Operations

How leading companies use price, speed, quality and flexibility to drive innovation and shareholder value.

Early research in e-commerce projected that online retailing would spiral into a never-ending price war, but recent research has shown that customers are more likely to pay higher prices to online retailers of high quality that they trust. But how do customers evaluate quality in online retailing? What are the specific aspects of an online transaction that customers value and use to distinguish one site from another? The authors explored these issues by surveying customers who had recently engaged in an online retail transaction to determine how they evaluate the quality of their experiences with online retailers. The results demonstrated that customers' perceptions of quality and satisfaction with online purchases depend upon three things: interaction with the Web site, delivery of the product and how prepared retailers are to address problems when they occur. Of the three, product delivery has the strongest influence on customers' satisfaction and future purchase intentions. The authors further break down each of the three aspects of quality to create a complete picture of what it takes to build a trusting relationship with customers in an e-commerce environment.

Effective product returns strategies can result in increased revenues, lower costs and enhanced levels of customer service.

The term "value chain" suggests an orderly progression of activities that allows managers to formulate profitable strategies and coordinate operations with suppliers and customers. Using examples from the telecom, pharmaceutical, steel and auto industries, the authors argue for a more complex view of value -- one that is represented by a "value grid". The grid approach allows firms to move beyond their industry lines to identify opportunities and threats. It pushes managers to understand the power balance between suppliers and manufacturers. The new pathways to value can be vertical (as firms explore opportunities upstream or downstream from the adjacent tiers in their value chain); horizontal (as firms identify opportunities from spanning similar tiers in multiple value chains); and even diagonal (as firms look more integratively across value chains and tiers for prospects to enhance performance and mitigate risk).

Companies should evaluate an outsourced process on several dimensions and then tailor the contract accordingly.

Many companies leave risk management and business continuity to security professionals, business continuity planners or insurance professionals. However, the authors argue, building a resilient enterprise should be a strategic initiative that changes the way a company operates and increases its competitiveness. Reducing vulnerability means both reducing the likelihood of a disruption and increasing resilience. Resilience, in turn, can be achieved by either creating redundancy or increasing flexibility. Redundancy is the familiar concept of keeping some resources in reserve to be used in case of a disruption. The most common forms of redundancy are safety stock, the deliberate use of multiple suppliers even when the secondary suppliers have higher costs, and deliberately low capacity utilization rates. Although necessary to some degree, redundancy represents pure cost with no return except in the eventuality of disruption. The authors contend that significantly more leverage, not to mention operational advantages, can be achieved by making supply chains flexible. Flexibility requires building in organic capabilities that can sense threats and respond to them quickly. Drawing on ongoing research at the MIT Center for Transportation and Logistics involving detailed studies of dozens of cases of corporate disruption and response, the authors describe how resilient companies build flexibility into each of five essential supply chain elements: the supplier, conversion process, distribution channels, control systems and underlying corporate culture. Case examples of Land Rover, Aisin Seiki Co. (a supplier to Toyota), United Parcel Service, Dell, Baxter International, DHL and Nokia, among others, are offered to illustrate how building flexibility in these supply chain elements not only bolsters the resilience of an organization but also creates a competitive advantage in the marketplace.

The practice of pushing product by building inventory in anticipation of demand has fallen out of favor in recent years. Many companies prefer to build product only in response to actual demand. This permits firms to avoid costly supply and demand mismatches. Given how successful product-based firms have been with this approach, it is only natural to wonder how it would apply to service firms. Some argue that services cannot be inventoried. Yet this view relies on an extremely narrow definition of inventory as finished product waiting for customers. In practice, the authors say, inventory also serves as a way to store work that functions as "service inventory." As with physical inventories, service inventories allow firms to buffer their resources from the variability of demand and reap benefits from economies of scale while benefiting customers. By using the correct form of service inventory, companies have the opportunity to offer better quality, faster response times and more competitive pricing. Using examples from the travel, hospitality and insurance industries, the authors discuss how service firms can use inventory as a strategic lever in designing and managing service offerings.

This article contends that companies' traditional approach to purchasing misses the function's significant potential to add value by driving innovation and superior long-term cost performance. As a former senior vice president of technical purchasing for BMW, the author oversaw the transformation of the department's mission from functional to strategic, and he offers insights about the transformation. Strategic purchasing, he says, can only be effective if the purchasing department constantly expands and updates its technical knowledge to preserve credibility with both suppliers and internal departments. Toward that end, BMW's purchasing agents spent up to 20% of their time training -- in everything from foreign languages to technical know-how to contract law. In addition, BMW began to hire industry experts and train them as buyers who had as much in-depth knowledge as the suppliers with whom they would be dealing. The author describes how BMW associates become involved at the early concept stage of product development, often suggesting how certain design features will affect the technical equipment at the factory or the level of investment that will be required to execute the design. They also suggest what types of materials, components and systems best meet end-user requirements.

For companies considering offshoring, there are dangers in taking too narrow a geographical view, say the authors. Every country presents a different mix of strengths and weaknesses. One country may, for instance, have very low labor costs but a high degree of political instability and a small domestic market. Another might offer a wealth of engineering talent but quickly rising labor rates. A third may have robust local markets but intrusive regulatory regimes and a weak transport infrastructure. Currency fluctuations may unexpectedly swell the costs of sourcing from one country, for instance, or a natural disaster may wreak havoc on a critical source of supplies. The authors suggest that offshoring is no different from any investment program that involves choices with widely divergent cost and benefit characteristics in that it makes sense to create a portfolio that balances risk and reward over both the short and long terms. Their research, canvassing 138 manufacturing executives in sectors ranging from automotive to consumer products to technology, confirms the wisdom of a portfolio approach. It reveals that while many companies confine their offshoring efforts to China and India, 96% of cost leaders are active in countries beyond those two, and nearly half of the leaders have offshore activities in three or more additional countries. The authors illustrate their argument with a description of the global outsourcing portfolio strategy of U.S.-based conglomerate Emerson Electric. They conclude with a brief discussion of a number of practical steps executives can take to ensure that their portfolios are constructed successfully.

How a textile manufacturer balances cost cutting with mass customization in its domestic facility.