operation Performance & Operation stategy

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OPERATIONS & PRODUCTION MANAGEMENT Lecture 2

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Operation & production Management

Transcript of operation Performance & Operation stategy

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OPERATIONS & PRODUCTION

MANAGEMENT Lecture 2

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Operations performance and Operations Strategy

IntroductionThe quality objective The speed objective The dependability objective The flexibility objective The cost objectiveThe ‘top-down’ and ‘bottom-up’ perspectives The market requirements and operationsresources perspectives The process of operations strategy

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EXAMPLEOperations management can have a very significant impact on a business’s financialperformance. Even when compared with the contribution of other parts of the business, the contribution of operations can be dramatic. Consider the following example. Kandy Kitchens currently produce 5,000 units a year. The company is considering three options for boosting its earnings. Option 1 involves organizing a sales campaign that would involve spending an extra a100,000 in purchasing extra market information. It is estimated that sales would rise by 30 per cent. Option 2 involves reducing operating expenses by 20 per cent through forming improvement teams that will eliminate waste in the firm’s operations. Option 3 involves investing a70,000 in more flexible machinery that will allow the company to respond faster to customer orders and therefore charge 10 per cent extra for this ‘speedy service’. Table 2.2 illustrates the effect of these three options.

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ANALYSIS OF EXAMPLE• Option 1:Increasing sales volume by 30 per cent certainly improves the

company’s sales revenue, but operating expenses also increase. Nevertheless, earnings before investment and tax (EBIT) rise to a1,000,000.

• Option 2 :But reducing operating expenses by 20 per cent is even more effective, increasing EBIT to a1,200,000. Furthermore, it requires no investment to achieve this.

• Option 3 :The third option involves improving customer service by responding more rapidly to customer orders. The extra price this will command improves EBIT to a1,000,000 but requires an investment of a70,000.

• Note how options 2 and 3 involve operations management in changing the way the company operates.

• Note also how, potentially, reducing operating costs and improving customer service can equal and even exceed the benefits that come from improving sales volume.

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The ‘stakeholder’ perspective on operations performance

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Operations can contribute to competitiveness

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Top management’s performance objectives for operations

• Of all stakeholder groups, it is the organization’s top management who can have the most immediate impact on its performance.

• They represent the interests of the owners (or trustees, or electorate, etc.) and therefore are the direct custodians of the organization’s basic purpose.

• They also have responsibility for translating the broad objectives of the organization into a more tangible form. So what should they expect from their operations function.

• Broadly they should expect all their operations managers to contribute to the success of the organization by using its resources effectively.

• To do this it must be

• creative, innovative and energetic in improving its processes, products and services. In more detail, effective operations management can give five types of advantage to the business:

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OM five types of advantage to the business

• It can reduce the costs of producing products and services, and being efficient.

• It can achieve customer satisfaction through good quality and service.

• It can reduce the risk of operational failure, because well designed and well run operations should be less likely to fail, and if they do they should be able to recover faster and with less disruption (this is called resilience).

• It can reduce the amount of investment (sometimes called capital employed) that is necessary to produce the required type and quantity of products and services by increasing the effective capacity of the operation and by being innovative in how it uses its physical resources.

• It can provide the basis for future innovation by learning from its experience of operating its processes, so building a solid base of operations skills, knowledge and capability within the business.

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The Five Operations Performance Objectives1. Quality: You would want to do things right; that is, you would not want to make

mistakes, and would want to satisfy your customers by providing error-free goods and services which are ‘fit for their purpose’. This is giving a quality advantage.

2. Speed : You would want to do things fast, minimizing the time between a customer asking for goods or services and the customer receiving them in full, thus increasing the availability of your goods and services and giving a speed advantage.

3. Dependability: You would want to do things on time, so as to keep the delivery promises you have made. If the operation can do this, it is giving a dependability advantage.

4. Flexibility: You would want to be able to change what you do; that is, being able to vary or adapt the operation’s activities to cope with unexpected circumstances or to give customers individual treatment. Being able to change far enough and fast enough to meet customer requirements gives a flexibility advantage.

5. Cost: You would want to do things cheaply; that is, produce goods and services at a cost which enables them to be priced appropriately for the market while still allowing for a return to the organization; or, in a not-for-profit organization, give good value to the taxpayers or whoever is funding the operation. When the organization is managing to do this, it is giving a cost advantage.

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The Quality Objective• Quality is consistent conformance to customers’

expectations• Quality is the most visible part of what an

operation does• It is something that A customer finds relatively

easy to judge about the operation• It is clearly A major influence on customer

satisfaction or dissatisfaction• A customer perception of high-quality products

and services means customer satisfaction• And therefore the likelihood that the customer

will return.

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Quality Inside The Operation

• Quality reduces costs. The fewer mistakes made by each process in the operation, the less time will be needed to correct the mistakes and the less confusion and irritation will be spread.

• Quality increases dependability. Increased costs are not the only consequence of poor quality. At the supermarket it could also mean that goods run out on the supermarket shelves with a resulting loss of revenue to the operation and irritation to the external customers.

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The Speed Objective

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The Speed Objective

• Inside the operation, speed is also important.

• Fast response to external customers is greatly helped in:

• decision-making and

• speedy movement of materials and

• information inside the operation.

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Speed inside the operation

• Speed reduces inventories.

• Speed reduces risks. – Forecasting tomorrow’s events is far less of a risk

than forecasting next year’s.

– The further ahead companies forecast, the more likely they are to get it wrong.

– The faster the throughput time of a process the later forecasting can be left.

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The dependability objective

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Dependability inside the operation

• Dependability saves time

• Dependability saves money.

• Dependability gives stability

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The flexibility objective

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The flexibility objective• Product/service flexibility – – the operation’s ability to introduce new or modified

products and services;• Mix flexibility – – the operation’s ability to produce a wide range or mix of

products and services;• Volume flexibility –– the operation’s ability to change its level of output or

activity to• Produce different quantities or volumes of products and

services over time;• Delivery flexibility –– the operation’s ability to change the timing of the delivery

of its services or products.

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Flexibility inside the operation

• Flexibility speeds up response.

• Flexibility saves time.

• Flexibility maintains dependability.

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Low cost is a universallyattractive objective

• Productivity

• Single-factor productivity

• Multi-factor productivity

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Single-factor productivity

• Often partial measures of input or output are used so that comparisons can be made. in the automobile industry productivity is sometimes measured in terms of the number of cars produced per year per employee. This is called a single-factor measure of productivity.

• Single-factor productivity=Output from the operation

One input to the operation

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The cost objective

• Productivity is the ratio of what is produced by an operation to what is required to produce it. The measure that is most frequently used to indicate how successful an operation is at doing this is productivity.

• Output from operations

Input to operations

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Multi-factor productivity

• Total factor productivity is the measure that includes all input factors.

Multi-factor productivity = Output from the operation

All inputs to the operation

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Improving productivity

• to reduce the cost of its inputs while maintaining the level of its outputs

• reducing the costs of some or all of its transformed and transforming resource inputs.

• cutting out waste

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Cost reduction through internal effectiveness

• High-quality operations do not waste time or effort having to re-do things, nor are their internal customers inconvenienced by flawed service.

• Fast operations reduce the level of in-process inventory between and within processes, as well as reducing administrative overheads.

• Dependable operations do not spring any unwelcome surprises on their internal customers. They can be relied on to deliver exactly as planned. This eliminates wasteful disruption and allows the other micro-operations to operate efficiently.

• Flexible operations adapt to changing circumstances quickly and without disrupting the rest of the operation. Flexible micro-operations can also change over between tasks quickly and without wasting time and capacity.

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External effect of five performance objectives

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Worked example• Slap.com is an Internet retailer of speciality cosmetics. It orders products

from a number of suppliers, stores them, packs them to customers’ orders, and then dispatches them using a distribution company. Although broadly successful, the business is very keen to reduce its operating costs. A number of suggestions have been made to do this. There are as follows:

• ● Make each packer responsible for his or her own quality. This could potentially reduce the percentage of mis-packed items from 0.25 per cent to near zero. Repacking an item that has been mis-packed costs 2 per item.

• ● Negotiate with suppliers to ensure that they respond to delivery requests faster. It is estimated that this would cut the value of inventories held by slap.com by 1,000,000.

• ● Institute a simple control system that would give early warning if the total number of orders that should be dispatched by the end of the day actually is dispatched in time. Currently one per cent of orders is not packed by the end of the day and therefore has to be sent by express courier the following day. This costs an extra 2 per item.

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Because demand varies through the year, sometimes staff have to work overtime.Currently the overtime wage bill for the year is 150,000.

The company’s employees have indicated that they would be willing to adopt a flexible working scheme where extra hours could be worked when necessary in exchange for having the hours off at a less busy time and receiving some kind of extra payment. This extra payment is likely to total 50,000 per year.If the company dispatches 5 million items every year and if the cost of holdinginventory is 10 per cent of its value, how much cost will each of these suggestions save the company?

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Analysis• Eliminating mis-packing would result in an improvement in quality. 0.25 per

cent of 5 million items are mis-packed currently. This amounts to 12,500 items per year. At @2 repacking charge per item, this is a cost of 25,000 that would be saved.

• Getting faster delivery from suppliers helps reduce the amount of inventory in stock by 1,000,000. If the company is paying 10 per cent of the value of stock for keeping it in storage the saving will be a1,000,000 × 0.1 = 100,000.

• Ensuring that all orders are dispatched by the end of the day increases the dependability of the company’s operations. Currently, 1 per cent are late, in other words, 50,000 items per year. This is costing 2 × 50,000 = 100,000 per year which would be saved by increasing dependability.

• Changing to a flexible working hours system increases the flexibility of the operation and would cost 50,000 per year, but it saves 150,000 per year. Therefore, increasing flexibility could save a100,000 per year.

• So, in total, by improving the operation’s quality, speed, dependability and flexibility, a total of 325,000 can be saved.

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Operations Strategy

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Operations strategy

• No organization can plan in detail every aspect

• Some strategic direction still needed

• E.g. where they are heading

• and how they could get there

• formulate a set of general principles which will guide its decision-making

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Operations strategy• pattern of strategic decisions and actions which

set the role, objectives and activities of the operation.

• ‘Operational’ is the opposite of strategic, meaning day-to-day and detailed.

• The content of operations strategy is the specific decisions and actions which set the operations role, objectives and activities.

• The process of operations strategy is the method that is used to make the specific ‘content’ decisions.

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What is strategy and what is operations strategy?

• Setting broad objectives that direct an enterprise towards its overall goal.

• Planning the path (in general rather than specific terms) that will achieve these goals.

• Stressing long-term rather than short-term objectives.

• Dealing with the total picture rather than stressing individual activities.

• Being detached from, and above, the confusion and distractions of day-to-day activities

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Implementing v/s Supporting v/s Driving Strategy

• Implementing business strategy. The most basic role of operations is to implement strategy. Most companies will have some kind of strategy but it is the operation that puts it into practice. You cannot, after all, touch a strategy; you cannot even see it; all you can see is how the operation behaves in practice. (insurance co)

• Support strategy goes beyond simply implementing strategy. It means developing the capabilities which allow the organization to improve and refine its strategic goals. (Mobile co)

• Driving business strategy. The third, and most difficult, role of operations is to drive strategy by giving it a unique and long-term advantage.( customer and supplier)

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Hayes and Wheelwright’s four stages of operations contribution

• Stage 1: Internal neutrality. This is the very poorest level of contribution by the operations function. It is holding the company back from competing effectively. It is inward-looking and, at best, reactive with very little positive to contribute towards competitive success. back in any way. It attempts to improve by ‘avoiding making mistakes’.

• Stage 2: External neutrality. The first step of breaking out of stage 1 is for the operations function to begin comparing itself with similar companies or organizations in the outside market (being ‘externally neutral’). This may not immediately take it to the ‘first division’ of companies in the market, but at least it is measuring itself against its competitors’ performance and trying to implement ‘best practice’.

• Stage 3: Internally supportive. Stage 3 operations are amongst the best in their market. Yet, stage 3 operations still aspire to be clearly and unambiguously the very best in the market. They achieve this by gaining a clear view of the company’s competitive or strategic goals and supporting it by developing appropriate operations resources. The operation is trying to be ‘internally supportive’ by providing a credible operations strategy.

• Stage 4: Externally supportive. Yet Hayes and Wheelwright suggest a further stage – stage 4, where the company views the operations function as providing the foundation for its competitive success. Operations looks to the long term. It forecasts likely changes in markets and supply, and it develops the operations-based capabilities which will be required to compete in future market conditions. Stage 4 operations are innovative, creative and proactive and are driving the company’s strategy by being ‘one step ahead’ of competitors – what Hayes and Wheelwright call ‘being externally supportive’.

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Perspectives on operations strategy• Different authors have slightly different views and

definitions of operations strategy. Between them, four ‘perspectives’ emerge:

• Operation strategy is a top-down reflection of what the whole group or business wants to do.

• Operations strategy is a bottom-up activity where operations improvements cumulatively build strategy.

• Operations strategy involves translating market requirements into operations decisions.

• Operations strategy involves exploiting the capabilities of operations resources in chosen markets.

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The ‘top-down’ perspectives

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Top-down strategies• A large corporation will need a strategy to

position itself in its global, economic, political and social environment

• This will consist of decisions about what types of business the group wants to be in, what parts of the world it wants to operate in, how to allocate its cash between its various businesses, and so on. Decisions such as these form the corporate strategy of the corporation.

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Bottom-up’ strategiesEmergent strategies

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Emergent strategies

• Strategy is gradually shaped over time and based on real-life experience rather than theoretical positioning.

• Indeed, strategies are often formed in a relatively unstructured and fragmented manner to reflect the fact that the future is at least partially unknown and unpredictable (see Figure ).

• This view of operations strategy is perhaps more descriptive of how things really happen, but at first glance it seems less useful in providing a guide for specific decision-making.

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Bottom-up’ strategies• When any group is reviewing its corporate

strategy, it will also take into account the circumstances, experiences and capabilities of the various businesses that form the group.

• Similarly, businesses, when reviewing their strategies, will consult the individual functions within the business about their constraints and capabilities.

• They may also incorporate the ideas which come from each function’s day-to-day experience.

• Therefore an alternative view to the top-down perspective is that many strategic ideas emerge over time from operational experience.

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The market requirements and operations resources perspectives

• Market-requirements-based strategies• To satisfy the requirements of its markets.• To survive in the long term.• Understanding markets is usually thought of as the

domain of the marketing function, it is also of Importance to operations management.

• It is impossible to ensure that operations is achieving the right priority between its performance objectives (quality, speed, dependability, flexibility and cost).

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The market influence on performance objectives

• Operations seek to satisfy customers through developing their five performance objectives.

• Low Priced

• High Quality

• Fast Delivery

• Reliable delivery

• Innovative Products and Services

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The market influence on performance objectives

• Competitive factors– Order-winning factors

– Qualifying factors

– Less important factors

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Order-winning factors

• Importance of competitive factors is to distinguish between ‘order-winning’ and qualifying’ factors.

• Order-winning factors are those things which directly and significantly contribute to winning business.

• They are regarded by customers as key reasons for purchasing the product or service.

• Raising performance in an order-winning factor will either result in more business or improve the chances of gaining more business.

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Qualifying factors• Qualifying factors may not be the major competitive

determinants of success, but are important in another way.

• They are those aspects of competitiveness where the operation’s performance has to be above a particular level just to be considered by the customer.

• Performance below this ‘qualifying’ level of performance will possibly disqualify the company from being considered by many customers.

• But any further improvement above the qualifying level is unlikely to gain the company much competitive benefit.

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Less important factors

• less important factors which are neither order-winning nor qualifying.

• They do not influence customers in any significant way.

• They are worth mentioning here only because they may be of importance in other parts of the operation’s activities.

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The Market Influence On Performance Objectives

Figure 3.7 shows the difference between order-winning, qualifying and less important factors in terms of their utility or worth to the competitiveness of the organization. The curves illustrate the relative amount of competitiveness (or attractiveness to customers) as the operation’s performance at the factor varies. Order-winning factors show a steady and significant increase in their contribution to competitiveness as the operation gets better at providing them. Qualifying factors are ‘givens’; they are expected by customers and can severely disadvantage the competitive position of the operation if it cannot raise its performance above the qualifying level. Less important objectives have little impact on customers no matter how well the operation performs in them.

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Different banking services require different performance objectives

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It is about four years now since we specialized in the small-to-medium firms market. Before that we also used to provide legal services for anyone who walked in the door. So now we have built up our legal skills in many areas of corporate and business law. However, within the firm, I think we could focus our activities even more. There seem to be two types of assignment that we are given. About forty per cent of our work is relatively routine. Typically these assignments are to do with things like property purchase and debt collection. Both these activities involve a relatively standard set of steps which can be automated or carried out by staff without full legal qualifications. Of course, a fully qualified lawyer is needed to make some decisions; however, most work is fairly routine. Customers expect us to be relatively inexpensive and fast in delivering the service. Nor do they expect us to make simple errors in our documentation, in fact if we did this too often we would lose business. Fortunately our customers know that they are buying a standard service and don’t expect it to be customized in any way. The problem here is that specialist agencies have been emerging over the last few years and they are starting to undercut us on price. Yet I still feel that we can operate profitably in this market and anyway, we still need these capabilities to serve our other clients. The other sixty per cent of our work is for clients who require far more specialist services, such as assignments involving company merger deals or major company restructuring. These assignments are complex, large, take longer, and require significant legal skill and judgment. It is vital that clients respect and trust the advice we give them across a wide range of legal specialism's. Of course they assume that we will not be slow or unreliable in preparing advice, but mainly it’s trust in our legal judgment which is important to the client. This is popular work with our lawyers. It is both interesting and very profitable. But should I create two separate parts to our business, one to deal with routine services and the other to deal with specialist services? And, what aspects of operations performanceshould each part be aiming to excel at?’ (Managing Partner, Branton Legal Services)

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Analysis Table 3.2 has used the information supplied above to identify the order winners, qualifiers and less important competitive factors for the two categories of service. Two types of service are very different. Routine services must be relatively inexpensive and fast, whereas the clients for specialist services must trust the quality of advice and range of legal skills available in the firm. The customers for routine services do not expect errors and those for specialist services assume a basic level of dependability and speed. These are the qualifiers for the two categories of service. Note that qualifiers are not ‘unimportant’. On the contrary, failure to be ‘up to standard’ at them can lose the firm business. However, it is the order winner that attracts new business. Most significantly, the performance objectives which each operations partner should stress are very different. Therefore there does seem to be a case for separating the sets of resources (e.g. lawyers and other staff ) and processes (information systems and procedures) that produce each type of service.

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The process of operations strategy• A process which formally links the total organization strategic

objectives (usually a business strategy) to resource-level objectives.

• The use of competitive factors (called various things such as order winners, critical success factors, etc.) as the translation device between business strategy and operations strategy.

• A step which involves judging the relative importance of the various competitive factors in terms of customers’ preferences.

• A step which includes assessing current achieved performance, usually as compared against competitor performance levels.

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The process of operations strategy• An emphasis on operations strategy formulation as an iterative

process.

• The concept of an ‘ideal’ or ‘greenfield’ operation against which to compare current operations. Very often the question asked is: ‘If you were starting from scratch on a green field site, how, ideally, would you design your operation to meet the needs of the market?’ This can then be used to identify the differences between current operations and this ideal state.

• A ‘gap-based’ approach. This is a well-tried approach in all strategy formulation which involves comparing what is required of the operation by the marketplace against the levels of performance the operation is currently achieving.

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What should the formulation process be trying to achieve?

• Comprehensive• critical first step in seeking to achieve an effective• operations strategy. Business history is littered

with world-class companies that simply failed• to notice the potential impact of, for instance, new

process technology or emerging changes• in their supply network. Also, many strategies

have failed because operations have paid undue• attention to only one key decision area.