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Competitive Operations

Understanding the voice of the customer helps design and production teams focus product development efforts, deploy technology to align operations, and improve productivity through the efficient use of labor, materials, and capital. Product and service designs determine the operational design, including its supporting processes. Operational design should be considered from a global perspective but with customization at a local or regional level to satisfy cultural preferences as well as economic, political, and other constraints. Aligning with customer experience expectations improves designs of any kind. As an example, when customers want a product faster, this encourages a supplier to think of ways to meet this customer’s need. Once a viable solution is found, other customers benefit and the supplier becomes relatively more competitive. Similarly, if customers request new features and functions to a current a product or service, opportunities arise to make designs less costly or more reliable and to incorporate other improvements for competitive differentiation. Differentiation is also created if suppliers work directly with customers and at their locations. Observing how customers use or don’t use products and services affords views for creating additional solutions. Customers do not always know what will help them until they are offered a unique solution.

Operational strategy for most industries was relatively simple prior to digitalization and globalization, which disrupted competitive ecosystems. Competitiveness was determined by available technology, design, and operational systems at a regional or at most a national level. Customer preferences and the technology used to design, produce, and mange products and services changed very slowly for most industries. The product life cycle in consumer appliances used to be measured in years or decades, although there were updates and modest increases in performance every few years. Today, many product and services life cycles are measured in years or months. As an example, consumer appliance features and functions proliferate because of both innovation in understanding customer preferences and experiences as well as the evolution in software application, sensor technology, and other digitalization capabilities. Proliferation of products and services is supported by flexible design, production, and fulfillment systems. Also, whereas several decades ago operational strategy changed infrequently, in some industries today it changes more frequently to match global customer preferences that are differentiated at a local level. Disruptions require effectively translating business and operational strategy to match changing customer preferences and expectations.

As an example, the operational strategies of Burger King and McDonald’s fast food restaurants are different by design, based on marketing strategies designed to service specific types of customers. An operational comparison shows Burger King uses a customization strategy based on its marketing promise of “You can have it your way.” Its operational design enables customers to customize their orders. Burger King also processes burger patties through a “flame broiler,” which is its second marketing promise. The process for customer orders is a classic “batch and queue,” and the flame broiler constrains the throughput batch by batch. When customers arrive at a Burger King restaurant, they expect (based on the marketing promise) to wait for customized food for a longer period than when they order at a McDonald’s restaurant. There is also more wait time variation in Burger King’s batch and queue system compared to a more standardized system like that used at McDonald’s restaurants. Several of the Burger King supporting processes, like fries and drinks, are standardized. The key concept is that marketing promises influence operational design because customers are promised products and services of specific types.

In contrast to the operational strategy of Burger King, the McDonald’s process provides fast and standardized products and service. Customers arriving at a McDonald’s restaurant find food products designed in a standardized way to improve process efficiency. McDonald’s also maintains a small inventory of food (i.e., still very fresh and made only minutes ago) and is ready to build a meal to satisfy customer demand. The types and quantities of food in inventory were determined by historical customer demand patterns by the minute of the day. Depending on the restaurant, when we purchase meals our expectations will be different. But because we receive products and services as promised, the experience will be great. McDonald’s and Burger King target different market segments but are very successful businesses.

In summary, an organization’s operational strategy should be aligned with its marketing strategy relative to the expected customer preferences for products and services so that expectations are met at every encounter (i.e., the moment of truth). If products, services, or supporting processes are misaligned with customer expectations, dissatisfaction occurs with negative consequences. Examples include returns and warranty issues, complaints needing resolution, higher transactional cost, and lost revenue. Productivity deteriorates.

Strategic operational linkage is achieved by translating customer requirements into the design of products, services, and supporting processes. The line of sight between business benefits such as productivity and shareholder economic valued added and resource allocations should be clear. Strategic alignment is especially important for larger and more complex systems having interrelated processes impacted by several active initiatives. Table 1.1 provides an example of how two enabler initiatives (e.g., Lean and Six Sigma) are aligned to improve operational productivity. If process yields are low, Six Sigma methods may be useful for identifying the root causes of low yield and creating solutions to eliminate them. Perhaps the problem is a machine creating rework because it cannot maintain a dimensional tolerance. Experiments may be useful for building a regression model to show relationships between the tolerance and several machine settings. Higher process yields correlate to lower scrap

TABLE 1.1

Enabler Initiative Examples

Measurable

Improvement

Enabler

Productivity

Opportunity

Productivity Linkage to Finance

Reduce scrap percentage

Use Six Sigma methods to increase yield

Reduce scrap expense

Reduce direct labor and materials

Increase inventory turnover

Apply Lean methods to reduce forecasting error and lead time

Lower inventory investment

Increase cash flow and reduce inventory holding costs

and rework percentages, which can save material and direct labor as well as reduce lead time.

In the second example, an inventory turnover ratio is increased by applying Lean tools and methods to reduce the lead time for a hypothetical product. Inventory turnover is a ratio of the annual cost of goods sold (COGS) divided by the average on-hand monthly inventory investment. As an example, if COGS is $12 million annually and the average inventory investment necessary to maintain this level of COGS monthly is $1 million, then the inventory turnover ratio is 12. The benefits realized with a reduction of inventory investment are increases in cash flow because money is available for other uses and a reduction of interest expense needed to maintain the inventory investment using financing.

The concept is that, when selecting projects either at an operational level from management reports or from operational assessments focused on gaps such as scrap, rework, or other issues, it is key that these decisions are linked to an enabler initiative with its tools and methods prior to project execution. All linkages must be measurable. As an example, operational improvements associated with a project should be linked to a financial statement such as profit and loss (P/L), balance sheet, cash flow statement, or others, and to project metrics to calculate their impact on productivity. This is important because project benefits offset the costs needed to create a team and to provide resources. In Chapter 7 we will show how linkage is done using hypothetical financial statements and operational reports.

Operational flexibility, decentralization, and integration have been accelerated through technology improvements and increasingly sophisticated operations management tools, methods, and concepts. Information available to organizations through the Internet has leveled the playing field relative to the ability of organizations to learn and adapt design and operations to align with customers. This has enabled disparate organizations to compete around the world based on the value components of price, speed, utility, and functionality, as well as mass customization of products and services. Mass customization is focused on efficiently satisfying customers’ local or personal needs and relies on several supporting structures, such as efficient design and production.

Global supply chain collaboration between participants evolved to reduce end-to-end time from quote to delivery. Collaboration is enhanced by supply chain aggregation or disaggregation of processes. As an example, marketing processes could be done in several countries to meet localization needs. Products could be designed and then manufactured in other countries for worldwide distribution. Back office support operations may be distributed from anywhere. This requires virtual teams, which are now commonplace. These teams, which are usually diverse, also resemble the customer they serve in that they are increasingly multilingual, culturally savvy, technically proficient, and collaborative by training.

Properly facilitated, collaboration within a diverse team increases because team members tend to ask questions from different perspectives rather than immediately moving to a predetermined and perhaps non- optimal solution. Questions are important. Several years ago, I joined a forecasting improvement team. The team comprised twenty people at management and director levels. It had been meeting for two years to discuss forecasting accuracy improvement. During the preceding two years, however, they had only mapped the forecasting process. They did not execute process improvements or improve accuracy. The problem was that the team had focused its scope only on improving forecasting accuracy. The scope ensured no other investigations would occur. After consulting with experts, after two years, the team was told the product forecasting accuracy was consistent with similar industries and benchmark accuracy. The reason this team had made little improvement in its demand process was that it had asked the wrong question. A better questions would have been, “How can we better estimate product demand?” Focusing attention on estimating customer demand would have provided the team with a larger scope for improvement options in addition to forecasting model improvement. Questions are important.

Approximately 50% of this organization’s product revenues were from ten large retailers. Several of these collected point-of-sale information as products were scanned in their stores. This demand could be timed with

100% accuracy. The balance of the organization’s customers were approximately 1,500 smaller warehouse distributors. Their demand needed to be aggregated by product group and forecasted. Using 100% known demand and the current accuracies over a smaller revenue base ensured overall forecasting accuracy would be immediately improved. If product promotions were offered, demand was simply additive to the already improved forecasts. In summary, organizations with diversity are more innovative because information gathered is more complete and is analyzed from different perspectives. More questions are asked and answered. Problems are better stated, leading to the following observation from Charles Kettering: “A problem well stated is half solved.”

It has been shown that when organizations align strategy with design and operations, they consistently outperform global competitors. Competing organizations may even use the same labor, materials, capital, and infrastructure; but they can exhibit different levels of productivity because of differing strategies and execution. Toyota is an example. It efficiently integrates customer feedback, design, and operations as opposed to some of its competitors. The results are vehicles that are lower cost and more reliable, as well as a greater market share. Its success shows that low cost is not the only differentiating factor for gaining market share in the automotive industry. Organizations need to successfully integrate state-of-the art technology and operational methods to compete successfully.

 
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