Making operations decision strategic

Operating decisions are not usually thought to be strategic – each decision seems to be of relatively small importance in the broad sweep. But can these decisions be made in a way that has strategic impact? The Japanese have been particularly successful in creating effective operating systems that have strategic significance in reducing costs and controlling quality.

The driver of the operating system is the reduction of operation step-up costs. The effect of lowering set up costs is to alter the balance between set up and inventory costs, lowering the economic order quantity (EOQ). The Japanese expend every possible effort toward reducing the set up costs through tool design, quick clamping devices, carefully worked out procedures and so on. The ultimate objective is to reduce set up costs to EOQ = 1 unit.

Of course, if EOQ = 1 unit, or even very small quantities, the immediate and obvious benefits are that in process inventories are reduced and the flexibility to change production form one product to another is maximized. Furthermore, reduction in production lot sizes triggers a perhaps more important chain of events involving improved motivation and a focus on scrap and quality control and on just-in- time (JIT)

The reason for the quality improvement derives from the human behavior pattern that results form JIT production. If a worker produces a part and passes it directly to the next worker, the second worker will report a defect almost immediately. On hearing that the part is defective, the first worker is motivated to discover the cause and correct it before large quantities of scrap are produced. The smaller the production lot size, the more immediate the discovery of defects will be. Each pair of operations in the sequences is closely linked, and therefore the awareness of the interdependence of the two workers is enhanced. Furthermore the immediate feedback creates a problem solving behavior pattern between pairs of workers, who are motivated to be creative in developing ideas for job related improvements of all kinds. The constantly repeating cycle of improvement gradually enhances productivity and quality.

We should not make a distinction between long term strategic issues and short term operating ones. There is usually little argument against the proposition that questions of capacity, process technology, and labor costs have strategic significance. But inventory quality and other factory floor issues tend to be dismissed, as if operations had no long term importance. Yet, quality, cost and on time delivery of products can be extremely important in the basic strategy of the firm.

Strategies Regarding Suppliers and Vertical Integration:

The operations system includes all the component and raw material inputs as well as the in-plant processes. As we look up stream to these inputs, we are concerned just as in the case of in-plant processes about cost, quality, on-time availability, and flexibility/service. The relative importance of these criteria in judging supplier effectiveness is controlled by the overriding strategy of the firm, as is the case with the operations function as a whole.

In dealing with suppliers there are many operational issues that need attention, and these are not to be minimized. However, the focus of our attention is on the strategic issues of choosing among alternative suppliers, judging the strength of our own position in dealing with suppliers and using our strengths effectively. In choosing among suppliers, it is suppliers, and using our strengths effectively. In choosing among suppliers, it is worthwhile to examine each from the viewpoint of how that supplier regards your organization. How does that supplier view you as a customer? Is your business significant to the supplier? Are you costly customer for the supplier to service? Is the supplier’s basic strategy one of low cost, or is the supplier differentiated or in a specific segment? There needs to be a fit or compatibility of the supplier’s objectives with your own to achieve overall strategic goals.

Suppliers relations in the United States tend to be based on arms length negotiations that are often unstable from the supplier’s viewpoint. We use the threat of taking our business elsewhere or, indeed, of integrating backwards and producing the component in house. On the other hand, the Japanese just-in-time (JIT) purchasing one of the unique elements in Japanese operations management strategy involves the development of long term stable relationships with suppliers.