Strategy 1

Strategy

What is a strategy in general ?Why do we need a strategy?What does a strategy tell us?Decisions that must support the strategy

• Structure

– delivery system

– facility design

– location

– capacity planning

• Infrastructure (management)

– service encounter

– quality

– information

– capacity ?

Strategy 2

Strategy concepts • Almost every decision we make must support our

company’s (supply chain’s) strategy• Decisions that do not support the strategy tend to

lower the value received by our customers.– This happens far to frequently because most managers

are pushed in other directions by company policies and procedures

• Go back to research discussed in previous class

– Measurement systems are often designed to foil strategy.

• Hall Mark DC / Harlan / Armor

– Managers do not understand the concept of total cost

Strategy 3

Total cost• Total cost is one of the most important ideas I can

disseminate to you.

– Price - is the dollar expenditure to purchase an input

– Total cost is all of the costs associated with the input

– The two often differ significantly both within an organization and in different organizations.

• The total cost of an item will be determined by our strategy and can include: price, costs of poor quality, costs of late shipments, and many other costs. The total cost equation should also quantify the benefits of things like faster delivery (which may have a higher price)

Strategy 4

Total cost example• You are in charge of buying food for an important client

meeting. Your boss instructs you to spend as much as you have too, but no more. So you have the supermarket cater the affair by preparing a 20 dollar cold cut tray. In addition, you buy a few bottles of soda. To lend an air of class to the event you also purchase some quality disposable implements and plates. What is the total costs of this event if the client is:

• Buying your service because of your quality reputation?

• Is a customer who wants you to help them market their environmentally (and animal) friendly products ?

• A customer known to make purchase decisions based entirely on getting the lowest price ?

Strategy 5

Some real world examples of managers not understanding total costs

• Caterpillar running low volume engines in large batches to save on set-up costs

• Bridge in Kansas • Saving 10 cents a pound on ground beef• Getting paid when the street is re-paved in Philly

– Or the sinking expressway

Our strategy determines the total cost of a decision (note that in general price does not vary)

Strategy 6

Our supply chain’s total costs equation is determined by our strategy

• Cost leadership (need not be low price) strategy– South West Airlines

– General Motors

– McDonalds• what has the market told McDonalds about low prices ?

– Post office

– Wal-Mart

– OSU ?• We say value but…

Strategy 7

Some generic cost leadership activities• Low cost customers (segmentation)

– banks who only deal with people with good credit

– TIAA CREF • Standardization

– McDonalds– Southwest

• Reduce “unnecessary” interactions – ATM– Dell

• Taking a service off line - separate the customer from delivery of the service (can you say inventory buffer)– Economies of scale– Film processing

Strategy 8

Differentiation strategy

• Creating something that is unique (often higher quality, faster delivery, or a level of innovation not available elsewhere)– Ritz Carlton Hotels

– Federal Express

– Herman Miller office furniture

– Harvard University

– Dell Computer

– Subway Sandwiches

– One hour photo shops

Strategy 9

Some generic differentiation activities• Tangibility – important for services

– many car dealers wash your car when it comes in for service - why?

• Customization of a standard product– people pay a bit more and wait a bit longer at Burger

King to have it their way– an insurance agent who comes to your house on your

time

• Quality– Lexus

• Speed / reliability – Federal Express

Strategy 10

Focus

• We deal with only a specific segments of customers - this is often a version of differentiation.

• Basically the key distinction between focus and differentiation is attempted market penetration.

• Many regional operations have a focus strategy – Fox sports has different regional broadcasts (focus)

– ESPN is the all sports for the entire country network (differentiation)

Strategy 11

A different and potentially more useful way to view strategy

• Our strategy is our stated way of satisfying (we hope) customers. But it ignores one key element; customer expectations. So we have another way of looking at the way we meet customer expectations for:

Availability Convenience

Dependability Price

Quality Reputation

Safety Speed

Selection Customization

Often put into 4 generic categories of: price, quality, delivery, and flexibility

Strategy 12

Order winners verses qualifiers• On any of the previously listed (not an exhaustive

list) criteria our customers will have a minimally acceptable level which our company / supply chain must achieve to be considered as a potential provider. – The minimal accepted level is an order qualifier

• On some criteria our company / supply chain will exceed minimal expectations. If customers value this additional performance we will have a way of winning orders.– Order winners are what customers use to chose between

qualified (meet order qualifiers) suppliers of a process

Strategy 13

“When flawless isn’t good enough”

• Recent JD powers data. – Traditional measure of auto quality – defects per car

• This is a conformance based measure of quality

• Today the American firms do pretty well on these measures – certainly better than ever before

– Customers now expect a car to be defect free – in other words doing this is not enough – it is an order qualifier

– Now quality encompasses other elements of quality such as functionality, aesthetics, fit and finish, and so on.

Strategy 14

Order winners and qualifiers: a way to view competitive priorities

• Order qualifier: those attributes our product or service must have to compete– Airline

• safety

• access (to destinations)

– Fast food• safety

• quick (drive in?)

• low price

• easy access

• Order winner: those attributes that differentiate our product or service:– Airline:

• price (Southwest)

• speed (British air)

• access (American)

– Fast food• speed (McDonalds)

• customization (Burger King)

• healthy (Sub-way)

Strategy 15

Conclusions

• Our strategy should guide all other decisions. • We should purchase goods and services on a total

cost basis not a price basis.• Our total cost equation is partially determined by

our strategy• Classical definitions of strategy (cost leadership,

differentiation, focus) may tell us how we win orders but they do not include order qualifiers.