Operations Strategy and Performance Measurement

Rolls-Royce Business Managers Program November 2002 Washington, DC

Doug Blocher Operations and Decision Technologies Department

What is Strategy?
Strategy is NOT about doing things right,
Strategy

It is about doing the right things.

Bob Collins, IMD

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What are the right things?

Must have a debate which involves all disciplines, about how products win orders in the Market Place, AND, what qualifies us to be there. Debate must be Specific Debate is Time Sensitive Functional area Strategies should support market characteristics.

Strategy

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Order Winner:
What the customer truly values. The essence of the product or service. Why the customer would choose you over the competition. Strategy

Order Qualifier:

Some minimum acceptable level of this measure is required to even be considered for the business.
Order Winners and Order Qualifiers are discussed in depth in Manufacturing Strategy, Terry Hill, London Business School

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Finding the Order Winner:

Focus on the Customer

How are we viewed by our customers?

Strategy
Customer service reps dont know strategy; top managers dont know customers.*

What do our customers really want or need?

Heard? Observed? Questioned? Experienced?

Stay Focused

What should we try to deliver?

Needed? Afford? Possible? Add Value?

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*Staple Yourself to an Order, Harvard Business Review Jul/Aug 5 92

Corporate or SBU Strategy

Links between Strategic elements and processes

Market Strategy Strategy

Order Winners

Operations Strategy

Performance Measures

Operation Processes and Tactics

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Corporate or SBU Strategy

Growth Be Profitable

Characteristics from Manzana

Drop Certain Insurance Products Regain Market Share Undercut Price? Build Relationship with Agent

Market Strategy Strategy

Order Winners Reduce Costs Focus on New Policies Tighten UW Standards

Operations Strategy

Performance Measures Increase Utilization New before ReNew Organize by Region Release Renews 1 day

Operation Processes and Tactics

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Functional Strategies?
A Market Strategy is not Marketings Strategy.
Strategy

It is the Firms Strategy to compete in a specific market.

An Operations Strategy is not Operations Strategy

It is the firms strategy to competitively support the market position
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Tradeoffs are necessary!

Can't be all things to all people Different (competitive) positions require:
different product configurations, different equipment, different employee behavior, different skills, and different management systems.

Strategy

Flexibility

Many tradeoffs reflect inflexibilities in machinery, people, or systems.

Porter, What is Strategy Harvard Business Review Nov/Dec 96, and another good read is Porter, Competitive Strategy, 80
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Cost

Tradeoffs are necessary

But not all are on the efficient frontier
Flexibility Strategy
High

Low High
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Low

Cost
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Operations Strategy
Good Operations are not just about being Efficient (Low Cost). Operations should properly support the companys market strategy or market strategies. Efficiency and Effectiveness are not the same thing

Strategy

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What are the right things?

Competitive Priorities for Operations Operations Levers
Be the Low Cost Provider Have the Quickest Delivery Speed Deliver when promised Customization / Variety Able to produce new products and variations Conformance Quality Quality in terms of Long Term Reliability
Strategy

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Components of Operations Strategy Porter: How will we be different?

Plant and Equipment
Job shop vs Flow shop Special vs General purpose equipment

Engineering Support
Process engineering vs Product engineering

Strategy

Organizational Style
Decentralized vs Centralized

Supply Chain
Efficient vs Responsive

Capacity Limits
Labor vs Machine Average vs Peak

Labor
Custom skills vs Repetitive tasks

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Strategy
A Good strategy should
provide focus for everyone be simple enough for everyone to understand always provide a guide for decisions Strategy

One must ensure that the strategy is explicit (as well as correct) before real improvement is possible
this often means that it has been interpreted and translated into goals and metrics thus it must be measurable

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Performance Measurement should Provide Direction

By looking at a firms key measures, one should be able to determine the firms direction, determine their strategy. A firm lacking good, consistent measures will tend to be going in all directions.
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Strategy

Performance Measurement
That which gets measured on a regular basis
Strategy

(and as a part of the performance appraisal process) , gets attention.

Beware of Gaps

Approximate Measures are better than wrong convenient measures.

Beware of False Alarms

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Measurement Mistakes to Avoid

Gaps exist where there are no measures for areas deemed strategically important.
Examples: Customer satisfaction, employee involvement,

Strategy

False Alarms occur where there are detailed measures for areas which are not strategically important.
Examples: many efficiency measures

Incorrect Emphasis (see following graph)

Vollmann and Schmenner, International Journal of Operations & Production Management, 1994
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Performance vs Importance:
Is the Emphasis in the right place?
Importance Trouble

Strategy

False sense of security Performance

Chase and Hayes
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A Balanced Scorecard
Customer Perspective
How do customers see us? Strategy

Internal Perspective
What must we excel at?

Innovation and Learning Perspective

Can we continue to improve and create value?

Financial Perspective
How do we look to our stakeholders?
Kaplan and Norton, The Balanced Scorecard, 1996
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Some Non-financial Measures Non Lead time for customer order delivery Number of Corrections Amount of Time needed to answer a phone Number of Complaints Conformance Quality Time to Respond to Change Request Trained users of ERP process X

Strategy

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Different Levels Need Different Measures

Measurements should be hierarchical

Strategy

Upper Management Middle Management Operational Departments

Will need 2-4 measures

Will need 2-4 per area -not all the same Will need 3-5 per dept or process

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The Heisenberg Uncertainty Principle of Productivity You cant have measures that are simultaneously broad and deep.
Strategy The broader the measure of productivity, the less meaningful and the more arbitrary it is for operations at lower levels in the organization. The more specific the measure, the more incomplete and partial it is for the company as a whole. The Dilemma: How to choose real-time proxies that help lead action to the overall productivity goal.
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The Need for Umbrellas

Financial measures for the upper levels of management; properly interpreted physical measures for lower levels.
Strategy

Progressive managers provide "umbrellas" for those under them so that the "rain" of financial measures dont drown them.
Dixon, Nanni, and Vollmann, The New Performance Challenge
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Using The Control Bucket

ou cant keep measuring everything forever ...

If a measure is not meeting goal or not showing the right improvement, then it must be monitored regularly. If a measure indicates satisfactory performance over some period of time, it should be placed in the control bucket and monitored once-in-awhile. If a control measure falls from grace, it should be brought back on the table for regular review.
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Strategy

Measurement Reminders
1. Link between strategy & action. 2. Consistent, simple, visual for all, and attuned to the customer. 3. Should not necessarily be identical across locations, units, or levels. Comparability is a false issue its too easy. 4. Should be significantly non-financial in character 5. Should be well defined and agreed upon
Dixon, Nanni, Vollmann, The New Performance Challenge: Measuring Operations for World-Class Competition, 1990
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Strategy