MANUFACTURING OPERATIONS STRATEGY

Companion Website MANUFACTURING OPERATIONS STRATEGY THIRD EDITION ALEX HILL & TERRY HILL

Preface to the Third Edition IV fl Summary 2 Manufacturing output 4 Exhibit 1.1 Comparative balance of payments on goods for selected countries, 1960-2007 (Smillions) 4 Exhibit 1.2 Percentage share of world trade in manufactured goods for selected countries, 1980-96 5 Exhibit 1.3 Export-import ratio for selected sectors (1984 and 1995) and total manufacturing (1972, 1984 and 1995) 5 Exhibit 1.4 Total manufacturing export-import ratio by region ' 6 Exhibit 1.5 Trade balance for electronic equipment and components for selected countries by value ($bn) for 1985, 1993 and 1998 j 6 Exhibit 1.6 The challenge of world competition: the North American auto lesson in the 1990s 7 Productivity: national comparisons 7 Exhibit 1.7 Trends in manufacturing output per hour for selected countries, 1960-2006 (1992 = 100) 8 Exhibit 1.8 Annual percentage growth in output per hour 1970-2006 9 Productivity: plant-level comparisons 9 Exhibit1.9 Productivity in some of the world's auto plants, 1997 and 1998 11 Exhibit 1.10 Best and worst productivity levels by auto maker and regional location (1998) 11 Why has this happened? 11 Exhibit 1.11 Production of machine tools without parts and accessories for selected countries (millions) 12 Exhibit 1.12 Gross domestic expenditurevn R&D as a percentage of gross domestic product (GDP) 13 Exhibit 1.13 International trade balance for highly intensive R&D industries in 2005 (S millions) 14 Top management's lack of operations experience 14 Operations strategy 15 Reflections 18 Discussion questions 20 Notes and references 20 a_ Summary Functional strategies within the context of a firm Exhibit 2.1 Levels of strategy and their distinctive tasks Functional executives: strategy versus other roles Exhibit 2.2 Operations, by proxy, secures the second sale Business unit strategy 22 24 24 25 26 26

Exhibit 2.3 Composition of the business unit strategy-making group 26 Exhibit 2.4 Ideal business unit strategy-making process 27 Exhibit 2.5 Real-life business strategy-making process 28 Exhibit 2.6 Market-driven and market-driving strategies 29 Strategies versus philosophies 30 Exhibit 2.7 Markets at the centre of strategy development 31 Functional dominance within corporate strategy 32 Reasons for operations' reactive role in business unit strategy formulation 32 Exhibit 2.8 The dichotomy of business views illustrated by the different figures included on typical customer order paperwork 35 The content of business unit strategy 36 Exhibit 2.9 The lack of interface between the differentjevels of strategy 38 Developing an operations strategy 39 Linking business objectives and functional strategies through markets 39 Exhibit 2.10 Framework for linking corporate objectives and operations and marketing strategy development 40 Exhibit 2.11 The iterative link between corporate objectives and marketing strategy 44 Exhibit 2.12 How defining relevant qualifiers and order-winners links corporate objectives with marketing and operations strategies 45 Understanding markets: the reality 46 Understanding markets: the approach to follow 48 The procedure for establishing order-winners and qualifiers 49 Exhibit 2.13 Contractual versus actual customer requirements 51 Exhibit 2.14 US graphics company':, order-winners and qualifiers for two customers 52 Exhibit 2.15 European cable-making company: order-winners and qualifiers for two products 52 Exhibit 2.16 European engineered sealing systems company: order-winners and qualifiers for three customers 53 Understanding the criteria chosen and their relative weightings 53 The outputs of operations strategy 55 Exhibit 2.17 Some possible order-winners and qualifiers and some typical areas for review and improvement 55 Exhibit 2.18 Assessing the implications for operations processes and infrastructure of order-winners 56 Exhibit 2.19 Operations' input into the business strategy debate 57 Reflections 58 Discussion questions 61 Notes and references 62 Exploring further 62 Summary Markets and market segments 64 66 Manufacturing Operations Strategy Long Contents

Strategic scenarios and approaches 66 Characteristics of today's markets: difference and speed of change 67 Exhibit 3.1 Phases and characteristics of strategy development and implementation 68 Trade-offs 68 Order-winners and qualifiers: basic characteristics. 71 Exhibit 3.2 Examples of the different strategic and operational outcomes that may result from activities 72 Order-winners and qualifiers: specific dimensions 74 Exhibit 3.3 Generalized product life cycle, 75 Exhibit 3.4 Relative average performance of world-class and other plants against selective dimensions 77 Exhibit3.5 Experience curve for colour film produced by Japanese companies, 1976-98 79 Exhibit 3.6 Cost/volume or price/volume relationship 80 Exhibit 3.7 The components of operations lead time 81 Exhibit 3.8 Customer lead time and operations lead time comparisons 82' Exhibit 3.9 The elements making up a supplier's operations lead time that constitute the company's own material lead time 83 Exhibit 3.10 Alternative responses to markets and their lead time implications 84 Exhibit 3.11 Overhead costs incurred in time-based management approaches compared with those involved in classic structures: industrial component suppliers 85 Exhibit 3.12 The dimensions of quality and the functions typically responsible for their provision 86 Exhibit 3.13 Examples of reduction in product development lead time. 90 Exhibit 3.14 Increased sales revenue element of the benefits of double gain 91 Exhibit 3.15 The higher profit margin element of the benefits of double gain 91 Exhibit 3.16 Digital Equipment Company's reduced completion time fora new product development 92 Exhibit3.17 Average project lead times and stage length in Japanese, US and European car makers 93 Exhibit 3.18 Shared functional provision of relevant order-winners and qualifiers 94 Exhibit 3.19 Comparative changeover times to produce a new model, North American and Japanese carmakers 94 Benchmarking 97 Exhibit 3.20 Benchmarking quality helped IBM identify its best-in-class, six sigma target 99 Exhibit 3.21 Source and levels of targeted achievement 100 Reflections 100 Exhibit 3.22 The roles of a company and customer before and after an order/contract is placed 102 Discussion questions 104 Notes and references 105 Exploring further? 106 Summary 110 Exhibit 4.1 Analysing markets and developing an operations strategy 112 8a

Generic strategies: the search for the alchemist's stone 114 Aspects to consider when analysing markets <, 115 Exhibit 4.2 US graphics company: order-winners and qualifiers for two customers 116 Order-winners and qualifiers for customers supplied by a US graphics company 116 Order-winners and qualifiers for products supplied by a European cable-making company 117 Order-winners and qualifiers by customers supplied by a European engineered sealing systems company 117 Exhibit 4.3 European cable-making company: order-winners and qualifiers for two products 117 Exhibit 4.4 European engineered sealing systems company: order-winners and qualifiers for three customers 118 Agree markets 118 Determine market order-winners and qualifiers 118 Exhibit 4.5 Actual versus estimated contribution fora number of representative products 121 Exhibit 4.6 A comparison of actual contribution fora group of representative products to the order-winner weighting given to price 121 Exhibit 4.7 Comparison of contribution percentage and contribution per machine hour for representative orders 122 Exhibit 4.8 Contribution percentage of sales and contribution per machine hour for representative orders for two segments 123 Exhibit 4.9 Analysis of the order mix received from a customer regarding gross margin percentage, quality conformance levels and associated inventory levels for alternative products 125 Exhibit 4.10 Review of customers believed to be in a segment showing the varying delivery lead times requested 125 Developing an operations strategy 126 Exhibit 4.11 Examples of how to review performance and typical improvements to meet alternative order-winners and qualifiers 127 Exhibit 4.12 A review of product and volume mix across four North American pharmaceutical operations 128 Exhibit 4.13 Correlation between the size (units) of a production run and the net output (units) per hour 129 Exhibit 4.14 Production volume, key market order-winner and actual contribution per machine hour for fourproducts 129 Reflections 133 Discussion questions 134 Notes and references 134 Exploring further 135 Summary Process choice Factors involved in making products Exhibit 5.1 Categories of product Types of manufacturing process Exhibit 5.2 Project: key characteristics 138 140 140 141 142 143 Manufacturing Operations Strategy Long Contents

Exhibit 5.3 Jobbing: key characteristics -. 143 Exhibit 5.4 Process choice related to volumes (.. 146 Exhibit 5.5 Printing: a multi-step batch process 148 Exhibit 5.6 Batch: key characteristics 148 Exhibit 5.7 Different stages on the Land Rover vehicle assembly line 149 Exhibit 5.8 Line: key characteristics, 150 Exhibit 5.9 ExxonMobil's ethylene cracking plant, Fife, Scotland 151 Exhibit 5.10 Continuous processing: key characteristics ~ 152 Product categories and production processes reflections 152 Exhibit 5.11 Manufacturing processes and their relationship to'the product categories in Exhibit 5.1 153 Exhibit 5.12 Process choice ~ 154 Exhibit 5.13 Tasks undertaken by jobbing, batch and line processes 155 Exhibit 5.14 The constituents of customer orders when choosing processes and the function responsible for their provision 158 Business implications of process choice 160 Exhibit 5.15 The operations and business dimension phases involved in process choice 161 Exhibit 5.16 Selected business implications of process choice 162 Selected business implications 164 An overview of process choice 170 Exhibit 5.17 Potential transitions between the different choices of process 171 Hybrid processes 172 Exhibit 5.18 The position of some hybrid processes in relation to the five generic choices of process 172 Exhibit 5.19 An example of a 15-station random FMS provided as a three-stage installation 175 Exhibit 5.20 Cellular layout and the transition from a functional (batch) to product (line) layout 177 Exhibit 5.21 Changing from process to Nagare cell layout 178 Exhibit 5.22 Hybrid NC process choice related to volume 181 Operations responses to similar markets 181 Exhibit 5.23 Elements of operations lead time and typical actions to reduce the length of time involved 182 Technology strategy 182 Reflections 184 Discussion questions 185 Notes and references 186 Exploring further 187 @ (^ y^g^ miki@ Summary 190 The need to expand operations strategy's language base 192 w _ viii

Product profiling 192 Company-based profiles 194 Exhibit 6.1 A product profile illustrating mismatch between the market and operations induced by process investment 195 Exhibit 6.2 A product profile illustrating the level of match and mismatch between two plants and their respective markets induced by applying the same operations strategy to both plants. 196 Exhibit 6.3 The level of inconsistency on all points of the dimensions on the vertical axis 197 Exhibit 6.4 A product profile of a company's mainstream products to illustrate the impact of incremental marketing decisions 198 Process-based profiles 200 Exhibit 6.5 A profile of the product variants packed on a number of similar packaging lines 201 Using product profiling 202 Reflections 204 Discussion questions 204 Summary 206 Focus 208 Exhibit 7.1 In pursuit of a panacea: which three-letter acronym next? 211 Alternative approaches to focus 211 Exhibit 7.2 Focusing operations around resources or markets 212 Exhibit 7.3 The advantages and disadvantages of alternative approaches to organizing operations.214 Focus advantages and disadvantages 215 Achieving focus 216 Maintaining focus 217 Exhibit 7.4 Production volumes and strategic tasks change in a product's life cycle 219 Exhibit 7.5 A typical product life cycle and its relationship to focus 219 Reflections 221 Discussion questions 222 Notes and references 223 Exploring further 223 Summary 226 Origins of existing approaches to organizing operations 228 Exhibit 8.1 Typical layout of existing plants based on economies of scale principles (not to scale) 228 Approach to focusing operations 228 Focusing operations 229 Manufacturing Operations Strategy Long Contents ix

Exhibit 8.2 Methodology: the six steps 231 Exhibit 8.3 Examples of the activities typically best allocated to a central function or focused unit 232 Maintaining focus 233 Maintaining focus in maturing markets 233 Strategic review resulting from increased demand for a product group 234 Focus examples 234 Benefits of allocating infrastructure 235 Creating an operation-within-an-operation arrangement 235 Exhibit 8.4 Operation-within-an-operation arrangement 236 Reflections 236 Discussion questions 236 Notes and references 238 Exploring further 238 g) o=m^(^by7y(a»[^^ iso_ Summary. 242 What is a supply chain? 244 Exhibit 9.1 Supply chain for a pharmaceutical company 244 Choosing whether to make or buy 244 Exhibit 9.2 The reduction in the internal phase of the supply chain where more advanced technology is incorporated into a product (not to scale) 248 The reality of make-or-buy decisions 249 Exhibit 9.3 The dominance of the cost argument 250 General issues involved in make-or-buy decisions 251 Exhibit 9.4 The anticipated reduction in overheads (represented by the vertical slice into organizational support and associated costs) that accompanies a decision to buy rather than make part of the operations requirement 252 Width of internal phase of the supply chain: deciding what and how much to make in-house 253 Exhibit 9.5 How to create your own competition 257 The hollow corporation 259 Alternatives to making in-house 260 Exhibit 9.6 A hint of satire in this comment on the trend towards outsourcing by highlighting the potentially simplistic approach to these key strategic decisions 261 Exhibit 9.7 Responses to the question 'Are joint ventures a viable alternative?' 262 Exhibit 9.8 Reasons for forming joint ventures 263 Developing the supply chain 264 Exhibit 9.9 Phase 1: typical initial position of functionally fragmented supply chains with built-in delays/inventory, vertical reporting structures and systems and the separation of suppliers, operations and customers 264 Exhibit 9.10 Phase 2: integration of the supply chain activities within a business 265

Exhibit 9.11 Phase 3: collaboration across the supply chain by coordinating activities between businesses 265 Exhibit 9.12 Phase 4: synchronized and real-time planning and execution of activities across the supply chain 266 Exhibit 9.13 Lean supply chain works elsewhere and brings similar benefits 267 Domestic vs offshore sourcing options and strategic fit 267 Exhibit 9.14 Sourcing location, percentage of goods purchased and discounts available 268 Exhibit 9.15 Suppliers' latitude for volume or mix change before and during the sales season, by geographical region 268 Exhibit 9.16 Examples of companies seeking and gaining additional roles from offshore plants 269 Exhibit 9.17 Progressive roles of offshore manufacturing plants 270 Aspects of change 271 Exhibit 9.18 The evolving role of IT in managing a supply chain 272 Exhibit 9.19 One type of internet fraud 273 Exhibit 9.20 A vulnerable side of the internet 273 E-procurement 274 Exhibit 9.21 E-procurement system 275 Managing the supply chain 276 Exhibit 9.22 The changing basis of competition - 276 Supply chain management issues 276 Exhibit 9.23 Phases in changing customer attitudes to suppliers 277 Exhibit 9.24 Customer/supplier dependence 279 Exhibit 9.25 Examples of customer/supplier relationship developments in a range of industrial sectors 280 Exhibit 9.26 Cushioning the delivery system categories and options 285 Exhibit 9.27 The cushioning requirements at each step in a supply chain 287 Exhibit 9.28 Components of operations lead time _ 287 Exhibit 9.29 A company's material lead time equates to a supplier's operations lead time 288 Summary benefits 288 Johnson Controls 289 Airbus 289 Exhibit 9.30 Integrated supply chain: the one-firm concept 291 Reflections 293 Exhibit 9.31 Changing approach to managing supply chains 294 Volkswagen 294 Mercedes-Benz 295 Skoda 295 Exhibit 9.32 The short lead time requirements of customers 295 Discussion questions 296 Notes and references 296 Exploring further 298 Manufacturing Operations Strategy Long Contents xi

Summary 302 Exhibit 10.1 Framework for reflecting operations strategy issues in corporate decisions 304 Exhibit 10.2 Strategic awareness ensures businesses identify market changes and develop the capability to support them 305 Issues to consider when developing infrastructure 305 Infrastructure development 306 Organizational issues 308 Exhibit 10.3 Typical phases in the evolution of specialist functions in an organization ' 309 Exhibit 10.4 The number of levels within a typical organization at different times 311 Exhibit 10.5 The separation between planning, doing and evaluating created by organizational structure 312 Developing infrastructure 312 Exhibit 10.6 Indication of how developments can be used to address infrastructure issues 313 Exhibit 10.7 Incorporating appropriate planning and evaluating steps into the doing tasks 314 Exhibit 10.8 Shop-floor workers are significantly more involved in world-class operations 316 Managing infrastructure 316 Exhibit 10.9 Varying quality conformance tasks and responsibilities by process choice ' 317 Exhibit 10.10 Baldrige Award (points allocation by category) 318 Exhibit 10.11 Three levels of mechanisms to cushion delivery systems from unstable markets 319 Analyse markets using cross-functional perspectives supported with data 320 Do not issue across-the-board inventory reduction directives 320 Exhibit 10.12 Benefits of using inventory by category and type. 321 Exhibit 10.13 Balance between improving the cash, cost and market support of operations 323 Computer system makes operation more expensive and less effective. 324 Systems not modified to meet changing business and market needs 325 One system used to support different market needs 325 Exhibit 10.14 Linking the master scheduling approach to operations and market needs 326 Exhibit 10.15 Linking materials planning approach to operations and market needs 327 Exhibit 10.16 Linking shop-floor control systems to operations and market needs 327 Reflections 328 Exhibit 10.17 The relevant manufacturing tasks and MPC system investments of two companies serving different markets 329 Discussion questions 332 Notes and references 332 Exploring further 333 Summary 336

Accounting and finance 338 Investment decisions 338 Exhibit 11.1 Restrictions imposed at both ends of the operations strategy process 339 The need for a strategic view of investments 340 Exhibit 11.2 Typical financial control system provision versus investment evaluation requirement 343 Exhibit 11.3 Documented and perceived reasons for all investments over a 30-month period, UK manufacturing company 345 Exhibit 11.4 Alternative approaches to investment decisions 349 Exhibit 11.5 Product life cycles, order-winning criteria and process investment interact 352 The simplistic nature of accounting information 354 Exhibit 11.6 Some accounting approaches depending on the type of process 355 Exhibit 11.7 Rule-of-thumb accounting practices 356 The need for accounting system development 356 Performance measurement 362 Exhibit 11.8 Number of measures used by 17 functions in 5 companies 363 Exhibit 11.9 Categories of performance loss 365 Reflections 367 Exhibit 11.10 The three phases in an investment programme 368 Discussion questions 370 Notes 370 Exploring further 371 1 2 3 4 5 6 7 8 9 10 11 12 13 Index Apple B & W: The Great Nuclear Fizzle Dell Fabritex Hoffman Tobacco HO Injection Moulding Jackson Precision Castings Millstone Packaging Peterson Carton Services Precision Steel pic Rumack Pharmaceuticals Sherpin Zara 375 384 392 399 408 416 430 444 450 466 480 486 494 500 Manufacturing Operations Strategy Long Contents xiii