Chipotle Project

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There is an increasing awareness that operations and the supply chain contribute to the global competitive positon of a business and are not merely making a firm’s products or services. Operations should be fully connected to the business strategy and decisions should fulfill the needs of the business and add competitive advantage to the firm.

Here are our Learning Objectives for this course. Between these videos, the textbook, supplemental readings, assignments and Discussion Boards, you will end the course with some new skills and many new insights.

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Dell Inc.: Using the supply chain to compete

The personal computer (PC) sector was still in its infancy when, in 1983, medical student Michael Dell began buying up remainder stocks of outdated IBM PCs from local retailers. Dell upgraded the machines in his college dorm, then sold them at bargain prices to eager customers. By 1985 Dell Computer had switched from upgrading old IMBs to building its own machines. The machines themselves were technologically unremarkable, but it was the way in which they were sold - directly to the customer - that gave the upstart company a unique advantage over established PC makers.

While industry leaders vied to introduce PCs with ever faster and more impressive technology, they gave little consideration to the mundane business of supply chain management. The computers they produced were invariably made-to-forecast and because of the way they were sold - through shops and resellers - were then destined to land on warehouse and shop shelves (inventory is money sitting on a shelf) for an average of two months before being purchased. Remember, inventory turnover is how companies turn to profit.

Dell's own operations continued to be constantly re-examined (continuous improvement) to squeeze every possible moment of non-value adding time out of procurement and assemble processes. As a result, the total number of interventions or "touches" involved in the manufacture of a Dell PC had been reduced to 60, against an industry average of around 130. The simplification is facilitated in part by Dell's focus on common components.

The supply chain is the network that links together the work and output of many different organizations. The purchasing function is responsible for finding other organizations to serve as sources and then buying the material and service inputs for the transformation process of the organization. The logistics function, in contrast, is typically responsible for the actual movement of goods and/or services across organizations.

On the inbound side too Dell works to minimize inventory and increase return on capital employed. Many components are not ordered from a supplier before Dell receives a customer order. To achieve such levels of co-operation and integration, Dell progressively reduced its number or suppliers from 204 companies in 1992 to just 47 by 1997. By around 2003, 20 suppliers provided 75% of Dell's direct material purchase. "We have no inventory and no warehouses in any of our factories. Instead we're able to pull material into our factories based on actual orders..." (Dick Hunter, Dell VP Americas Manufacturing Operations).

Bulky finished sub-assemblies, such as monitors and speakers, are treated differently. Instead of shipping them to Dell's factories, they were sent directly to the customer from the supplier's hub (located close to the market rather than close to Dell's factory), saving Dell approximately $30 per item in freight costs (now multiply that figure by millions of products sold each year).

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The corporate strategy defines the business that the company is pursuing. The Walt Disney Corporation considers itself in the business of “making people happy.” The business strategy follows from the corporate strategy and defines how each particular business will compete within their industry. Michael Porter describes three generic business strategies: differentiation, low cost, and focus. Differentiation is associated with a unique and frequently innovative product or service, while low cost is pursued in commodity markets where the products or services ae imitative. Focus refers to the geographical or product portfolio being narrow or broad in nature. Focus can be combined with either a differentiation or low-cost strategy.

Every operation should have a mission that is connected to the business strategy and is coordinated with the other functional strategy. For example, if the business strategy is differentiation through innovative products, the operations mission should emphasize new-product introduction and flexibility to adapt products to changing market needs. Other business strategies lead to other operations missions, such as low cost or fast delivery. The operations mission is thus derived from the particular business strategy selected by the business unit.

At McDonald’s, the operations mission is to provide food and service quickly to customers with consistent quality and low cost in a clean and friendly environment. How then does McDonald’s turn its mission into reality? By setting operations objectives derived from the operations mission in quantitative and measurable terms.

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How does a firm use these objectives to gain a competitive advantage?

Remember Dell re-examines its operations to squeeze every possible moment of non-value adding time out of procurement and assemble processes. As a result, the total number of "touches" involved in the manufacture of a Dell PC had been reduced to 60, against an industry average of around 130. Simply put, less touches equals less time and fewer employees that results in saved costs. The simplification is facilitated in part by Dell's focus on common components. By using a modular design (to be discussed in a later chapter) of common components, Dell was able to reduce its inventory of raw materials and still offer a large variety of finished goods.

The strategic objectives we seek to exploit (cost, quality, delivery, and flexibility) can be achieved by incorporating the right strategy into our operations. By reducing the amount of touches, we pay less employees. If we were to redesign a tool box that uses 24 parts (nuts, bolts, sides, handle, etc…) down to 2 parts (handle that snaps into a molded box), reducing the number of parts used to make the final product would reduce our overall ordering, transporting, holding, and carrying cost within the supply pipeline and work in progress.

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All operations should have a distinctive competence that differentiates it from the competitors. The distinctive competence is something that operations are difficult to imitate. Walmart has a mission to be the low-cost retailer. To achieve this mission it has developed a distinctive competence in cross-docking aimed at lowering the costs of shipping. Using cross-docking, goods from supplier’s trucks are transferred across the loading dock to waiting Walmart trucks and delivered to the stores without entering the warehouse.

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Let’s discuss how we can use the four operations objectives (cost, quality, delivery, and flexibility) that we discussed earlier to describe different ways to compete through operations. Most firms choose one or a few objectives to focus on, so that the strategic decisions made in operations can be aligned with and support these focused objectives.

Not only should objectives be linked to an operations mission, operations strategic decisions should be linked to business strategy and to marketing and financial strategies as well. Table 2.3 of your text shows two diametrically opposite business strategies that can be selected and the resulting functional strategies.

The first one is the product imitator (low-cost) business strategy, which is typical of a mature, price-sensitive market with a standardized product or service. When you see the word “standardized,” you must automatically think of a cookie-cutter mold. Products are all identically made with the same mold, increased production rate, little to no downtime, resulting in a low unit cost.

The second business strategy is the product innovator and new-product introduction. This strategy typically is used in emerging and possible growing markets where advantage can be gained by bringing to market superior-quality products in a short amount of time. Price is not the dominant form of competition, and higher prices are charged, thereby putting a lower emphasis on costs.

When asked to evaluate operations, you must immediately ask, what is the business strategy, mission, and objective of operations. The product imitator strategy should focus on mass distribution, repeat sales, a national sales force, and maximization of sales opportunities. In contrast, the product innovator strategy, you should focus on selective distribution, new-market development, product design, and perhaps sales through agents.

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McDonald’s successfully links its mission statement directly into its operations objectives, then makes strategic decisions in the five operations decisions areas:

Process: Specialized equipment and work flows ensure meals are delivered to customers quickly.

Quality: More than 2,000 quality, food safety, and inspections monitor food as it moves from farms to suppliers to restaurants.

Capacity: Restaurant capacity is carefully designed to control customers waiting times.

Inventory: Just-in-time replenishment ensures food and packaging are available when needed. Food and packaging are highly standardized across restaurants.

Supply Chain: Each restaurant is connected to its supply chain for fast replenishment. The supply chain is designed for frequent deliveries and to avoid stockouts.

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When operating in global markets, a company needs to be organized properly to produce and market its products. As a result, the global corporation has emerged with the following characteristics. Facilities and plants are located on a worldwide basis, not a country by country.

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Supply chain strategy includes consideration of customers, suppliers, sourcing, and logistics in addition to operations. There is a focus on flows of inventory, materials, and information throughout the supply chain from the suppliers to the ultimate customer. A supply chain is the network of manufacturing and service operations that supply one another from raw materials through manufacturing to the ultimate customer.

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Sustainable operations have become an increasingly important part of operations and supply chain objectives and strategy. It refers to minimizing or eliminating the environmental impact of operations along with social and financial viability of the firm for future generations.

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