Problem Set: Introduction to Operations Management (IOM OS)

IOM1 Differences between Goods and Services
[20 pts] Explain differences between goods and services in terms of: * Customer contact for goods is low because a customer buying goods will never come in contact where the goods are being produced. Versus for services its high because the customer is usually present during the formation of the service. * Opportunity to correct problems for goods is high because they may be exchanged or tailored versus for a service low because you can’t reconstruct a service that has already been performed. * Variability of input is low because you can always fix or change the goods being produced and output is high because you can’t change the finished product. * Measurement of productivity for goods is simple because you can count the amount of finished goods and inventory, and for services difficult because you can’t keep track of all the services being given. * Evaluation of employees for goods is easy as you can monitor the outcome but for services it is difficult because you can’t supervise all services performed.

IOM2 Customization
[10 pts] Discuss the impact of higher customization on complexity of manufacturing or service processes, level of worker skills, and productivity. The impact of higher customization compared to standardized products and services is that it is more labor-intensive, and more time-consuming resulting in a slower workflow. In addition customization requires highly skilled worker skills, more flexible equipment, much lower volume of output, and higher price tags.

IOM3 Trade-offs in Services
[10 pts] Discuss the trade-offs that might arise in a fast-food restaurant when the number of cashiers is increased or decreased. In a fast food restaurant having more cashiers will be a greater expense but the level of customer service will increase. In contrast decreasing the number of cashiers is more affordable but can result in a loss of revenue. This may result in not being able to take as many orders per day that can lead to angry customers.

IOM4 Mini-Case: Zara - Fast Fashion
Amancio Ortega Gaona, the founder of Inditex, thought that consumers would regard clothes as a perishable commodity just like yogurt, bread, or fish to be consumed quickly, rather than stored in cupboards, and he has gone about building a retail business that provides “freshly baked clothes.” Getting locally targeted designs quickly onto store shelves is where Zara excels. One telling example is: “When Madonna played a set of concerts in Spain, teenage girls arrived to the final show sporting a Zara knock-off of the outfit she wore during her first performance.” (2005. Economist)

Zara is a chain of fashion stores owned by Inditex, Spain’s largest apparel manufacturer and retailer. In 2007, Inditex reported sales of about 9.5 billion euros from more than 3,600 retail outlets in 68 countries. The company opened about two new stores for each day in 2007. In an industry in which customer demand is fickle, Zara has grown rapidly with a strategy to be highly responsive to changing trends with affordable prices. Whereas design to-sales cycle times in the apparel industry have traditionally averaged more than six months, Zara has achieved cycle times of four to six weeks. This speed allows Zara to introduce new designs every week and to change 75 percent of its merchandise display every three to four weeks. Thus, Zara’s products on display match customer preferences much more closely than the competition. The result is that Zara sells most of its products at full price and has about half the markdowns in its stores compared to the competition.

Zara manufactures its apparel using a combination of flexible and quick sources in Europe (mostly Portugal and Spain) and low-cost sources in Asia. This contrasts with most apparel manufacturers, who have moved most of their manufacturing to Asia. About 40 percent of the manufacturing capacity is owned by Inditex, with the rest outsourced. Products with highly uncertain demand are sourced from local manufacturers, whereas products that are more predictable are sourced from its Asian locations. More than 40 percent of its finished-goods purchases and most of its in-house production occur after the sales season starts. This compares with less than 20 percent production after the start of a sales season for a typical retailer. This responsiveness and the postponement of decisions until after trends are known allow Zara to reduce inventories and forecast error. Zara has also invested heavily in information technology to ensure that the latest sales data are available to drive replenishment and production decisions. In 2007, Inditex distributed to stores all over the world from eight distribution centers (DCs) located in Spain. The group claimed an average delivery time of 24 hours for European stores and up to a maximum of 40 hours for stores in America or Asia from the time an order was received in the DCs to the time it was delivered to the stores. Shipments from the DCs to the stores were made several times a week. This allowed store inventory to closely match customer demand. In 2007, Inditex distributed 627 million garments globally.

a) [20 pts] What advantage does Zara gain against the competition by having a very responsive supply chain, e.g., by replenishing its stores multiple times a week compared to a less frequent schedule? How does the frequency of replenishment affect the design of its distribution system? What information infrastructure does Zara need in order to operate its production, distribution, and retail network effectively?
Zara has an advantage of being able to respond quickly to demand at higher margins because price is not a prime customer driver. In addition they can maintain capacity flexibility to buffer against demand/supply uncertainty and inventory by having a very responsive supply chain. The frequency of replenishment doesn’t quiet affect the design of its distribution system because Zara creates modularity to allow postponement of product differentiation. In order to operate its production, distribution, and retail network effectively managers should communicate to head quarters on a daily bases so when a new design comes they can immediately work on it.

b) [20 pts] Why does Zara outsource basic designs with predictable demand from Asian manufacturers and manufacture fast-changing designs with uncertain demand in house? Why has Inditex maintained manufacturing and distribution facilities in Europe even though manufacturing in Asia is much cheaper? (Hint: Consider reasons for outsourcing and vertical integration.)
Zara outsources basic designs with predictable demand to reduce risk, cost, and overhead, also to improve the quality and effectiveness. Zara manufactures the fast changing designs in house because of vertical integration, which is delivering a single product or service. Inditex has maintained manufacturing facilities in Europe because with outsourcing you can risk a lack of control from broken process, loss of internal capability and growth in 3rd party power, cost of coordination, quality issues, and leakage of sensitive data and information.

OS1 Honda’s Flexible Plants
[10 pts] Honda assembles both SUVs and cars in the same plant. Discuss the benefits of Honda’s flexible plants especially in the downturn of 2008. (Hint: This is similar to Toyota’s global complementation strategy.) The benefit of Honda’s flexible plant is its global production and distribution network. Honda’s global strategy is serving two different markets in the same plant.

OS2 Mini-Case: Hard Rock Café
Hard Rock brings the concept of the “experience economy” to its cafe operations. The strategy incorporates a unique “experience” into its operations. At Hard Rock, the experience concept is to provide not only a custom meal from the menu but a dining event that includes a unique visual and sound experience not duplicated anywhere else in the world. This strategy is succeeding. Other theme restaurants have come and gone while Hard Rock continues to grow. The trick is not to play the game better than the competition, but to develop and play an altogether different game. At Hard Rock, the different game is the experience game. From the opening of its first cafe in London in 1971, during the British rock music explosion, Hard Rock has been serving food and rock music with equal enthusiasm. Hard Rock Cafe has 40 U. S. locations, about a dozen in Europe, and the remainder scattered throughout the world, from Bangkok and Beijing to Beirut. New construction, leases, and investment in remodeling are long term; so a global strategy means special consideration of political risk, currency risk, and social norms in a context of a brand fit. Although Hard Rock is one of the most recognized brands in the world, this does not mean its cafe is a natural everywhere. Special consideration must be given to the supply chain for the restaurant and its accompanying retail store. About 48% of a typical cafe’s sales are from merchandise. The Hard Rock Cafe business model is well defined, but because of various risk factors and differences in business practices and employment law, Hard Rock elects to franchise about half of its cafes. Social norms and preferences often suggest some tweaking of menus for local taste. For instance, Hard Rock focuses less on hamburgers and beef and more on fish and lobster in its British cafes. Because 70% of Hard Rock’s guests are tourists, recent years have found it expanding to “destination” cities. While this has been a winning strategy for decades, allowing the firm to grow from 1 London cafe to 157 facilities in 57 countries, it has made Hard Rock susceptible to economic fluctuations that hit the tourist business hardest. So Hard Rock is signing a long-term lease for a new location in Nottingham, England, to join recently opened cafes in Manchester and Birmingham — cities that are not standard tourist destinations. At the same time, menus are being upgraded. Hopefully, repeat business from locals in these cities will smooth demand and make Hard Rock less dependent on tourists.

a) [20 pts] Summarize the strategic changes that have taken place at Hard Rock Café since its founding in 1971. Is Hard Rock’s strategy focused more on efficiency for low costs or more on responsiveness to local demands?
Hard Rock’s strategy is to focus on globalization. Since 1971 Hard Rock has changed to meet demand and face the cultural changes in the world. Hard Rock started as a British Café and is now a global brand with restaurants and hotels. They tweaked their menu based on local needs, and of course the music has changed now from what used to be popular back then. Their strategy seems to be focused more on the responsiveness to local demands. Hard Rock focuses on differentiation in order to entertain their guest by looking at their interest of food and giving them the entertainment and visual experience.

b) [20 pts] As Hard Rock Cafe has changed its strategy, discuss briefly how you would change operations in the new British non-tourists locations in terms of (1) product design (menu), (2) procurement and inventory (of food ingredients, clothing, and memorabilia), (3) processes (cooking and retailing), and (4) human resources?
Since 78% of Hard Rock’s guests are tourist I would try to find a way to attract local customers throughout every season. Starting with the product design I would have a set menu for non-tourists but still have a constant changing secondary menu option to cover everyone’s preferences. For procurement and inventory I would try to start selling not only items that attract tourists but items that the locals would like too. In addition for processes I would hire chefs from diverse backgrounds to help master the taste from different cultures. Lastly, I would do the same for human resources since most of our customers are tourists I would try to hire people from diverse backgrounds.