Operations Rules

Operations Rules: Delivering Customer Value through Flexible Operations

David Simchi-Levi
Copyright Date: 2010
Published by: MIT Press
Pages: 256
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  • Book Info
    Operations Rules
    Book Description:

    In recent years, management gurus have urged businesses to adopt such strategies as just-in-time, lean manufacturing, offshoring, and frequent deliveries to retail outlets. But today, these much-touted strategies may be risky. Global financial turmoil, rising labor costs in developing countries, and huge volatility in the price of oil and other commodities can disrupt a company's entire supply chain and threaten its ability to compete. In Operations Rules, David Simchi-Levi identifies the crucial element in a company's success: the link between the value it provides its customers and its operations strategies. And he offers a set of scientifically and empirically based rules that management can follow to achieve a quantum leap in operations performance. Flexibility, says Simchi-Levi, is the single most important capability that allows firms to innovate in their operations and supply chain strategies. A small investment in flexibility can achieve almost all the benefits of full flexibility. And successful companies do not all pursue the same strategies. Amazon and Wal-Mart, for example, are direct competitors but each focuses on a different market channel and provides a unique customer value proposition--Amazon, large selection and reliable fulfillment; Wal-Mart, low prices--that directly aligns with its operations strategy. Simchi-Levi's rules--regarding such issues as channels, price, product characteristics, value-added service, procurement strategy, and information technology--transform operations and supply chain management from an undertaking based on gut feeling and anecdotes to a science.

    eISBN: 978-0-262-28976-4
    Subjects: Management & Organizational Behavior, Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Preface
    (pp. ix-xii)
  4. 1 The Value of Operations
    (pp. 1-16)

    In early 2005, Pepsi Bottling Group (PBG) approached the Massachusetts Institute of Technology (MIT) with a daunting challenge: consumer preference was shifting from carbonated drinks to noncarbonated drinks and from cans to bottles. At that time, PBG produced these newly preferred products in a limited number of plants, resulting in half of the plants operating at capacity and leading to service problems during periods of peak demand.¹ What did PBG do to address the problem? Did it invest in more manufacturing capacity or outsourced production? Not even close!

    MIT-PBG’s approach to the challenge was surprisingly simple. It focused on a...

  5. I Operations Strategy
    • 2 From Customer Value to Operations Strategy
      (pp. 19-34)

      In today’s customer-driven markets, what matters most is not the product or service but rather the customer’s perceived value of the entire relationship with a company. In the last few years, many companies have emphasized both the quality of their products and services and customer satisfaction, which involves understanding current customers, their use of the products, and their impression of the company’s service. The emphasis on customer value goes a step further by establishing the reasons that a customer chooses a specific product and by analyzing the entire range of products, services, and intangibles that constitute the company’s image and...

    • 3 Matching Products, Markets, and Strategies
      (pp. 35-52)

      In the previous chapter,customer valueis defined as the way that customers view the company’s offerings—from product innovation through price all the way to experience and relationships. I argued that different customer value propositions require different operations and supply chain strategies.

      This chapter focuses on the effects of customer value, product characteristics, and the sales channel on operations and supply chain strategies. I consider various supply chain strategies including push, pull, and a relatively new paradigm, the push-pull strategy, and develop a framework for matching products and industries with supply chain strategies. Importantly, these concepts and framework provide...

    • 4 Procurement and Supply Contracts as Competitive Weapons
      (pp. 53-72)

      Until recently, procurement was considered a clerical function that added very little value to the organization. It sat low in the organizational structure and received little attention from senior management. As a result, the best and the brightest were not attracted to this functional area.

      Today, procurement is used as a competitive weapon that distinguishes highly profitable companies from others within the same industry. Indeed, a survey of electronics companies identified 19 percent gaps in profitability between the least and the most successful companies, a full 13 percent of which was accounted for by the lower cost of goods sold....

    • 5 Risk Mitigation Strategies
      (pp. 73-102)

      Increasing competition in the manufacturing industry is leading to mounting pressure to reduce supply chain costs. Companies are responding by pursuing strategies such as outsourcing, off-shoring, and lean manufacturing to retain market position or gain competitive advantage. Unfortunately, such cost-cutting measures are sometimes adopted at the expense of managing risk within the supply chain.

      Indeed, current industry trends correlate directly to the rising risk levels in the supply chain. As off-shoring and globalization of manufacturing operations continue to grow, supply chains are geographically more diverse and therefore exposed to various types of natural and manmade disasters. Similarly, for lean manufacturers...

    • 6 Rethinking the Role of Information Technology
      (pp. 103-130)

      In 1979, Kmart was one of the leaders of the retail industry with 1,891 stores and an average revenue per store of $7.25 million. At that time, Wal-Mart was a small niche retailer in the South with 229 stores and an average revenue per store of about half of that of Kmart stores. In ten years, Wal-Mart transformed itself and the retail industry, and in 1992, it had the highest sales per square foot, highest inventory turnover, and largest operating profit of any discount retailer.¹ How did Wal-Mart do it? The starting point was a relentless focus on satisfying customer...

  6. II Flexibility:: The Key Enabler
    • 7 System Flexibility
      (pp. 133-146)

      This book thus far has focused on issues that are strategic in nature—the alignment of customer values, markets, and channels with operations and procurement strategies; effective supply contracts that create value; risk mitigation strategies; and the link between business strategy and IT investments. These broad topics are important for any organization.

      But details matter, and applying the rules, concepts, frameworks, and ideas described in these chapters requires more information. This is particularly true with respect to flexibility, an important theme that runs throughout the previous chapters and topics.

      The need for flexibility is not new. Many of today’s corporate...

    • 8 Process Flexibility
      (pp. 147-160)

      The previous chapter focused on achieving supply chain flexibility through the coordination of activities across the manufacturing and distribution networks. In this chapter, the same concept that was applied for system flexibility is adopted for a single production line, allowing the line to achieve flexibility by focusing on workforce skills and processes.

      Achieving flexibility through process design is at the heart of the Toyota production system.¹ These types of production systems are also referred to asjust-in-time(JIT) orlean manufacturing. To put the Toyota Production System in perspective, this chapter starts with a review of the automotive industry.


    • 9 Product Design Flexibility
      (pp. 161-172)

      One of the most effective tools for achieving flexibility is product design. Product design is part of thedevelopment chain—the collection of activities and processes that are associated with the introduction of a new product. It includes the product design phase, the associated capabilities and knowledge that need to be developed internally, sourcing decisions, and production plans. Specifically, the development chain includes decisions about product architecture, make or buy decisions (what to make internally and what to buy from outside suppliers), supplier selection, early supplier involvement, and strategic partnerships.

      The development chain and the supply chain intersect at the...

  7. III Emerging Trends
    • 10 The Effects of Oil Price Volatility
      (pp. 175-194)

      In the summer of 2008, oil prices reached a peak of $145 per barrel, and analysts and pundits predicted that they will continue to rise. As the recession hit the global economy, oil prices reversed and plunged to $33 per barrel. By late 2009, oil prices were fluctuating wildly, and the trend is now upward. For example, oil prices had increased by almost 90 percent between January 2009 and January 2010.

      Of course, the level of volatility in oil price has a large impact on supply chain strategies. Specifically, with rising and volatile oil prices, classical strategies such as just-in-time...

    • 11 Doing Well by Doing Good
      (pp. 195-214)

      In 2006, Fonterra—New Zealand’s world-leading exporter of dairy products—was faced with significant competition in local markets. In the United Kingdom, local producers ran advertisements claiming that dairy products with high food miles—those produced thousands of miles away—contribute significantly more to global warming than local produce. UK-based Dairy Crest, for example, underlined growing consumer awareness of the food-miles concept when it launched an advertising campaign comparing its locally produced products with images of Fonterra’s Anchor brand butter traveling thousands of miles to Britain on a rusty ship.¹

      Fonterra took a scientific and holistic approach to the challenge....

    • 12 Barriers to Success
      (pp. 215-220)

      From my vantage point as an academic, consultant, and entrepreneur, I have observed tremendous changes in the operations and supply chain strategies employed by companies across all industries. A number of trends have emerged in the last few years—more emphasis on improving service levels, response times and satisfying customer needs; a move from a functional focus in which each area is marching to its own drum to a holistic approach to supply chain; a significant emphasis on risk-mitigation strategies to address supply and market volatility, disruptions, and globalization; and IT investments to achieve better planning, coordination, event visibility, and...

  8. Appendix A: The Bullwhip Effect
    (pp. 221-226)
  9. Appendix B: Rules
    (pp. 227-228)
  10. Index
    (pp. 229-239)