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Need an account? Click here to sign up. Download Free PDF. Arnoldo Hax. A short summary of this paper. Download Download PDF. Translate PDF. HII28 Oewey. M tj. Fine Arnoldo C. Hax Sloan School of Management M. June Abstract A manufacturing strategy is a critical component of the firm's corporate and business strategies, comprising a set of well-coordinated objectives and action programs aimed at securing a long-term, sustainable advantage over the firm's competitors.
A manufacturing strategy should be consistent with the firm's corporate and business strategies, as well as with the other managerial functional strategies. We present a process and a structured methodology for designing such a manufacturing strategy. This methodology has been successfully tested in actual manufacturing environments.
An illustration is given based on work at Packard Electric. Introduction For most industrial companies, the manufacturing operation is the largest, the most complex, and the most difficult-to-manage component of the firm. Because of this complexity, it is essential for firms to have a comprehensive manufacturing strategy to aid in organizing and managing the firm's manufacturing system.
This paper provides a process and a structured methodology for conceptual- izing and formulating a manufacturing strategy. The manufacturing strategy cannot be formed in a vacuiom; it affects and is affected by many organizations inside and outside the firm. Because of the interrelationships among the firm's manufacturing unit, the firm's divisions and other functions, and the firm's competitors and markets, it is necessary to carry the process of manufacturing-strategy design beyond the borders of the manufacturing organization in a single firm.
Figure 1. Cooperation and consistency of overall objectives are the keys to success in these types of interactions. Second, manufacturing strategy design requires careful monitoring of the markets external to the firm in conjunction with the aforementioned functional groups within the firm.
For example, manufacturing managers, in conjunction with the engineering group, may monitor developments in the electronics industry so that they are aware of new applications of electronics to process technology in their industry.
Similarly, manufacturing, in conjunction with marketing, monitors the product markets in which they compete so they are aware of the product improvements and product introductions of their competitors. Following this suggested line of thought, we begin in Section 2 with a brief discussion of the corporate strategic planning process and some of the conceptual issues that are important for manufacturing strategy design.
Our principal contributions are in Sections 3 and 4 where we define and elaborate on the major strategic decision categories in manufacturing and provide a highly structured, and successfully tested, method- ology for manufacturing strategy design. Section 5 contains a brief conclusion.
The essence of strategy is to achieve a long-term sustainable advantage over the firm's competitors in every business in which the firm chooses to participate. The corporate strategic planning process is a disciplined and well-defined organizational effort aimed at the complete specification of corporate strategy. It identifies all the major tasks to be addressed in setting up corporate strategy and the sequence in which they must be completed.
The specific characteristics of the planning process to be adopted by a firm depend on the degree of complexity of the firm's businesses, its organizational structure, and its internal culture. However, it. These tasks, described briefly in Figure 2. For a comprehensive discussion of this subject, the reader is referred to Hax and Majluf [ a, b].
Each hierarchical level of the firm has a distinct and important role to play in the effort to achieve competitive advantage. Within the context of this paper it is appropriate to ask the question: at what level does the firm design its manufacturing strategy? The answer, obviously, is at all three hierarchical levels The corporate level, in its statements pertaining to the vision of the firm and its strategic thrusts, identifies the role that manufacturing should play in the pursuit of competitive superiority.
Normally, the manufacturing objectives are expressed in terms of the four major dimensions of performance measurement used in formulating manufacturing strategy Wheelwright [] : cost, quality, delivery, and flexibility.
There are important trade-offs to be made among these objectives, since it is not possible to excel in all of them simultaneously. The vision of the firm: corporate philosophy, mission of the firm, and identification of strategic business units SBUs and their interactions. Strategic posture and planning guidelines: corporate strategic thrusts, corporate performance objectives, and planning challenges.
The mission of the business: business scope, and identification of product- market segments 4. Formulation of business strategy and broad action programs. Formulation of functional strategy: Participation in business planning, concurrence or non-concurrence to business strategy proposals, broad action programs. Consolidation of business and functional strategies. Definition and evaluation of specific action programs at the business level.
Definition and evaluation of specific action programs at the functional level. Resource allocation and definition of performance measurements for management control. Budgeting at the business level. Budgeting at the functional level. Budgeting consolidations, and approval of strategic and operational funds. Figure 2. Quality measures include percent defective or rejected, field failure frequency, cost of quality, and mean time between failures.
To measure delivery perfor- mance, percentage of on-time shipments, average delay, and expediting response time may be used. Flexibility may be measured with respect to product mix flexibility, volume flexibility, and lead time for new products. This task- of matching performance measures with corporate and business objectives can be difficult because of the often uncertain effects of changed shortrterm- operating policies'on long-term.
The business level managers respond to the corporate objectives, assuring that all the managerial functions, including manufacturing, have plans that are consistent with Che corporate vision and move the business toward the desired competitive position. Since business unit strategies are primarily a collection of well-coordinated multifunctional programs aimed at developing Che fullest potential of each business; functional strategies, including manufacturing strategies, are developed primarily at the business level.
Finally, Che functional managers, who might have participated actively in the development of the various business strategies, have to formulate the corresponding functional strategic programs. The nature of those programs and the strategic categories that must be part of a manufacturing strategy are the subjects of Sections 3 and 4 of this paper. IC is important Co emphasize once more chat Che central objective of manu- facturing strategy is Co achieve long-cerm competitive advantage.
Obviously, this objective cannot be fulfilled unless Che firm understands how Co position its manufacturing skills vis a vis its competitors. For some excellent discussion on this issue we refer the reader to Buff a [], Hayes and Wheelwright [], and Kantrow [].
The Strategic Decision Categories in Manufacturing A manufacturing strategy must be comprehensive in the sense that it should provide guidelines for addressing the many facets of manufacturing decision- making.
At the same time, the complex web of decisions required in manufacturing management must be broken down into analyzable pieces. Nine strategic decision categories provide a comprehensive coverage of the broad set of issues that must be addressed by a manufacturing strategy while dividing' the manufacturing decision-making task into small, easy-to-analyze pieces.
Figure 3. Due to space limitations, we can only describe a small number of key issues in each category that must be addressed by the manufacturing strategy. Section 4 then describes how these categories are used in the manufacturing strategy design methodology. A key step in facilities policy-making for a multi- facility organization is choosing how to specialize or focus each facility Skinner [], Hayes and Schmenner [].
Facilities may be focused by geography, product groups, process types, volumes, or stage in the product life cycle. For example, due to the economies of scale in refining and the cost of transporting crude oil, oil companies tend to have process-focused plants that are located near crude oil sources oil wells or ports. Consumer product companies have large, centralized plants when there are significant manufacturing economies of scale and non-critical delivery response requirements e.
One such configuration is to have low volume, high flexibility facilities for manufacturing prototypes; and high volume, dedicated plants for maturing products that are experiencing high demand. Developing a well-thought-out facility focus strategy automatically provides guidance to the firm in other facilities decisions such as determining the size, location, and capabilities of each facility.
Capacity is determined by the plant, equipment, and human capital that is currently under management by Che firm. Important capacity decisions include how to deal with cyclical demand e. The decision to vertically integrate involves the replacement of a market mechanism over which the operations managers have limited control by an internal, non-market mechanism that is the sole responsibility of the managers in the firm.
Before making such a decision, a firm must assure itself that it has the capability of designing and controlling such a non-market mechanism that will be more efficient than the market it replaces. Other important issues are the impact of integration on the risk, product quality, cost structure, and degree of focus of the firm.
Legal ownership of the series of productive processes may not be the key element that determines the benefits of having integrated processes. Toyota Motor Company in Japan plays a very large role in directing the operations of its legally independent suppliers. Toyota gets the benefits of lower transaction costs through what Porter [] calls a "quasi- integrated" market mechanism because they coordinate the production of independently owned suppliers with the just-in-time system.
The success of this system raises the question of whether the crucial element for success of integrated operations is ownership of the series of productive processes or management and coordination of the processes. See, for example, Marshall et al. Although crude, this framework is quite useful for conceptualizing some important tradeoffs in process choice.
Relative to assembly lines, job shops tend to use more general purpose machines and higher skilled labor, provide more product flexibility, and yield higher unit production costs. Recent innovations in computer-aided design CAD , computer-aided manu- facturing CAM , robotics, and flexible manufacturing systems have added more complexity to technology decision problems. In many cases, these technologies can drastically change the manufacturing cost structure, capital intensity, unskilled labor usage, and ability to rapidly deliver high quality products at low cost.
Many firms decide to invest in these new technologies because they believe their survival depends on it. Traditional financial and accounting evaluation tools are often unable to capture all of the benefits that can be attributed to the installation of these systems.
Because of these shortcomings, thorough strategic analysis is required to properly evaluate these investment choices. In well-run manufacturing organizations, the manufacturing management must have significant input into product scope and new product decisions. See, for example, Peters and Waterman []. The principal challenge in human resource management is to design a set of policies that motivate and stimulate employees to work as a team to achieve the mission of the firm.
The design of such a set of policies can be quite complex. For example, with respect to incentives and compensation, a firm must decide whether to compensate its people as a function of hours worked, quantity or quality of output, seniority, skill levels, effort expended, loyalty, etc. Informational asymmetries e. Aside from pecuniary compensation, employees often are rewarded with perquisites such as cars or loans , training human capital invest- ments by the firm , employment guarantees , recognition for achievement , promo- tions to better jobs, etc.
A well-thought-out incentive system will consist of a combination of these elements that promote quality, efficiency, and employee satisfaction. A quality improvement strategy requires zealous top management support and participation, a well articulated philosophy, and concrete goals and objectives.
Such a strategy must specify how quality responsibilities are to be allocated among employees of the organization, what decision tools and measurement systems are to be used, and what training programs will be instituted for employees at various levels. See Fine [] and Fine and Bridge [] for more detail on this subject. Quality topics can be divided usefully into the categories of - design quality and conformance quality.
Although manufacturing managers should be involved in some degree with design quality especially with respect to the design for manufacturability issue , conformance quality is the area where manufacturing managers play a most crucial role. Three important issues related to managing for conformance quality are quality measurement, economic justification of quality improvements, and alloca- tion of responsibility for quality.
Economic justification of quality improvements is a difficult and contro- versial subject- Cost of quality accounting, the only economic tool that is widely used to evaluate quality projects or quality improvement programs, has two severe drawbacks. First, COQ ignores revenue effects of quality such as market share benefits and price premia for high quality products.
Second, it emphasizes short-term cost effects without consideration of the long-term consequences of quality decisions. A system for measuring revenue effects of quality as well as cost effects is needed for sound economic decision making in the quality area. We know of no instances where measurement of the revenue effects of quality has been attempted.
DOI: Hax , Man-Gyun No Published Business Linking technology and business strategies is a demanding task that has central importance in strategy formation. Now that technology is a critical source to achieve and sustain competitive advantage, the ability to incorporate technology into a business strategy can make the difference between a winning or a losing strategic alternative. This paper discusses a methodology that can be used to explore systematically the way to link business and technology strategies.
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