Matching Supply with Demand:
An Introduction to Operations Management
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Highlights from Syllabus
• Two group assignments
Assignment #1: Two options with different due dates (Session 3 or 4)
Assignment #2: Littlefield (due by Session 7) — a simulation game connecting everything from this course
• Form groups today
• All assignments due one hour before class
Course Roadmap
1. Introduction to Operations Management Operations and Business Strategy
Introduction to the Analysis of Flows
2. Process Analysis and Design 3. Managing Flows
4. Managing Variability
5. Inventory Management
6. Production System and Quality 7. Operations in a Networked World
Operations Strategy
Operation n.
power to act
– Random House Dictionary
A plan of action … intended to
accomplish a specific goal – The American Heritage Dictionary
• Strategy = plan to achieve superior performance
• Operations = power that transform inputs into outputs
• Operations Strategy = the crucial link between the planned strategy and the executed reality.
Operations as Part of the Value Chain
Definition: Operations Management is the organization and control of the fundamental business activity of providing goods and services to customers.
New Product Development
Transformation Operations
Demand Logistics
Cust Support Service
Marketing & Sales
Distribution
Accounting Management of Organizations
Fundamentally, OM is about transformation processes.
Strategic Alignment
Business Performance
(Financial Metrics)
~ NPV (absolute)
~ ROI, ROA (relative) ~ Cash flow (survival) ~ Stock price
~ Market share
Operations Performance
(Operational Metrics) ~ Flow time
~ Throughput ~ Inventory
~ Process cost ~ Quality
Customer Priorities
(Order Winners) ~ Price
~ Quality ~ Time
Matching Capabilities to Strategy
Price (Cost) P
~ Customer service
~ Product quality
~ Rapid, reliable delivery
~ New product development
~ Degree of customization
To deliver we need “capabilities” as measured by operational metrics
“order winners”
Identifying Appropriate Capabilities
FedEx vs. USPS
• speed/traceability hub and spoke system • price regional post office system
Trader Joe’s vs. Aldi
• service experience/quality specialty grocery store
• price highly efficient discount grocery store Apple vs. Dell
• variety/customization direct business marketing • quality/service high-end products with integrated,
uniform consumer experience Develop processes that support desired capabilities
Wal-Mart – Approach
Corporate Strategy
(Gain competitive advantage by) providing customers access to quality goods, when and where needed, at competitive prices
Operations Structure
– Crossdocking
– RetailLink(PoSdata)
– Fasttransportationsystem
– Communicationbetween retail stores
– Focusedlocations
Operations Strategy
– Short flow times
– Low inventory levels
“Wal-Mart never jumped to some far off location to later fill in the area in between… Wal-Mart always placed new stores close to where it already had store density.
“When stores are packed close together, it is easier to set up a distribution network that keeps stores close to a distribution center.
“When stores are close to a distribution center, Wal- Mart can save on trucking costs. Moreover, such proximity allows Wal-Mart to respond quickly to demand shocks.”
Holmes, T. J. (2011). The Diffusion of Wal-Mart and Economies of Density. Econometrica, 79(1), 253-302.
Wal-Mart – Results
• Higher inventory turns, even compared with other industry leaders (e.g., Target)
• Improved targeting of products to markets
~ Famous example: increased stock of U.S. national flags on the same day of 9/11
• Sales per square foot increased from $102 in 1985 to $485 in 2019
~ industry average increased from ~$100 to ~$300
~ $326 for Target (2019)
What Separates Wal-Mart from Target?
Inventory Turns = COGS/Inventory
Walmart: ~9 turns a year
Net Income
Net Income
Target: ~6 turns a year
All numbers in million dollars.
1976-2021:
Walmart return: 2,750 times* Target return: 270 times S&P 500 return: 37 times * Inc. (BRK.A) return: 2,820 times
You Can Do (Much) Better Than Wal-Mart
• salespersquarefoot
~ Walmart: $485
~ Whole foods: $1,200
~ Costco: $1,400
• WhataboutTraderJoe’s?
~ $2,000 (2018)
• WhatmakesTradeJoe’ssosuccessful?
Trader Joe’s Operational Capability
• Keep things simple: offer fewer SKUs; sell mostly store brands; minimize promotions in order to reduce complexity; packing for easy checkouts
Quantity discounts lower costs
• Achieve flexibility by cross-training employees
• Eliminate waste (muda) in everything but allow waste in staffing!
~ Err on the side of over-staffing
• Let employees make small decisions
Flow units/Entities (customers, data, material, cash, etc.)
Goods Services
Operations as Process Flows
Operations Management
Network of Activities and Buffers
Resources Labor & Capital
Flow units/Entities Vaccines,
glass vials, syringes, stoppers,
fill-and-finish
Outputs Vaccination (1st dose)
Vaccination (2nd dose)
Operations as Process Flows
Operations Management
Network of Activities and Buffers (Hospitals, vaccination clinics, pharmacies, mobile clinics)
Resources Staffing, transportation,
freezers, funding,
data lake, sign-up portal, 2nd dose reminder system etc.
Process Architecture
Flow Efficiency
Job Shop Batch
Line Flow Continuous Flow
Product Flexibility
Process Positioning: Product/Process Matrix
Product Volume
Jumbled Flow (job shop)
Disconnected Line Flow (batch)
Connected Line Flow (assembly line)
Continuous Flow
Process Flexibility
Low Volume Low Standardization
Low Volume Multiple Products
Higher Volume Few Products
High Volume High Standardization
Design company, outpatient clinic, Formula 1 race car
Bakery, Car repair
Inefficient
Infeasible
Auto assembly, Computer assembly
Sugar Refinery Paper mill
aka Hayes-
Product/Process Matrix – Healthcare Industry
Process Job shop
Assembly or Continuous flow
High customization High unit margin Low volume
Some customization Ave margin
Med volume
Low custom Low unit margin High volume
Standard medical procedures
Shared medical appointments*
Group testing (e.g., COVID-19)
Autonomous AI screening (e.g., EyeArt)
Remote patient monitoring
*Ramdas, K. and Darzi, A., 2017. Adopting innovations in care delivery-the case of shared medical appointments. Journal of Medicine, 376, pp.1105-1107.
Job Shop vs. Batch vs. Flow Shop
Type of Product Specialized Product Machine Variable
Process Volume Equipment Variety Setup LaborSkills Cost Frequency
JobShop low low high high high high Batch med med med med med med Flow Shop high high low low low low
Representation of Strategy
Responsiveness
Current position and strategic directions of movement in the competitive product space
Strategy and Operational Effectiveness
Responsiveness
Strategic Focus
position on efficient frontier
Operational Efficiency
distance from efficient frontier
Inefficient
Infeasible
efficient frontier
Contrasts in Strategic Focus
Inefficient
Rolls Royce
Efficient Frontier
Infeasible
Low Quality High
Strategic Dynamics – Technology Change
Responsiveness
Responsiveness
High Price Low
High Price Low
• Technology (IS, OM practices, etc.) elevates efficient frontier
• Firms must continually improve to remain competitive • Frameworks (e.g. lean, six sigma) offer guidance
Summary: Operations Strategy
• Strategy = plan to achieve superior performance
~ four modes of competition: price, quality, time, variety
~ differentiated position in competitive product space of (P,Q,T,V)
• Operations = power/processes that transform inputs into outputs
~ network of activities and allocation of resources
~ four process attributes: cost, process quality, cycle time, flexibility
~ operational effectiveness = distance to the frontier
• Operations Strategy = consistency between strategy and operations
~ Evaluation: strategic operational audit – do process capabilities and strategy fit?
~ Competition: impact and dynamics
– anticipate (offense) vs. react (defense) ~ Evolution: shifting basis of competition
– capabilities must evolve to support new strategies
Talking about Strategy is Easy; Execution is Hard
• Sayingweneedtocreatecapabilitiesthatsupporta
strategy is one thing. Doing it is another
• Weneedtounderstandthelinksbetween management levers and performance metrics
• Forthat,weneedtounderstandFLOWS
What’s Next
• Class2:WinstonManufacturingCase
See the syllabus for purchasing instructions
• Class3:wewilldiscussNationalCranberryCase
~ Textbook Chapters 2-3: read as case prep
~ National Cranberry is a group case
~ Practice problems, case instructions, hints and templates on Blackboard
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