using the measurement.

Strategic Implications of Measurements usually encompass the competitive capabilities of the organization:

Low cost

One way to be competitive in this area is to use process improvement techniques (minimizing costs by streamlining process through concurrent engineering). Low cost achieved thanks to low-cost suppliers and direct/indirect labor, high-capacity machine utilization, short lead-times

Examples of low cost measurements:

Productivity improvements = qty produced/no. of employee hours

Lower inventories by increasing inventory turns = cost of goods sold/average inventory

Employee turnover = no. of employees who left the organization/ no. of employees overall

Reduction of warranty claims = no. of claims processed this period/ no. of claims processed previously

Superior quality

Today’s order qualifier instead of an order winner so organizations strive for quality awards to stand out from their competitors. Quality advantages that help organizations win orders include: highly skilled and cross-trained employees, high-quality conformance, selection of high-quality suppliers. Quality measurements could include: X percent of the supplier base being certified, X percent reduction in product returns or warranty claims, X percent reduction in supplier base

Flexibility

Ways to achieve flexibility advantage: implementing lean manufacturing, short lead-times to customers, rapid new product introductions/concurrent engineering, highly skilled and cross-trained employees, JIT supplier environment. Flexibility measurements include: % reduction in lot sizes, % of supplier delivering within a specified no. of days, % reduction time to market, % of employees trained to perform multiple jobs

Delivery – speed and reliability, providing consistent and reliable delivery to the customer

Not only having shorter lead-time for customer (lower inventories or/and flexibility in product mix), also bringing a new product to market quickly so that the organization can capture more market share. Delivery measurements: % on time deliveries to customers (measured to customer’s door), % decrease in lead-times from suppliers, % reduction in no. of days to market for new products

Product design/technology -> concurrent engineering

Applying for and be granted patents on the new design or technology to gain and maintain lead in the market. HIGH quality and leadership position in product design and/or technology is a hard combination to beat.

Qualitative measurements: award winning (chosen by a panel of judges)

Quantitative measurements: no. of patents applied for and no. of patents awarded, no. of awards won for product design or technology, reduction of time to market for an idea, no. of engineering changes implemented after production introduction

After-sale service

Having a quickly reacting customer service support group, service dept. that provides calls or installations on demand. A satisfied customer tends to repeat its business with the organization, and a repeat customer tends to be easier and more profitable to retain. Measurements are: % reduction in the abandonment rate of incoming calls, average response time to service calls, mean time between failures

Ratios/Scorecards/Dashboards (successful implementation of these tools depends on clear and sustainable strategy, positive organizational culture, robust information system infrastructure, robust performance measurement system)

3 methods of presenting the data:

financial statement analysis

prepared for owners, government agencies, and potential owners or lenders; contains information on the performance of the organization and trends in that performance, spread across 3 reports: balance sheet, income statement, and funds flow statement. Changes and trends in historical data can give some clues as to what will happen in the future. Based on financial statement analysis organization can take internal decision to whether to outsource a function or to continue or discontinue a product line

Limitations: analysis is based on historical data and provides clues as to what should be examined in more depth; use of ratios for comparing firms (basic data may not provide a valid comparison because of differences in accounting methods).

3 methods commonly associated with financial statement analysis:

Method 1 monetary units and % change involves putting 2 or more years of data side by side and looking for significant changes or trends that may provide clues as to what will happen in the future.

Method 2 ratio analysis e.g. price-earnings ratio, earnings per share, return on total assets

Method 3 common-size statements show the items in both monetary units and as a percentage (% of total sales in a common-size income and as % of total assets in common-size balance sheet)

balanced scorecards are list of measures used to evaluate the performance of an organization focusing attention on critical things to the organization meeting its strategic objectives and succeeding. Measures should be derived from and support the strategy of the organization or supply chain (each company has a unique balanced scorecard); easy to understand, linking the objectives, strategies and measurements focusing on improving performance on each of the measures in the scorecard; not only the overall organization should have a scorecard but also each organizational unit or individual should have their scorecards. There are following groupings of measures: financial (financial performance to plan), customers (strategy of customers that firm wants to serve and how it’s going to win and retain them), business processes (that are critical to providing value to customers) and learning and growth (ability to change to improve). Performance of the measures in a balanced scorecard is frequently displayed on a performance dashboard
performance dashboards are convergence of BI (Business Intelligence) with performance management. BI transforms the organizational data to information upon which the user and organization can act (definition). Performance dashboard (like the car dashboard) displays few performance measures that are (critical) indicators of success. It also conveys the information in a way that is easy to understand and displays data at the level of detail needed for the task. The benefits are effective communication of organization strategy, delivery of information that can be acted upon, consistent view of performance, users empowerment and reduced waste. There is a risk of performance dashboards not being as affective as expected when: the measurements are focused on and supportive of a function or dept. rather than on implementing strategy, data collecting and determining performance is labor extensive and error prone, supporting applications don’t have adequate data or analytical capabilities to support root cause analysis and taking action.

Bottom line: what to measure (based on strategic objectives)? Why we measure what we measure? It needs to provide positive action towards goals. Combine both qualitative (e.g. how it’s perceived by customers) and quantitative measurements

Understanding the Business Environment

Categories of considerations when developing strategy for a firm that pursues global sources of supply or markets:

cultural
geo – economic relating to economic conditions or policies and that are influenced by geographical factors
governmental

3 aspects of the legal systems: maturity, stability, uniqueness of the laws

Issues relating to global:

Markets: understanding current markets, the effects that expanding into new markets is likely to have on the current markets and the distribution channels, understanding the level of economic development in the target markets and how that can affect the planned expansion. Firm needs to continually monitor existing markets to recognize changes or developing trends. The way of expansion in existing markets can be done by expanding the product line or adding outlets.

market requirements in developed economy: purchasing in larger packages to get lower cost per unit, wide variety of features or options for other types of goods, producing much more of a product at one time and handling a larger volume of good per unit of time by the distribution system, markets well defined and served,

market requirements in developing economy: smaller and lower-priced packages due to funds or storage space limits, single products, markets typically not as large and structured,

The level of economic development can be also an indicator of the potential size of the market and the level of the infrastructure development in the area. The growth of the market typically depends on the speed and spread of development in the economy. It’s important to know whether the growth will be concentrated in a geographical area or segment of the population or if it will be spread throughout the economy.

Some of the risks from economic, legal framework and political instability

The firm must understand its current distribution channels and capabilities and those in the target markets answering questions about total cap and unused cap in the channel, additional organizations that could be activated as part of the channel, alternate channels and its advantages and limitations etc.

Suppliers, where the following should be considered in reference to global supply: intellectual property treatment, longer lead times and resulting higher inventory, availability of needed skills, dealing with multiple time zones and languages, reduced flexibility due to transit time and contractual limits, risk of human and natural disasters
Competition; most firms know their direct competitors but are not aware of other forms of potential competition e.g. firms offering similar or competitive products in other markets entering a market in which the firm operates, firms offering products or services based on existing technologies that can be substituted for the firm’s products or services, new technologies that make the technologies in the firm’s products or services obsolete. To consider all of the forms of competition a planning process called scenario planning is used that identifies actual events that might happen in the strategic planning horizon and determines effective responses to those events. Scenario planning allows considering factors that are difficult to formalize or quantify into the strategic planning process. Another way is to use system thinking approach which is a school of thought to problem solving that focuses on understanding how things within the whole interact with each other
Partners; most common challenges when dealing with independent partners include: primary languages, business ethics and practices, work schedules, beliefs and value systems, customs.

The challenges that arise from global supply and demand can be grouped into three categories: geographical (longer distances between trading partners increase both transit time and inventory in transit; the variability of demand and delivery times also typically increases as the distance between trading partners increases), cultural (operating in multiple geo-economic units can mean learning to communicate in multiple languages and dealing with different business ethics and practices, belief and value systems, customs, and work schedules), geo-economic (operating in multiple geo-economic units can also mean learning to deal with multiple political systems, legal systems, regulatory requirements, and tax systems).

Information Requirements

Environmental scanning – process/technique used to monitor the environment in which the firm operates or considers entering and gather and analyze information when defining or revising strategies/tactics which is required in the following areas: value as perceived by the market (identifying the order qualifying criteria and order winning criteria for the product or service), supplier capabilities (understand the capabilities of its current suppliers and the capabilities that are required to implement its strategy and close any gaps that are identified), existing and emerging competitive technologies (potential new entrants into the market and innovative products, services and business practices), products, and services, regulatory considerations, stakeholder issues. Environmental scanning can include both internal and external environment and can refer to the macro environment, industry, competitor analysis, marketing research, and/or new product development. The objective of environmental scanning is to detect early signs of changes in the environment that affect the future plans (primary purpose is to look at external factors that may be either a threat or an opportunity for an organization; strengths and weaknesses are internal factors). ES is frequently used to support SWAT analysis. Scanning the environmental variables for threats and opportunities requires that each issue be rated on its potential impact and on the likelihood of it occurring. The two factors can be added or multiplied to arrive at an overall ranking.

Forms of scanning:

Ad-hoc scanning: short-term studies often initiated by a crisis or the threat of a crisis, least appropriate for strategic planning
Regular scanning: done on regular schedule e.g. as part of the strategic review and update
Continuous scanning (continuous learning), most appropriate for strategic planning

Agility and Adaptability in the Supply Chain

Based on 4Rs

Responsiveness to deal with the danger of making decisions based on long term forecast (uncertainty of future demand pattern) organizations must shift from forecast-driven to demand-driven
Reliability reducing variability in processes to ensure they are under control
Resilience in a way contradictory to lean which wants to reduce the amount of slack in a system, whereas there might be a sort of strategic need for a certain amount of slack or additional capacity at key points in the supply chain. Resilient supply chains identify where the supply chain is most sensitive. These supply chains take a “critical patch management” approach to managing the supply chain. In this approach, the supplier with longer lead time requirements or bottlenecks is identified.
Relationships –> we no longer compete as individual business, we compete as supply chains with suppliers, partners and customers focusing on win-win

The agile and adaptive supply chain may not be the lowest cost, or the leanest but the best supply chains are agile and adaptive, not just efficient. It is one that enhances market position through superior customer service. A decade ago promotional efforts were typically driven by consumer package goods manufacturers such as Procter & Gamble and Henkel. Today it is much more common to see promotional efforts being initiated by retailers, such as Wal-Mart. The shift of power from manufacturers to retailers has dramatically weakened brand loyalty. Brands no longer have the strength or dominance they used to have, weakening their manufacturer’s position in the marketplace.

Economic and business trends that make managing supply chain a challenge today:

Rise of retailer
Demise of brand loyalty
Increasing cost pressure
Growth of outsourcing
Time-starved populations in the industrialized world (more efficiency but less time comparing to the past)
Increase in product proliferation
Abundance of transparent data
Borderless trading
Shorter product life cycles
Tighter relationships between supply chain partners

Differentiation through Customer Service

Customer service is often an overlooked market differentiator. A truly competitive differentiator is superior customer service at lower cost. Customer service value can be through product availability, post-sales service, technical support, product information, financing, and so forth. Nowadays time-starved consumers are more sensitive to service, technical and customer support capabilities and no longer brand loyal. Organizations with better product availability will have more satisfied customers and fewer lost sales. The best supply chains are necessarily flexible, just as flexible as their marketplaces, and just as flexible as their marketplace opportunities. The cost-maximized (Lean) supply chain often has little flexibility because the tradeoff for efficiency is often a significant sacrifice in flexibility (this is difference cost-minimized lean environment vs cost-optimized agile environment). Supply chain Efficiency in not the same as Supply Chain Agility. Looking at the standard deviation curve that is used to measure of how much demand fluctuates from the average demand it is very expensive/ not feasible to solve customer service issues by using more and more finished goods inventory (as a matter of fact it’s more expensive to go from 95% in-stock to 98% than to go from 70% to 80%). Each company needs to decide how much it’s willing to spend in order to serve its customers (service level based on cost of service and level of service demanded by key customers).

The agile supply chain has capabilities that distinguish it from inflexible supply chains.

Developing Supply Chain Agility and Adaptiveness

Decoupling point – in supply chain a point where the real demand information is no longer visible. This is also the point where the supply chain wants to hold raw materials or unfinished components. Prior to the decoupling point in the supply chain it’s often more advisable to forecast demand, and from the decoupling point forward to work from actual demand in the supply chain. As a practical matter it will often be necessary to operate as a LEAN supply chain – efficiency focused – up to the decoupling point and to operate as an AGILE supply chain past the decoupling point.

Bottleneck locations – in supply chain those places where production is regularly behind the tempo of the rest of supply chain, where supply is irregular, or where the supply chain process tends to experience long delays.

Some cross-company metrics that can be developed with key suppliers include order to fulfillment, lead times required for orders, and perfect order rate. Some metrics that measure agility include changeover times, lead times, lead times for new shipping destinations, and lead times for incorporating changes in packaging requirements.

So what can an organization do to develop agility and adaptability in its supply chain?

Review the supply chain in its totality
Understand the business environment, customers, and trading partners
Develop an understanding of risk & consequences
Align metrics for agility
Dig deeper to understand root causes of supply chain issues

Manufacturing Management Techniques Part 1 & 2 (check in ECO study notes: Lean, TOC, Six Sigma, TPM, Reliability Centered Maintenance, Quick Response Manufacturing)

Choices affecting Operations Structure

Organizational Strategy -> broken down to Business Strategy -> broken down to Functional Strategies (Financial, Product Development, Marketing, Operations)

Developing an operations strategy is an unstructured and interactive process. In order to focus the process, there are four approaches to focusing the operations strategy. These are the overview, trade-off, reduction and sequential approaches.

Operation Strategy Components:

Type of focus: product/service focused, process focused, customer focused (depends on the organization’s distinctive competency, also called order-winner focus)

The limitations of having a specific focus is that an organization may not be able to quickly and easily shift its focus when there is a significant shift in the marketplace. In determining its focus, an organization will first determine whether it is going to segment its business based on market criteria or resource criteria. If it’s market criteria it will limit its focus choices to either a product/service focus or customer focus. The difference between these two is whether the organization will clearly define its market segmentation based solely on customer requirements (customer focus; market driven) or whether it will take a broader view and target specific market segments with more generic products and services (product/service focus) to satisfy more customers. Process focus, however, is based on resource criteria: an organization determines what type of process technology it will follow and uses its resources to build capacities around that type of process (normally process focus when producing a wide range of products or services in low volumes that fit only one type of a process)

The key decisions when implementing product/service focus strategy are: how much overall capacity is needed to meet fluctuating demand, how many of the organization’s products/services should it outsource, what type of relationship should be built with its suppliers (long-term, short-term),what type of process technologies are required to produce the products or services. The key decisions when implementing a process focus strategy are: how does the market volume and variety influence process technology that should be selected, what degree of automation should be used, what about the constrains to the type of process technology being used, what skills are required, what is expected lifespan of the technology being used. The key decisions when implementing a customer focus strategy are: how flexible does the organization need to be? at what cost can the organization produce its products and/or services? What type of delivery network is required to meet customer expectations (on stock vs on demand)? What level of quantity is needed to win the customer’s orders?

Product factors that need to be considered: product volume and variety (how many products/services should be offered and in what volume), product profile (does the product profile match the process decision? What is the range of product profile and will it cause an issue for the organization’s strategy?), product life cycle, process used to produce the product, timing of market entry and exit

External factors (that affect the operations strategy, actions outside the control of the organization can cause it to adjust its strategy). Factors affecting operations strategy are: environmental concerns, ethics and cultural differences, diversity issues (equal opportunity employment with regard to race sex or religion), cost, quality, flexibility, delivery, product design/technology (time to market reductions)

Internal factors that help to define the operations strategy; organization can control the outcome of those factors.

Product Profiling is used to determine the level of fit between the position on the volume and variety matrix and deployment choices for a product or product family.

Choices associated with organization’s structure (structural design, its facilities strategy, its capacity strategy -> hard choices that result in something physically being added, subtracted, altered) and infrastructure (workforce involvement, operations system configuration -> soft choices)

Ways to identify its fit (alignment with the requirements of its markets) is to do a SWOT analysis or to use product profiling to determine where the organization fits within the marketplace. Sustainability is extending that fit over time. A market evolves over time, and the organization’s fit must also be able to evolve with it. Fit can be approached in two ways: an organization can align its operations resources to market requirements or it can align its market positioning to operations resources capabilities.

Addressing sustainability in the organization

by static mechanisms (defensive move) creating barriers to entry the market for organization’s competitors (not effective against the competitor that changes or revolutionizes the market); examples are: being the single source for a market niche, taking advantage of economies of scale, setting a technological standard for the rest of the market, keeping its processes, recipes, and bills of material confidential; barriers to imitation are: difficult to copy, create a substitute. by dynamic mechanisms that are those of innovation and change (offensive approach for an organization).

There are two types of risks that an organization can face. Pure risk is an event that produces the possibility of loss (error in judgment by a doctor or nurse can be fatal to the patient). Speculative risk is a competitive scenario that may produce either a loss or a gain (researching a new drug in the hope that some day it will provide the organization with a profitable new product).

Service design is characterized by the degree of customization of the service for each customer and labor intensity of the process. Service processes that have a low degree of labor intensity frequently are capital and have high fixed costs (e.g. hospital). On the other hand, industry segments that have a high degree of labor intensity need to focus on staffing and training. The opportunities for additional product or service sales are relatively high where there is a high degree of customer interaction. In this case, the system should be designed for flexibility rather than efficiency (boarding of a commercial aircraft is example of service process that should be designed for efficiency).

Manufacturing Process Matrix

Product Profiling Template

If the profile is not straight (the degree of consistency between what the market requires and what the organization is producing), the organization has a few alternatives from which to choose:

Live with the mismatch
Alter the marketing strategy
Invest in changing the manufacturing process and/or capacity level it can produce

When it comes to operations strategy product’s characteristics of volume and variety is just half of the planning process. Second half is how the product is produced (project, job shop, batch, line/repetitive, continuous) and what is the manufacturing environment to meet customer orders (MTS replenish what has been sold or used, MTO build to customer order, ATO build to customer order with models and options, ETO build to unique customer specifications, Mass customization – product is produced in a high volume that can be quickly CONFIGURED TO CUSTOMER ORDER. This type of process is typically associated with models and options, and is done using a final assembly schedule). Other functional areas within the organization also have a stake in the strategy. These other functional areas include human resources, finance, information systems, delivery, and sales and marketing.

Process choice within the production environment

Product and Service Technology Life Cycle

4 product life cycles:

Introduction where the initial idea of the product or service is determined and selected and the startup begins (prototype and low volume). Strategic questions in this phase relate to the readiness of product/service to be implemented, amount of resources available and how the handoff from R&D will occur (what product offerings, product volume, process technology?). Here design features is most likely to be order winner.
Growth where volume begins to grow and the organization defines which of the SKUs or business units it will concentrate on. Strategic questions in this phase relate to whether the product requires a facility or process upgrade, and whether this will affect the product/delivery system that is in place (main focus on delivery, reliability, flexibility -> if played well then volume will tend to grow). Question about process improvements and capacity strategies.
Maturity is the stable state where volume is high and variety is low (commodity products). Strategic questions in this phase relate to what process efficiencies can be gained and what product/service features are required to sustain market share. Demand for organization’s product/service is highest/variety is reduced/order-winner is lowest price possible by producing the product at the lowest possible cost (what process efficiencies and order-winning characteristics to increase market share?) -> price and availability
Decline in volume of current product or service and renewal of the system with a new product or service. Focusing on adding cost-effective features to the product to keep customer demand flowing for as long as possible. Strategic questions in this phase relate to people side of the business and how to minimize the effects of decline phase for organization’s employees, long-range responsibilities , can this product be retrofitted to produce something else (especially when product becomes an obsolete), how many repair parts should be produced and stocked to cover warranty issues (variety becomes an order winner at the end of mature stage and it doesn’t equal design features)

Capacity strategies deployment mirroring go-to-market strategies:

Capacity-leading strategy at the introduction phase to gain market share from the beginning
Smoothing capacity strategy balanced with inventory levels to cover uncertainty in demand at the growth phase
Capacity-lagging strategy not to build to much inventory at the maturity and decline phase

Four generic strategies that an organization can follow when entering and exiting market:

Innovation – entering with new product and existing when product starts to develop stable growth
Flexibility – entering market when there is still plenty of room for competition. At this point the product still needs to mature and when it starts to decline the organization will exit
Standardized – entering market just before a product is ready to explode into a high-volume level and exiting when volume starts to decline
Blunder – entering market when volume is at its peak and exiting when volume starts to decline

Difference in choices between structure and infrastructure:

Organization Design (affects how the organization fulfills its market requirements and it develops its operations resource capabilities):

Simple – few layers of hierarchy, centralized authority, small number of employees, quick reaction to changes in market and environment, relatively informal structure
Functional – resources are grouped by their functional purposes, requires coordination across departments, control is managed by adding more managers or layers to the organization; disadvantage is that it can lose sight of customer service and may not be easily adaptive to changing market conditions; advantage is that each functional area is process-specific and efficient; it is hierarchical in nature with centralized decision-making. This form works best when following a cost strategy
Divisional – where resources are grouped in business units either by specific products or service groups or by geographic areas. Within each business unit/division in this design the functional form may be used. Disadvantage is loss of economies of scale and operating efficiency since functions/departments are dispersed among business units. Advantage is that each business unit can tailor its products and services to its specific market needs. Key is to develop by employees networking skills with other business units to share best practices.
Conglomerate encompassing several unrelated businesses (banking, oil and gas, newspaper) with its own managerial levels. Risk is spread across the several kinds of businesses, control is widely decentralized, and complexity is very high.
Hybrid – in this matrix structure, each group of resources has two lines of reporting: one can be to the functional area and the other to the business unit (e.g. an engineer on the new bridge project must report to the bridge project manager and the vice president of the engineering department). This design can be very complex and costly to manage but can be also flexible and accommodating to market changes and affective with its cross-functional activities that share knowledge across the business units. An organization that uses a matrix design will tend to follow strategies such as innovative products and/or speed to market (often project-oriented; it can be a cross between a vertical and a horizontal organization)

Organizational Chart (depicts the style of management and number of levels of command)

Vertical: centralized where all support functions (e.g. purchasing or cost accounting) are done by corporate (fits well with simple or functional organization); decentralized where all support functions are done by each business unit such as plant purchasing and production control (this form fits well with the divisional organization). This is type of organization where management operate under a command-and-control style (FORMAL). This type of organization will have many layers of management; it would not be uncommon to have vice president, directors, senior managers, managers, and more. Large organizations with a vertical hierarchy also tend to use the top-down approach to corporate strategy. Overall, the larger the organization and the more locations it has or the more variety it produces, the more complex it tends to be. The more complex the organization, the more often it tends to be a vertical organization
Horizontal having few levels which supports being responsive to customer wants and needs and faster decision making; here command and control gives way to participative management (INFORMAL). With a flatter structure horizontal organization operates in a cross-functional, team-based environment. Its top management is focused on strategic decision-making and long-range planning, middle management acts as support function and employees make the decisions that affect their area. JIT or lean manufacturing works best in a horizontal structure. Conglomerate and divisional forms tend to be used in more decentralized and horizontal environments. In a horizontal organization, decision making is spread out to the local operating units. As such, operating decisions are made at the local level where Senior managers must focus on removing the obstacles which impede decision making and ensure that decisions are made with the speed and flexibility required.
Hierarchical with multiple levels; information flows upward and decision flow downward. Simple and functional forms are typically used in centralized and hierarchical environments.

Capacity strategies:

Lag where capacity is added or deactivated after a change in demand has proven to be real (appropriate when capacity changes must be done in large and expensive increments). Risk when running near full capacity limits the firm’s ability to respond to unforeseen events
Lead where capacity is added or deactivated in anticipation of a change in demand. The risk is that unexpected change in demand might not materialize (when decrease in demand doesn’t happen the firm will not be able to meet demand; when increase will not materialize the added capacity will sit idle)
Chase or Tracking where capacity is added or deactivated to match, as nearly as possible, changes in anticipated demand. It is most appropriate when capacity can be changed quickly and in small increments

Product Life Cycle and corresponding Capacity strategy:

Introduction and growth stage -> Lead Strategy
Mature stage -> Lag or Chase Strategy (monitoring when demand starts to decline)
Decline stage -> Lag Strategy (never having excess product or unfulfilled demand at the end of the product’s life)

Facility Strategy (factors considered in determining whether to modify an existing facility or acquire another one):

Number and size of facilities depending on the scope and scale of operations and directly related to its marketing and finance strategy
Location factors depending on the long-term strategy and also on where an organization’s customers, suppliers, and other facilities are located (qualitative factors) + cost of doing business in that local market such as (quantitative factors): cost to build, taxes, local labor rates, utility costs, transportation costs of getting raw materials in from suppliers and finished products out to customers. Also quality of life for workforce, legal issues and community attitude play an important role (qualitative factors)
Plant layout

Plant layout – structural design – capacity strategy:

Fixed-position plant layout (one-of-a-kind) – project structural design (one-of-a-kind) – lag capacity strategy
Process or functional-oriented layout – job shop or batch structural design – lag or tracking capacity strategy – simple or functional organizational design
Product or line-oriented plant layout – line/repetitive structural design – lead strategy (adds flexibility and delivery speed)

Choices Affecting Operations

These choices are usually made by middle to lower management and concern four decision areas such as workforce involvement, organizational design, quality systems and information systems.

Infrastructure Choices and Productivity

Productivity is a measurement of the effectiveness of resource use for individuals and organizations. It is the amount of value added that workers provide in the transformation process between input and output. Job design is a key element of productivity. If the job is designed poorly, then it will most likely be performed poorly. It not only includes assessing the job itself and the environment in which it is performed; it also includes setting job specifications that help give the human resources area the right tool to hire the right person for the right job.

One way to measure productivity is to take the value of the outputs (determined by either the selling price of the products or services or by the number of units produced or customers served) and dividing it by the values of the inputs (resources such as labor, cost of equipment, material -> input determined by the cost of inputs or the number of labor hours worked). Commonly used single-factor productivity measurements can be broken down into labor, machine, or multifactor productivity (considering multiple inputs such as labor, material costs and overhead costs and dividing that by the quantity of outputs). Traditional productivity measurements were based on machine utilization and efficiencies. In today’s changing organizations, productivity measurements tend to support productivity improvements more effectively by focusing on no. of employees participating in improvement teams, improvement suggestions implemented etc.

Job Design process steps:

Assessment of Job
Assessment of Employee (type of employee needed to do the job)
Job Description (define responsibilities, duties and work environment of the job)
Job Specification (detail the job specifications in terms of specific knowledge, skills, abilities, effort, and working conditions required for the job)
Hiring

How to increase quality of Work Life?

Give employees a chance to participate in the decision-making process
Empower employees to allow them to make their own decisions on how to satisfy a customer or how to produce the product
Provide unique rewards and compensation
Recognize employees for their accomplishments

Workforce involvement

If workforce involvement is going to succeed it is essential to align human resources policies and practices (including appraisal -PMP and reward systems) with the organization’s strategy. Organizations need to clearly define job descriptions and job specifications, education and training is another avenue that can match the right person to the right job.

Three types of teams that organization can implement:

Ad hoc teams brought together temporarily to solve a specific problem
Natural work teams that are already a group of employees who either work within the same area or work together on the same process. The goal of this team is to work on their daily processes to make them more efficient and cost effective
Self-directed work teams working without direct supervision, normally an evolution of a natural work team

In the Participative Management (horizontal or flat organizational design) the Management’s changing role:

Managing by observation
Share financial and other business information
Use supervisor as coaches
Provide incentives and recognition
Schedule extra time for problem-solving and face-to-face conversation

In the Participative Management (horizontal or flat organizational design) the Employee’s changing role:

Indirect duties – employees take the initiatives in problem-solving and process improvements suggestions
Quality at the source
Responsibility for growth

Quality Systems

An organization’s quality system can go through four levels of development. The quality tree (today’s an order qualifier) is a tool that can help visualize these levels of achievement. This tree is made up of the following:

Quality inspection where a small percentage of the parts in a lot is removed to be tested for conformance to product and customer specifications. At this level, quality is treated as a cost of doing business
Process measurement and improvement is where real improvement occurs. A sequential set of questions will help uncover root causes of process issues and permanently fix them. The focus of quality turns to the process instead of the product
Process control -> the tighter the control, the more capable the process is in repeatability and consistency. When a process is in control it means that the process can be repeated on a consistent basis. The organization will do process control inspections looking for common or random causes (happen due to the inability of being able to repeat the process perfectly) and special or assignable causes (can be identified and eliminated). Employees are responsible for recording and analyzing data so as to monitor the process for quality

X-chart to judge stability of process level over time

R-Range Chart to measure the range of specific dimension of a certain variable

P-chart to measure the percentage of defect of product or service

C-chart to measure the number of nonconformities in a process

U-chart to measure the number of nonconformities per unit

Design for quality -> the highest achievable level of quality. Involving the customer from the earliest conceptual stages can result in a product that precisely meets the customer’s needs as well as the organization’s requirements. Quality becomes everyone’s job with top management visibly showing its support

Information Systems

The key in implementing the right software to support the organization’s strategy is making sure that it provides the right information to the right person in a timely manner. The criteria that need to be considered when selecting an information system are: type of information or data required and how timely that information needs to be; infrastructure required depending on the amount of transactions processed, the amount of data managed and amount of memory or data-processing capabilities. An organization that is striving to be known as an innovative leader in its industry would likely require an information system that clearly supports the R&D and/or the engineering department. Similarly, an organization that is striving to be the low-cost producer in its industry might require an information system that provides it with financial and productivity information.

Implementing the Strategic Plan

Operations Management System (OM)

Operations Management System can

Support the Strategy, or
Be consistent with, but not supportive of the strategy,
Be inconsistent or in conflict with the strategy

OM System is significantly influenced by the operations management group, upper management is only involved in the higher levels of decisions on the design of OM System. When planning OM System the concept is to move from an aggregation of products with longer timeframes to very precisely defined products and very short timeframes. The levels of OM System move from a broad-based production plan to very specific priorities on what should be done next in each operating area of the company. The four dimensions of operations management are: level of interaction, operations management function, critical resources, and decision focus.

OM System Life Cycle

The generics requirements for OM System refer to the levels of the planning hierarchy chart which are sales and operations planning, master scheduling, detailed scheduling and planning, and execution and control of operations. The goal is to configure a system – based on the volume/variety structure – that determines the product profile and the manufacturing strategy. Configuring for Master Scheduling /S&OP begins with the business plan, an output of the business planning process, which becomes an input to the S&OP planning process during which a production plan defines product groups and volumes to be produced to meet business plan objectives. In master scheduling process, the production plan is converted into the master production schedule which defines in more detail what products will be produced. When evaluating capacities at the master scheduling level, the ultimate goal is to manage bottleneck work center. The higher the variety of end-products, the more imperative it becomes to manage the bottleneck work center. The key point is that bottlenecks need to be identified where low volume/high variety and lines should be balanced when high volume/low variety (continuous flow). As we move to high volume/low variety point the focus shifts toward achieving an efficient line-balance for the process (we will run at or over capacity under a lag strategy; in contrary to dynamic environment associated with high-variety products where variation of mix requires excess capacity to accommodate fluctuation of demand). A push system is normally used when low volume/high variety (MRP) to communicate the overall requirements and a pull system such as a Kanban, is used when high volume/low variety to generate orders and establish priorities and time commitments. When Kanban is used the relationship with supplier can be tightened: Kanban then is used to communicate expectations and is more predictable. In this case material will be stored at the point of use (in contrary to low volume/high variety where material is stored in the stockroom. Here production takes place in batches and is recorded by batch). Production is recorded by item because it’s produced in large volume.

Emerging Concepts and the Supply Chain

Supply Networks can include internal supply chain components (aspects under direct control of organization e.g. company-owned distribution centers) and external supply chain components (aspects under indirect control of organization). When moving from integration its internal supply chain to integrating external supply chain as well, focus must be changed from a product/service orientation to a customer orientation.

Value chain model is the internal supply chain of organization. It’s measured by the amount that customers are willing to pay for the organization’s products and services. Each stage of processing (building up the value chain) adds both costs and value; therefore, each step should add more value than cost, and if not, then that particular step needs to be re-engineered in some way. The functions of the organization can be categorized as primary activities and support activities. Primary activities are those involved in the physical creation of the product, its marketing and delivery to customers, and its support and servicing after sale. Support activities enable the primary activities to take place and include: infrastructure of the firm, human resources, technology, purchasing

The supply chain encompasses all activities associated with the flow and transformation of goods from the raw materials stage to the end user, as well as the associated information and funds flows. Additionally, reverse logistics, called also returns management, focuses on getting product back from the customer. The key components of the supply chain are suppliers, producers and consumers. Supply Chain Management focuses on managing its resources to meet customer requirements, provide competitive advantage, and meet business objectives. Supply chains can compete in many ways grouped into two basic categories:

Efficiency – by reducing waste offer consistently low prices
Responsiveness – by focusing on being able to respond more quickly to changes in the environment in which they operate

But normally very efficient firm can not be very responsive at the same time and vice versa (thus needs to find a balance between efficiency and responsiveness).

Supply Chain Management (SCM) is the oversight of materials, information, and finances as they move between supplier, manufacturer, wholesaler, retailer, and consumer. The components of SCM include:

Plan -> forecasting demand and analyzing supply to determine what needs to be produced
Source -> materials and machines required are specified, sourced and purchased
Make -> product is assembled, tested, quality-checked and packed for shipment
Deliver
Return -> return of defective product

Two goals of SCM are to reduce inventory (assuming that product is available when needed) and to maximize the value of money spent on purchased materials and services. The reduction in inventory can be accomplished by increasing flexibility in the manufacturing process or through the reduction of resupply. The scope of supply chain management ranges from recognition of market need for the product to the end of the product’s life

Acquisition costs vs total cost of ownership

Quoted price is the cost that was agreed upon with the vendor, whether it was stated in a written contract, a verbal agreement, or their catalog.

Total cost of acquisition is the quoted price plus the cost of variables such as transportation, duties, taxes, receiving, and inspection.

Total cost of ownership (TCO) of the supply delivery system is the sum of all the costs associated with every activity of the supply stream.

The main insight that TCO offers to the management team is the general understanding that the total cost of acquisition is often a very small portion of the total cost of ownership. Therefore, evaluating a potential supply chain partner’s cost structure requires an in-depth understanding of that partner’s total cost.

SCM Evolution

Level 1: functional and process improvement -> internal focus on execution of supply chain process steps by functional area (reduction of suppliers and logistics service providers and leveraging the buying volume)
Level 2: savings and excellence -> focus toward turning over some assets to third-party providers; moving to higher level of buyer-seller relationship with focus on the most strategic vendors.
Level 3: strategic sourcing -> reaching out to important suppliers and inviting them to S&OP sessions; work on collaborative design and linking more closely supply witch demand; the logistics, transportation and warehousing functions establish global relations with qualified logistics service providers; empowering key customers to self-configure products and services, often through an interactive online portal; shortening time from concept to commercial acceptance
Level 4 and 5: collaboration/advanced -> supplier and customer collaboration is an initiative that is referred to as value chain constellation. The most advanced stage of supply chain evolution is characterized by communication connectivity across the total supply chain network. This is the world full of network collaboration and the use of technology to gain positions of market dominance.

Emerging issues in SCM include:

Sustainable development – achieving a balance among economic development, social development, and environmental protection. Sustainable development is different than green development in that green development prioritizes environmental sustainability over economic and social development while sustainable development seeks a balance. Triple Bottom Line is the measurement of the economic, environmental and social consequences of a firm or supply chain’s activities. It provides a way to evaluate the progress of the firm and supply chain towards achieving balanced sustainable business operations.
Risk management – identifying the factors that could adversely affect the supply chain and planning how to deal with them if they occur. Risk management can be described as a four step process:
Identify the potential failure points and the risks associated with each of the points
Select a strategy for avoiding or responding to the risk
Developing a plan for responding each of the selected risks (Risk response planning)
Implementing the risk response plans

3 basic strategies for dealing with risk:

Decide that the probability of occurrence or the effects are not significant enough to warrant action
Implementing redundancies to avoid or reduce the effects of the event (redundancy strategy) e.g. IT company could arrange for a complete off-site back up of its equipment, systems, and data
Developing a strategy and plans to recover from the event (failure recovery strategy)

4 ways to mitigate risk:

Reduce likelihood of the event occurring (reducing the probability of controllable events)
Invest in redundancy
Increase supply chain visibility (increase the speed at which the supply chain can sense and respond to the foreseen events) via flagging the occurrence of certain events (software application alerts)
Increase supply chain adaptability

Supply Chain Relationship

Strategic sourcing is a comprehensive approach to locating and sourcing key material suppliers. The strategic sourcing focuses on the development of long-term relationships with trading partners who can help the firm meet both profitability and customer service goals. Strategic sourcing typically includes automation of many of the routine transactions between the buyer and seller and should consider both internal and external sources of supply. The use of internal sources is commonly referred to as in-sourcing. One of the forms of relationship is strategic alliance where the key point is that supply chain improvement process looks at the upstream suppliers and the downstream customers. The best reason for companies to form an alliance is to achieve improvement in both companies’ performance. Along with increased marketing efforts to accommodate the customers, there is a need to strengthen relationships with the suppliers. Supplier relationship range along a continuum from arm’s-length, transaction-based tactical buying-a vendor relationship-to a strategic supply management process that incorporates benchmarking, continuous improvement, and shared values – a strategic alliance.

Customer Relationship Management (CRM) is the ongoing process of identifying and creating new value with individual customers, and sharing benefits over a long-term association. CRM is a marketing philosophy based on putting the customer first. It entails the collection and analysis of information to understand and support existing and potential customer needs. One of the key principles of CRM is segregating customers based on their importance to the company. CRM manages customers in order to maximize their long-term value both to the supplier and to themselves. The degree to which firm owns its upstream suppliers and its downstream buyers is referred to as vertical integration. There are three varieties of vertical integration: backward (upstream) vertical integration (e.g. automotive company owns tire company), forward (downstream) vertical integration (e.g. movie studio owns a chain of theatres), balanced vertical integration. Two factors to consider when deciding for integration: cost and control. The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration.

There are 4 basic types of integration. They are functional, organizational, strategic, and interorganizational. Functional deals with the integration of internal functions. Organizational deals with the links and extent of coordination that exists between the different functional areas of the firm. Strategic integration deals with the extent that strategic objectives are coordinated with the activities of the functional areas. Interorganizational integration deals with the linkages external to the firm.

Configuring and Integrating Design and Development Process

Traditional Process

The scope of the process development stages:

Concept investigation when preliminary ideas designed by the product planning group are refined. At this point, the product planning group can develop more precise performance specifications, while engineering develops a few preliminary designs and investigates their feasibility.
Design preparation involving the preparation of a detailed product plan, which includes a schedule for product introduction and estimates of the likely investment required, prices, potential market demand, production costs, and the overall financial return of the project

(good moment to assign a project manager responsible for preparing final product proposal that would be submitted to senior management for approval)

Prototype and pilot phases; at this point design defects that weren’t obvious before have now become evident, and changes to the product or process may occur but in order to meet the goals of the market it is imperative to keep the changes very minor. Before the product’s pilot production run phase starts, it is imperative that all the tooling, equipment and parts to be used are debugged.
Manufacture through phase-out that tends to be a handoff from the advanced manufacturing engineering group to the manufacturing organization. The main intent is to eliminate or minimize any defects in the design or manufacturing process related to the switch.

The product design and development activities determine how well the product meets the customer requirements and how well operations can produce and support it (meaning the quality of product design is best demonstrated by customer satisfaction with features and characteristics). The design of the product and process must support the strategies of the organization; however, these strategies need to be aligned with the marketplace. Product design must be concerned with the concept of manufacturability. This concept is defined as “a measure of the design of a product or process in terms of its ability to be produced easily, consistently, and with high quality”. Design for manufacturability involves simplification of parts, products, and processes to improve quality and reduce manufacturing costs where the production process must be designed simultaneously with the product itself.

The product design functions are directly responsible for five of the eight dimensions of quality (performance, features, reliability, durability, and aesthetics). They are jointly responsible for the serviceability of the product (sixth dimension). The design and development process limit the manufacturability and serviceability of the product and can have a substantial impact on the ability to produce consistent levels of quality. The design specifications must reflect the requirements of the customer (conformance, seventh dimension) and not some higher level of technical excellence or the best possible product. Customers will value most the product that most closely represents their requirements. This is perceived quality, the eighth dimension.

Tools that can be utilized to manage the design and development process are computer-aided design (CAD) software, concurrent engineering, group technology, quality function deployment (QFD) and the house of quality, Taguchi methods, and ensuring that capabilities are aligned within the organization and with the customer. CAD is sometimes translated as computer-aided drafting or computer-assisted process planning. CAD/CAM is the integration of computer-aided design with computer-aided manufacturing to achieve automation from design through manufacturing. Computer-aided engineering (CAE) analysis is the application of computer software in engineering to analyze the robustness and performance of components and assemblies. It encompasses simulation, validation, and optimization of products and manufacturing tools. Computer-integrated manufacturing (CIM) includes all of the engineering functions of CAD/CAM and the business functions of the firm as well (e.g. order entry, cost accounting, customer billing). In many ways, CIM represents the highest level of automation in manufacturing. Concurrent design is the integration of all the technical data needed to design, manufacture, test, and support a product. It is based on concurrent activities and cross-functional participation. It is a time-based strategy in which functions, which are usually performed in series, are instead performed in parallel or concurrently. Through the reduction of cycle time, design quality is improved and costs are minimized. The basic intent is to enhance the product design with input from all stakeholders, often including suppliers and customers. The overall goal of concurrent engineering is to reduce engineering design and introduction lead-time, and reduce or eliminate later changes and quality problems by involving cross-functional teams at the outset. Concurrent engineering is the most effective way to reduce the cost of new product development.

Group technology is an operations management philosophy based on the recognition that similarities occur in the design and manufacture of discrete parts so then different workpieces are divided into groups of items having similar characteristics. These groups can be produced by the same group of machines, tooling and people with only minor changes in procedure or setup. Group technology or families-of-parts concepts are often used in cellular design (job shops). With proper coding and classification of parts and machines, new product designers can use the information to use existing parts and machines to create new products. This keeps new parts to a minimum, thereby reducing costs and complexity over time.

Taguchi Methods comprise a system of cost-driven, off-line quality engineering control conducted in the product and process design stages. They emphasize the effective application of engineering strategies rather than advanced statistical techniques, and include both upstream and shop-floor quality engineering through the development of reliable and proven technology. Robust design will facilitate an error-free implementation based on the past collective knowledge and experience, and will facilitate the generation of new design information, often for improving product quality and reliability, performance, and cost. Typically the applications of Taguchi methods are centered around two main areas: improving an existing product and improving a process for a specific product by identifying product and process parameters that will minimize variation (change in technologies at the earliest possible point because the farther from the pivot point the greater the leverage it produces on the improvement) while keeping the mean on target.

Managing Design Changes

The change that needs to be implemented can be managed either through an engineering change request process (ECR) for the product or a product quality process (APQP advanced process quality planning) for the process. The cost of a change when it reaches the customer is 10 000 times higher than if it occurs at the level of concept. The common measurement of error in the design quality is known as the “figure of merit”. The figure of merit allows for comparison among the various design processes, and will result in three statistical values that need to be measured: cost, cause, and prevention. From a cost perspective, this measurement could include actual versus planned costs, internal and external failure cost, and appraisal costs. Additionally, the data can be used by management to compare the results against other designs within the organization. The initial cause will need to be quantified to determine if the process improvement is effective (e.g. the previous reject rate was ten parts per minute, now we are at two parts per minute). The overall impact of prevention will need to be measured, which correlates to the cause (e.g. did the quantity training for the line workers and the implementation of the new process have the correct effect on the process?). With the ECR process, the cross-functional team has identified the root cause and corrective action, and will now need to develop pilot samples to test against the specifications of the requirements. The advantage of the ECR process is that it involves all functions within the organization working together to resolve an issue and continue to build a high-quality product. The initiatives that will assist in overcoming the obstacles of poor product and process design include: involve customer early in the process, supplier development, concurrent engineering, computer-aided design tools.

Configuring and Integrating the Cost Management Process

Cost Management Concepts involve both internal and external factors. External factors will drive the overall direction of the business while internal factors will heavily influence operational control and decision-making within the organization. The internal cost drivers include factors related to operational control and decision-making, while the external drivers can include taxing authorities, accounting standards, shareholders, stakeholders, and so on. Currently it is imperative that accounting systems move from passive after-the-fact reporting system to a tool that proactively helps organizations manage their day-to-day operations as well as their overall cost patterns on an active, immediate basis. The objectives required today for a cost management system need to address three different functions: inventory valuation, operational control, and individual product cost measurement. Inventory valuation for financial and tax statements involves allocating periodic production costs between goods sold and goods on stock based on generally accepted accounting principles (GAAP). When business uses a single plant-wide burden rate for allocating overhead to products, regardless of the diversity of their production processes, the cost system for external reporting doesn’t give relevant performance measurement and product cost information. Operational control system must provide accurate, timely feedback to managers on their performance which can be based on speed, cost fluctuations, cost allocations, and other non-financial measurements. Companies measure speed performance by comparing actual results against standard or budgeted levels with the frequency corresponding to the cycle of production process being measured. Effective operational control requires an understanding of which costs are fixed and which change with short-term variations in activity. With product cost measurement the cost accounting group must understand allocations and estimates, cost variability, the scope of the system, product cost updates. A product’s cost includes not only the cost of the factory resources to convert raw materials and purchased components into a finished item, but also the cost of resources to: establish the distribution channel, service the product, provide other support services such as engineering design changes, process improvements, purchasing etc.

Major inputs to product cost structure (equal total standard cost for a product):

Direct labor (significant decrease over time)
Direct material (significant increase over time)
Factory overhead

Major outputs that result from the product cost structure:

Inventory valuation
Cost of goods sold (or cost of sales)
Production performance measurements
Managerial decisions based on the data

The wider the product mix and the lower the production volume per product, the more likely the organization is to have a high direct labor component of cost of goods sold. The cost information provided by accounting is used to develop and modify product costing, to make operational decisions, to review performance measurements, and for financial reporting.

Cost Management Processes

The cost management process involves several steps and can begin with estimating product costs used to make key decisions within the organization from a financial, operational and strategic perspective. These estimates, which include engineered standards (most precise), process-based standards and target costs (least precise), are compared against the actual costs and become the basis for developing product standards becoming a benchmark for measuring performance of the actual cost data.

Engineered approach to cost estimation is based on physical relationship between manufacturing activity and costs. Industrial engineers observe each step of the production process both to measure the time needed to perform a task and to determine the most efficient way to perform the process, based on that average amount of time needed per task is determined. For estimation of material costs engineers study the materials and machines used to produce a product and identify the quantity and quality of the direct materials needed.
Target costing is used to establish concrete and highly visible cost targets for their new products. The process begins when top management establishes a target cost for a new product. A cost estimating group will then decompose the target cost for a product as a whole into cost targets for subassemblies and individual component parts.

Frequently a gap exists between the target cost and cost projections for the new product based on current design and manufacturing capabilities. Closing the gap through cost reduction is central to the target costing process through searching for cost-saving opportunities.

Methods to accumulate actual costs:

Process costing assigning costs to large quantities of similar or identical products more or less continuously (best where cost structures for items are similar; mass-production). Costs are accumulated for a particular operation or department for a period, then averaged over all of the units produced during the period (the department production report is the key document showing the accumulation and deposition of costs by a department)
Job-order costing used when the difference between similar products become significant enough; here costs are assigned to the job (appropriate where a wide variety of products are produced intermittently and an authorizing document is used to identify the job, batch or lot (the job cost sheet is the key document controlling the accumulation of costs by job).
Project costing used where service is performed on a project-by-project basis. Therefore, costs related to direct material, direct labor, and overhead are incurred on the project and applied to the overall budget of the project.

Methods of allocating overhead:

Full absorption accounting frequently used in the past and still most widely accepted method of reporting overhead, based on direct labor or machine run time per units to establish one or more overhead rates. The overhead is then absorbed or charged to inventory, key point to watch is that overhead can be over-absorbed or under-absorbed when the actual level of production varies from the planned level. A key concern with using direct labor is that it tends to allocate more overhead to the high-volume and frequently stable products, and less to the low-volume products.
Activity-based costing, currently used method due to significant reductions in the direct labor component and changes in machine technology, used to allocate overhead costs more precisely than full absorption method. This method attempts to allocate overhead on the basis of those activities or events that cause the costs to be incurred. Activity-based overhead rates have two advantages over full absorption accounting. First, with activity-based rates, only products using an activity are charged for its use. Second, each activity uses the cost driver that best relates its cost to its production activity. Unfortunately this method is limited to managerial analysis because of the difficulty in defining the relationships between cost elements and cost drivers and the lack of wide acceptance for external reporting.
Throughput accounting (Theory of Constraints TOC) is a simplified form of variable costing. It applies only those costs that vary directly with the production levels to the products or services. These costs would typically include direct material, direct labor, and the variable overhead. In TOC accounting, costs and revenues are accumulated in three areas: throughput, inventory, and operating expense. Throughput is the rate at which a company generates revenue through sales; inventory is defined as all of the money the system invests purchasing things the system intends to sell; and operating expense refers to the money the system spends in turning inventory into throughput. Throughput accounting ignores fixed costs and places emphasis on short-term optimization by assuming that variables such as product price, customer orders, technology, and production design are fixed and therefore maximizing throughput is appropriate. From a positive side this method provides a comprehensive program for managing inventory, improving quality, and improving profitability. Also, TOC suggests that managers should identify the weakest links in the chain of events in which raw materials become product. This method is used to measure efficiency but it’s not widely accepted for external reporting.

Direct costing in most appropriate for internal management control. Management will want to monitor the variable costs to ensure compliance with plan (variable costs are direct costs).

Inventory valuation methods (increased net income means more taxes) include FIFO, LIFO, Average cost method, Actual cost method but also

Standard cost method – values the inventory and all inventory transactions at the standard cost of the item. Any deviations from the standard rate are recorded in a variance account and taken as a period expense; most appropriate for a fairly stable environment
Replacement cost method – values inventory and all inventory transactions at the estimated cost of replacing the units

The valuation of production resources and other fixed assets is intended to reflect their decline in value over time with use.

Cost of asset = original acquisition cost + any additional cost incurred to extend its useful life

Net asset value = Gross asset value – cumulative depreciation

The traditional cost accounting methods calculate the useful life of equipment in years. This useful life is based on either the expected production rate and product mix or the rate of technology change.

Questions related to Valuation of Resources

Three-way match procedure after an invoice is received from supplier (purchase order PO, receiving report or documentation, invoice): item number and associated quantity should be the same on all documents, whereas the prices and the extensions of prices should be the same on the purchase order and the invoice, all of this is a responsibility of accounts payable function.

The cost accounting group and operations function have different requirements when using accounting data. In a traditional environment, the cost accounting group will gather data for the month, about two weeks after month end. Therefore, its use for operational control is limited by the lack of timeliness.

The costs that are relevant in decision-making are classified as avoidable costs. Avoidable costs are defined as costs that can be eliminated by choosing one alternative over another in a decision-making situation. Process steps in identifying the costs that are avoidable include:

Assemble the costs associated with each alternative being considered
Eliminate those costs that are considered sunk (sunk costs are costs that have already been incurred and are not avoidable so then they must be ignored in decision-making)
Eliminate those costs that do not differ between alternatives
Make a decision based on the remaining costs; these costs will be either differential costs or avoidable costs

Effective Supply: Evaluating Potential Suppliers

Determine extent of Evaluation

In this stage the buyer evaluates the list of likely, or potential suppliers to narrow it down by choosing decision criteria, asking what do the stakeholders care about and what is required from a supplier. The evaluation is quick or thorough, depending on value (how important the purchase is) and risk (how difficult it is to acquire). To decide about the importance of a purchase a quadrant analysis is used to compare risk and value

Bottleneck purchases are unique or highly customized items (not just any supplier can provide these items) having low to medium value to the buying organization but the cost of not having them may be great. In the long term, the buyer’s goal is to reduce uniqueness, moving the purchase into the leverage category, or to eliminate the need for the bottleneck item). Strategic purchases promote mutual dependence between the buyer and supplier because the stakes are high for both parties. Companies often work in partnerships or strategic alliances when procuring their strategic items. Leverage purchases are high value, typically because of volume. These products or services are easy to acquire, making them low risk. As volumes climb, unit price becomes even more important. Buyers need good negotiation skills to get the best possible per unit cost or the base rate (for services). Non-critical purchases are low value to the buying organization and low risk to acquire. Buyers look for efficient suppliers that use tools such as procurement cards, e-procurement systems, and online catalogs to streamline the ongoing acquisition process.

Bottleneck: focus evaluation on issues that affect supplier’s ability to deliver

Strategic: focus evaluation on issues that affect supplier’s ability to deliver continuously and that affect cost structure and cost drivers

Non-critical: focus evaluation on issues that minimize the buyer’s acquisition time. No need to put too much emphasis on price since the marketplace does a good job of keeping supplier’s prices in line with each other.

Leverage: focus evaluation on suppliers willing to provide price-volume discounts and to negotiate rates and on issues that minimize the buyer’s acquisition time

Identify Decision Criteria

Depending on category of purchase (is it bottleneck, strategic, non-critical or leverage) and operational capabilities such as service, delivery, quality assurance and control, financial strengths and weaknesses. How deeply you dig into a supplier’s operation depends again on value and risk.

For Bottleneck Purchases

For Strategic Purchases

For Leverage Purchases

For Non-Critical Purchases

Operational Capabilities:

Product/service design, development, manufacturing/delivery; decision criteria on record of innovation, order backlog, length of time to process orders, equipment capabilities

For strategic purchases experience affects total cost of ownership, for non-critical and leverage purchases it can help minimize acquisition time and cost, for bottleneck purchases it can help break the bottleneck (broaden specifications, lessen uniqueness)

Quality assurance and control, related systems; decision criteria on quality control inspection procedures and delivery performance
Inventory locations, methods, turnover; decision criteria on location, just-in-time capabilities, inventory management systems/techniques
Delivery; decision criteria on delivery facilities and capacity issues, delivery performance
Service; decision criteria on reliability, responsiveness, effectiveness of management
Pricing methods and cost management

For non-critical purchases – price analysis (comparing price with competition), for leverage purchases – cost element analysis, for strategic purchases – total cost of ownership,

Financial strengths and weaknesses; decision criteria on balance sheet, income statement, ratio analysis, annual reports, business and credit information
Human resources; decision criteria on stability/technical competence, training and professional development, contract issues (unions)
Organization, management and management systems; decision criteria on top management commitment, top management succession plan, general reputation and industry status, customer and environmental commitment, subcontractor management

Gather supplier data

An evaluation of existing suppliers relies primarily on their past performance: quality, service, delivery, price and cost, quantity, other relevant operational capabilities

When evaluating new, unknown supplier it’s good to use techniques such as site visits, asking for references (ask for companies of similar size and objectives, develop a list of questions, talking to right people). Objective or unbiased data is also useful. Examples of possible objective data include analyst intelligence, industry certifications, and awards.