Module 1 Section D

Question 1

Functional Strategy

Answer 1

-strategy built from business strategy for various business functions such as finance, marketing and production

Question 2

Operations Strategy

Answer 2

-total pattern of decisions that shape long-term capabilities of an operation and their contribution to overall strategy
-different from ops. management in the following ways:
1. longer time frame - considers trends in demand & supply, effects of new tech., opportunities for internal investment/development
2. broader perspective - considers effect of forces inside/outside the org on ops. looks at entirety of ops rather than pieces
3. higher level of focus - will provide direction that can be used to develop policies/processes needed to implement the strategy

Must address:
1. Technology analysis - determining tech. choices such as level of automation to use
2. Capacity requirements analysis - determining need to build or change capacity to meet performance requirements based on cost-volume profit, break-even, sales mix or other analysis
3. Capacity strategy - determining how and when to adjust capacity through capital expenditures and determining where to locate capcity and what capacity should look like
4. Marketing strategy - aligning with marketing strategies e.g. product placement
5. Supply network - what to make vs. buy and how to create/manage a supply network, including managing network’s risks
6. Manufacturing environment and push-pull boundaries - determining point at which actual demand, rather than a forecast, will drive supply and appropriate manufacturing environment for given product family

pg. 1-118

Question 3

Process Technology

Answer 3

-set of decisions that define the strategic role that direct and indirect process technology can play in overall ops. strategy of org. and set out the general characteristics that can help evaluate alternative technologies

Examples of direct process tech:
* material processing systems and equipment or, for services, customer processing systems (e.g. medical equipment; rides at Disney designed to be people movers –> high/steady throughput + fast pass)

Examples of indirect processs tech:
* information processing systems and administrative support systems

-Can improve 1 or more competitive priorities (speed, dependability, flexibility, quality & cost)

pg. 1-120

Question 4

Technology Road Map

Answer 4

-tool that originated in agile project management to enable longer-term yet still flexible planning
-maps are easy to interpret, brief, and high level –> can easily be revised such as due to customer-driven changes even late in development

Question 5

Process Tech & Manufacturing Environments -
Engineer-to-Order

Answer 5

-few items produced (low volume)
-each item unique (great variety)
-work is complex and requires variety of skills
-work usually done in stages, perhaps waiting for completion of other tasks or customer approval before proceeding
-projects must meeet agreed client deliverables that would require speed (meeting promised delivery date) and quality (conformance to promised specs. and processes)
-margins are higher –> fewer competitors who can provide comparable levels of capabilities
-direct process tech. will need to be numerous, specialized, distributed among multiple subcontractors likely on such a project

Question 6

Process Tech & Manufacturing Environments -
Make-to-Order

Answer 6

-greater volume of product is generally produced than ETO
-work begins only after order is received and components are a combination of existing and customized elements
-lead time not as long as eto
-tasks and skills not quite as diverse
-work proceeds in intermittent fashion, testing at each stage before handing product off to next layer of development (esp. when project is subcontracted to a manufacturer)
-customer-facing performance metrics - customer service and dependability - are important
-margins remain higher in this environment

Question 7

Process Tech & Manufacturing Environments - Assemble-to-Order

Answer 7

-while it waits for order to begin work, it uses its designs and creates product primarily from components in stock
-lead times are shorter
-workers tend to specialize in 1 tasks
-order follows a designated route through shop to completion and shopping

Question 8

Process Tech & Manufacturing Environments - Make-to-Stock

Answer 8

-produces large amount of the same item (may be individual units or products produced only in large amounts e.g. steel roads, oil, grains, concrete, etc.)
-products are manufactured before the order
-orders are filled from existing stock, and, unless the order are unexpectedly large, they are filled quickly
-jobs tend to be repetitive –> workers repeat the same tasks with each batch prduced
-process technology should automate as much as of this repetitive work as possible, to reduce both labor costs and worker fatigue
-competitive forces are more likely to keep margins low

Question 9

Process Technology & Manufacturing 3 Process Characteristics

Answer 9

Scale
* # of technology units required to process the work
* the project and work center environments tend to have more units of technology (e.g. more desktop computers) than the line or continuous environments (e.g. sinlge computer system that can be accessed from multiple points)

Automation
* degree to which human intelligence or skill is applied in the process
* in project process - human workers use tech as a tool to transform products
* in line or continuous process - computerized systems or robots may perform tasks with human monitoring but little intervention

Coupling
* refers to degree to which technology is integrated in process
* in project - there may be little benefit to investing in tech. that can connect processes

Question 10

Manufacturing Process - Project

Answer 10

-used for large, often unique, items or structures that require a customer design capability
-highly flexible
-can cope with broad range of product designs and design changes
-resources are generally dedicated to individual tasks, so there is redudancy
-worker skill requirements are high

Question 11

Manufacturing Process - Work center or job shop

Answer 11

-used to produce items to each customer’s specifications
-production ops. are designed to handle a wide range of product designs and are performed at fixed plant locations using general purpose equipment
-resources (equipment and labor) tend to be shared among tasks
-worker skill requirements are high

Question 12

Manufacturing Process - Batch

Answer 12

-used to product items with similar designs typically of a repeat nature
-depending on volume, batch processes may resemble a work center process (lower volume) or a line process (high volume)

Question 13

Manufacturing Process - Line (repetitive)

Answer 13

-used to process narrow range of standard items with identical or highly similar designs
-work moves at high volume and within predictable time
-work comes to the work center (e.g. assembly line)

Question 14

Manufacturing Process - Continuous manufacturing

Answer 14

-non discrete products that are transformed by physical or chemical reactions flow continuously form one part of process to next and are not separated

Question 15

Cost-Volume-Profit (CVP) Analysis

Answer 15

-study of how profits change with various levels of output and selling price
-selling price of product or service impacts demand to lesser or greater degree, depending on item in question (this is called price elasticity)
-level of demand then affects volume
-if lowering price increases volume sufficiently, it will make up for the lower profit per unit
-conversely if raising a price does not decrease volume by too much, the higher profit per unit will cover the lost volume

Question 16

Fixed Cost

Answer 16

-expenditure that does not vary with production volume e.g. rent, property tax

Question 17

Variable Cost

Answer 17

-operating cost that varies directly with change of 1 unit in production volume e.g. direct materials consumed, sales commissions

Question 18

Total Cost Curve

Answer 18

-in cost-volume (breakeven) analysis, the total cost curve is composed of total fixed and variable costs per unit multiplied by # of units provided.
-breakeven quantity occurs where total cost curve and total sales revenue curve intersect
-in inventory theory - total cost curve for inventory item is sum of costs of acquiring and carrying item
-above the break-even sales level, org will be profitable
-below break-even sales level –> loss
-increasing prices will make this curve rise more quickly and shift break-even point, but because higher prices could reduce unit sales, thre will be an optimum price that maximizes profit at acceptable level of risk (risk of loss)

pg. 1-128

Question 19

Break-Even Point

Answer 19

-level of production or volume of sales at which operations are neither profitable nor unprofitable
-intersection of total revenue and total cost curves

Question 20

Contribution Margin (CM)

Answer 20

-used in CVP analysis
-an amount equal to difference between sales revenue and variable costs
-it’s what’s left to cover fixed costs and (hopefully) profit

Question 21

Break-Even Analysis

Answer 21

-a study of number of units, or amount of time, require to recoup an investment
-identifies the point at which fixed costs equal contribution margin
-can be used to determine if product’s demand (its sales potential at a defined price level) will be sufficient to cover costs of manufacture
-only considers the cost of manufacturing

Question 22

Target Income Volume Analysis

Answer 22

-considers contributions to general and administrative costs of org and return on investment for the facility and equipment that is producing the units
-helps translate sales targets into production requirements
-what level of sales is required to meet the target income goal?

Question 23

Sales Mix Analysis

Answer 23

-sales mix = proportion of individual product-type sales volumes that make up the total sales volume
-if total sales remain at same level, increasing sales for a product line that has a lower contribution margine will decrease net income

Question 24

Capacity

Answer 24

-maximum level of value-added activity over a period of time that the operation can achieve under normal conditions
-not enough capacity = org cannot take full advantage of opportunities to turn demand into revenue
-too much capacity = org. incurs costs related to maintaining debt burden of creating capacity and to operating idle capacity - costs that may exceed revenue

Question 25

Capacity Strategy

Answer 25

-one of the strategic choices a firm must make as part of its manufacturing strategy
-3 commonly recognized capacity strategies - lead, lag, and tracking

Question 26

Capacity Planning

Answer 26

-process of determining amount of capacity required to product in future
-process may be performed at:
1. aggregate or product-line level (resource requirements planning)
2. master scheduling level (rough-cut capacity planning)
3. material requirements planning level (capacity requirements planning)

-planning occurs at every level in manufacturing process
-high-level capacity planning addresses entire org, for all of its product lines in all of its sites

Question 27

Factors Affecting Resource Planning

Answer 27

1. demand / external / market-based
* possible for demand to go above or fall below forecasts
* surge capacity - ability to meet sudden, unexpected increases in demand by expanding production with existing personnel and equipment
**2. supply / internal / related to operations resources **
* org’s decisions about sizing itself to meet demand requires that it understand relationship between its costs, volumes, and profitability
* if building capacity to fulfill demand will create excess capacity, org must decide if its wants the potential revenue even if it comes with a loss of profitability
* economic of scale operate by spreading fixed costs of operation over a larger volume
* diseconomies of scale are point at which cost per unit stops decreasing and instead begin to increase as volume increases

pages 1-136 & 137

Question 28

Lead Capacity Strategy

Answer 28

-adding capacity to a resource in anticipation of increased future demand to ensure ability to satisfy market demand when increase occurs
-often used in hotel/entertainment industry since capacity is hard to change later

ADVANTAGES
* demand is satisfied –> optimal revenue capture and satisfied customers
* unexpected small spikes in demand, overly pessimistic forecasts or drops in capacity can be accomodated by lead output cushion

DISADVANTAGES
* earlier timing for capital spending affects cash flows
* overcapacity occurs if demand drops unexpectedly or forecasts are overly optimistic

Question 29

Lag Capacity Strategy

Answer 29

-not adding capacity unti org. is operating at or beyond full capacity
-keeps unit costs minimized by working at full capacity, but does not satisfy total demand
-low-cost providers of things like commodities often use this strategy becaus efficiency is necessary when margins are low

ADVANTAGES
* capacity is full utilized so unit costs are lower
* capital spending is delayed

DISADVANTAGES
* revenue loss occurs and risks of lost future sales is created when customer demand can’t be met
* systems cannot absorb increases in demand or drops in capacity

Question 30

Tracking Capacity Strategy

Answer 30

-capacity added incrementally when demand cannot be met by current capacity and accumulated inventories
-adding capacity in small amounts to attempt to respond to changing demand in real time in marketplace
-this approach may satisfy total demand and help minimize unit costs, but can be difficult in some situation to add incremental amounts of capacity, esp. if facility has no more space available
-often used when there is supply flexibility
-often used by machine shops

ADVANTAGES
* all demand is satisfied
* capacity utilization is high and thus unit costs are lower
* system is moderately flexible to changes in demand or capacity

DISADVANTAGES
* cost of inventories detracts from capital resources available for other purposes
* risk of inventory loss (e.g. obsolescence, theft, damage) increases

p. 1-138

Question 31

Planning Increments of Capacity Change

Answer 31

-capacity can be increased in small or large increments

increasing capacity in large increments -creates overcapacity until demand has increased -increases unit costs, but larger operation offers greater economies of scale

increasing capacity in multiple small increments
-more flexible approach that decreases the amount of overcapacity
-provides some protection against overly optimistic demand forecast
-inaccurary of forecast is likely to be detected before next unit of capacity is addd

Question 32

Marketing Strategy

Answer 32

-basic plan the marketing function expects to use to achieve its business and marketing objectives in particular market
-includes marketing expenditures, marketing mix, and marketing allocation
-links back to organizational strategy and help determine what products and services market actually wants
-marketing management involves implementing this strategy using marketing tools to generate demand
-tools include advertising, trade discounts, sales force incentives
-since marketing management involves prioritizing demand –> demand-side professionals have levers a their disposal to balance supply and demand when there is a mispatch
* if demand outstrips supply for given product, demand-side professionals can adjust prices or quoted lead time
-overuse of levels to balance supply and demand could result in customers going to competition –> demand-side professionals often want supply side to correct imbalances using production flexibility and/or inventory holding

Question 33

Four Ps

Answer 33

-set of marketing tools to direct business offering to customer
4 Ps = product, price, place and promotion

Question 34

4 Ps - Product

Answer 34

-includes product and service design to determine combinstion of features that will make products into order qualifiers and some competitive differentiators will hopefully make into order winners

-product decisions include selecting:
1. brand names,
2. varieties,
3. sizes,
4. grades (e.g. basic or deluxe, light or heavy duty) - different from quality
5. returns, and warranty policies,
6. service levels

-marketing is a key stakeholder in determining product characteristics since it has the closest understanding of customer value proposition/customer experience
-operations needs to ensure products ar designed for ease of manufacture and required services are capable of being deliveries (e.g. sufficient staffing)

Question 35

4 Ps - Price

Answer 35

-price of product
-involves setting credit terms, trade discounts, allowances (e.g. discounts to compensate for quality or delivery issues)
-involves determining price at which product will make highest profit, which is combination of both profit margin and number of units sold at given price
-often market constrained –> ops. need to develop manufacturing or service provision process that can deliver at low enough cost to leave room for physical distribution costs and profit margin
-inventory carrying costs are calculated partly based on price, with higher priced objects getting more management attention for security, materials handling, etc.
-marketing may decide to use market penetration pricing, accepting a loss (loss leader) or low margins to gain market share
**-price skimming **- setting high price when you are the only game in town and then dropping price when competitors enter the market

Question 36

4 Ps - Place

Answer 36

-both where to sell products and what lead times to offer
-where goods will be located for sale, or market geography, the physical distribution channel(s) that will be used to get them there, and sales channels customers can use to place orders (e.g. online or retail)
-location of ops. and scope of distribution (localm regional, national, or global) can impact distribution costs

Question 37

4 Ps - Promotion

Answer 37

-process of generating or increasing demand for org’s good and services
-includes: sales promotions, advertising, sales incentives for salespersons/retailers/resellers, campaign management, public relations
-can result in increased sales volumes in specific locations, so physical distribution needs info on promotions to plan for inventory to be in right locations in right amounts

Question 38

Logistics

Answer 38

-in supply chain management context it is subset of supply chain management that controls forward and reserve movement, handling, and storage of goods between origin and distribution points
-in industrial context, art and science of obtaining, producing, and distributing material and product in proper place and in proper quantities
-in military sense - movement of personnel

Question 39

Materials Flow

Answer 39

-requires designing how materials will flow into, through, and out of manufacturing process from acquisition to use and eventual distribution
-may also need to account for reverse logistics - returns, end of life disposal, remanufacture
-demand-driven planning and its material planning subset, demand-driven MRP (DDMRP) are good examples of systems that prioritize effective materials flow
* avoid generic safety stock in favor of strategically positioned inventory buffers that are dynamically adjusted to maximize materials flow

Question 40

Disintermediation

Answer 40

-eliminating intermediate stage or echelon in a supply chain

Manufacturer A
-shares distributor with another manufacturer
-also has created a direct channel to the customer (e.g. internet sales) which cuts out the distributor and retailer –> allows them to reduce supply chain operating expense, inventory, order cycle time and increase profits

Manufacturer B maintains 2 channels through distributors, but also sells directly to retailer

DISADVANTAGES
1. could disrupt relations with distributors;
2. inadvertently raise costs if distributors added significant value such as picking and packing very small orders more efficiently than the manufacturer can do

Manufacturer C - dedicated supplier
* increases reliance on that supplier which can be risky if supplier cannot meet demand
* reduces expense/complexity of operating upstream supply chain

pg 1-145

Question 41

Functionally Oriented Organizations

Answer 41

-organized into departments such as R&D, purchasing, production, distribution
-often compared to grain silos, each operating in its own walled-in world
-each department given strong incentive to maximize its own metrics for success regardless of how this impacts other departments

Example: Sales/marketing
1. highest priority will be customer service –> requests for expedited orders or changes in what is being produced with little notice
2. could also desire high production flexibility, which will increase setup costs and reduce economies of scale

Question 42

Cross-Functional Organizations

Answer 42

-often takes form of focusing more on process flows than on functional areas –> helps org. gain overall systems perspective which helps to ensure each aspect of process is value-added and takes final result/total of all costs into account
-logistics management - unifying role of getting multiple departments to act as one
**-risk management **- needed in supply chains because these are complex systems that are often streamlined to the point where a failure in any part could create a supply disruption –> can lead to dissastisfied or lost customers

**Example of value-added risk tools: **
1. insurance,
2. geographic diversification to reduce risk of disruption from severe weather and other regional events
3. redundancy to allow for operations to be resilient (e.g. same part can be made in 2 diff. plants)
4. getting supply from multiple sources rather than just one

Question 43

Operational Plan

Answer 43

-set of short-range plans and schedules detailing specific actions
-more detailed than strategic and tactical plans
-cover shorter time horizon
-what - strategies and taks that must be undertaken
-who - people who have responsibility for each of the strategies and/or tasks
when - time lines in which strategies/tasks must be completed for the organization to be successful
-how much - the financial resources provided to complete each strategy/task

purpose: provide employees with clear picture of their tasks/responsibolities in line with goals/objectives contained in the strategic plan

-can be made in areas of:
1. design - select products, manage development, make or outsource design
2. delivery - monitor and adjust to demand levels, processes to buy/make and deliver products
3. development - measure and report performance, continuously improve performance, assure quality

Question 44

Make-or-Buy Decision

Answer 44

-act of deciding whether to produce an item internally or buy it from and outside supplier
-factors to consider in decision:
1. costs
2. capacity availability
3. proprietary and/or specialized knowledge
4. quality considerations
5. skill requirements
6. volume
7. timing

Question 45

Insourcing

Answer 45

-decision to use org’s internal resources to provide goods and services
-ops. will make and not buy activities related to its core competencies
-core competencies are directly related to org’s ability to compete and outsourcing them creates a risk that org will not have this competitive edge

makes sense to outsource when:
1. Activity requires competencies that ops. does not possess and will not develop because activity is considered non-strategic
2. economies of scale would discourage ops. function from developing complex skills that would be rarely used
3. supplier can do a non-strategic activity with better speed, dependability, flexibility, quality, and/or cost

Question 46

Locating Capacity - number and size of sites

Answer 46

-capacity can be distributed between sites fairly evenly can be concentrated in some way such as by area of specialization
-basic choice for ops. is to build capacity in:
* larger but fewer sites* - less costly to operate due to economies of scale, less costly to supply materials to centralized location
* smaller but more numerous sites - decreased risks due to geographic diversification, decreased costs of transportation to customers by locating smaller facilitires near customer markets, increased customer responsiveness by shortening time from order to delivery

Question 47

Locating Capacity - location selection criteria

Answer 47

-question of where to locate capacity arises when:
1. demand increases and ops. must either expand its existing site or build additional capacity in entirely new site
2. demand increases and ops. must decide on closing or combing sites

may factor in relative proximity to customers and/or suppliers which can impact transportation cost and lead time
1. market factors - customer service may require location near a new, rapidly growing market segment
2. operational factors - may include costs of operating in a particulr location, such as price of land, labor costs, or costs of transporting supplies to ops. site

Question 48

Locating Capacity - locating value chain activities

Answer 48

Widespread
-widespread dispersal of value chain may be advantageous for orgs. that distribute goods in multiple foreign countries
-provides protection against interruptions and reduces currency rate volatility

Focused/Local
-production advantages - lower production costs from cheaper labor, cheaper land, and/or lower energy costs may outwigh increases costs of transporting goods further
-economies of scale - few very large production centers will provide greater economies of scale than many smaller facilities
-learning curve effects - may be best to focus sales or activities in one or few location, gain experience, then disperse
-better coordination with suppliers and customers - some processes benefit from proximity to suppliers for more rapid response and greater supplier involvement; customer service or product research may be best in areas with growing customer bases

Question 49

Locating Capacity - using domestic competencies in new markets

Locating Capacity

Answer 49

-orgs can leverage their distinctive home-country competencies (e.g. brands or cost effective processes) to enter new markets as strong competitor
-success in domestic market –> early entry into new market –> competitive edge –> new competencies –> enhanced competitive strength

Question 50

Options for entering new foreign market (5)

Answer 50

1. Export
2. Licensing
3. Franchising
4. Creation of subsidiaries
5. creation of location strategic appliances or joint ventures

Question 51

Export

Answer 51

-requires relatively little investment and internal change to org
maximum control
-Competitive power will be weakened if:
1. org’s manufacturing costs + transporation costs are higher than those of foreign rivals
2. adverse currency shifts
3. host countries impose tariffs/trade barriers

Question 52

Licensing

Answer 52

-paying fee for permission to manufacture and sell a prouct created by another
-appealing when org. has intellectual property (e.g. patented or trademarked product or process) but does not have resources to develop foreign market
-org receives royalites from licensee
-licensee assumes expenses of using/producing property and all market risks

RISK - licensee may steal the intellectual property so orgs. must commit to monitoring/enforcing legals right of ownership

Question 53

Franchising

Answer 53

-more appropriate for service and retail businesses
-franchiser sells brand or service concept to a foreign business entity
-franchisee assumes costs of building and operating the business
-franchiser gives up some control over its brand; franchisee can weakened brand by delivering poor quality or service or alter brand when it conflicts with local culture and customer preferences (dilutes power of brand)

Question 54

Subsidiaries

Answer 54

-subsidiary is a company that is a least majority-owned by a parent company
-option allows org. to maintain full control over its investment but that investment will be larger
-may be created by acquiring existing business in foreign country or by developing entirely new business (greenfield venture)
-investment risk and potential for reward are higher for subsidiaries than for licensing or franchising
-profits have to be shared only with minority stakeholders

Question 55

Strategic Alliances and Joint Ventures

Answer 55

-org may enter foreign market by forging strategic alliance or joint venture with an org. operating in host country
-orgs each share some of risk (including investment) and some of reward
-collaborations allow new entrant to benefit from local expertise
-orgs. achieve economies of scale and gain additional access to distribution channels

RISKS
* less control over business/profits
* more potential for conflict
* risk of losing proprietary information