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Let's look at Timbuk2,
a different kind of a business,
a much smaller business.
This is a business of making messenger bags.
If you know what messenger bags are,
they are a very simple type of a bag that people can just put on
their shoulder and it's usually used by messengers
who go on bicycles in large cities like New York and San Francisco.
So, this is a San Francisco based company started in 1989.
And what are they well known for?
They're well known for the quality of their bags, very durable bags.
And they're also known for very quick delivery of customized bags.
So, you are able to get your design on your own.
You have certain parameters within which you can design
the bags by going online and you can order it and
it's delivered to you relatively quickly and
at not much of a price premium compared to the standard bags.
Now what is it about their operations that helps them achieve this?
And what they do is they use
a combination of a make-to-stock and make-to-order production.
What does make-to-stock mean?
Well make-to-stock means that you make product
to keep it in inventory based on a forecast of demand that you might receive.
Now that helps with to reduce costs in terms of the production but then,
it helps, it also increase the cost of keeping inventory.
Make-to-order means you make it based on when you receive the order from the customer.
Now that helps with keeping inventory cost low but it can take
a long time if you're starting right from scratch to make the bag for the customer.
So, what they've done is they've combined these two types of processes,
the make-to-stock and the make-to-order in giving you a short turnaround time.
Their manufacturing facilities are very open in the sense that they have
cross-trained workers and people are able to go from one process to the
other and get things done to get product moving out the door very quickly.
This gives them better capacity utilization and
helps them achieve that quicker lead time for customized orders.
What they've also done is they've combined their retail store sales with
their customized product sales in the same manufacturing facility.
So, when they do have times when there's not too much demand from the customized,
they make the standard product and
then they make the customized product whenever it's needed.
What that does is reduces
their total costs in terms of the customized product so they're able
to give product to customers which is
customized and still at a lower price than you would expect.
Another company that you probably heard off is Walmart.
Now Walmart has about $32 billion
and that's $32 billion in inventory at any point in time.
So, it's a very large company,
a very large retailer of all kinds of goods and it's known for its lower prices.
It's able to give lower prices to customers because its costs are very low.
It keeps very little inventory.
It keeps its inventory moving.
And if you think about their operations,
if you look at their operations,
you can see how they are able to do that.
A technique that they used that they kind of
pioneered is this idea of cross docking. Now what is cross docking?
Traditionally you have the trucks that are coming,
the trailers that are coming from different manufacturers.
They go to a warehouse,
the warehouse takes all of the product from different manufacturers,
stores it there and then puts them in different combinations for different stores,
retail stores, and then sends it to the retail stores.
Cross docking involves not having a warehouse at all,
in fact having docks on two sides of
a straight line where you have the incoming trucks and the outgoing trucks.
The result is that product doesn't sit in the warehouse.
It comes from the different manufacturers.
It has to be timed correctly but it comes from the different manufacturers and then gets
into the different trucks that are going to
the different stores in the mix that each of those stores need it.
Now this does take some planning,
some information technology that needs to be used in order to
figure out the right mixes coming there at the right time.
But they're able to do this in
an efficient way and cut down their inventories in a big way.
Walmart has developed supply chain relationships with all their large suppliers.
They have what is called vendor managed inventory or VMI.
What that means is that a supplier,
a large supplier such as Procter and Gamble,
is actually managing the inventory in the warehouses.
What Procter and Gamble gets in exchange in
this relationship is that they get information about the day to day
sales at each of the Walmart stores and they are able to
use that for their planning of their production.
Walmart also shares a lot of information and
believes in collaborating on forecasts so that
the manufacturer and the retailer are on the same page when they
are thinking about product that's going to be sold in their stores.
So that's the way that they're able to achieve this
this low cost that Walmart is relatively well known for.
Well, let's take a different type of product and its a fashion product,
a high fashion product.
And this is a company called Zara that originated
in Spain and now has stores in many different countries.
Now Zara is well known for keeping up with changing fashions.
They have this process by which they can take
a concept and convert it into clothes in the stores in four to five weeks,
sometimes even in two weeks,
sometimes in as little as two weeks.
What they do is they try to have reasonable pricing.
They are able to achieve this because they have fast moving items which is
very important in the fashion industry and they don't have to discount their goods.
Their rate of discounting for their garments is much lower than the industry.
What do they do that is different in
their operations in order to achieve these kinds of advantages?
Well, they have this thing called quick response production.
So, when they get a design and these designs come from the scouts that they have going
around in different high fashion locations,
and getting the designs ideas from there and sending them back to
production and they are able to take those designs and
convert them into product and distribute it very quickly.
Now they're able to do this because they have what is
called a much more work vertically integrated production system.
They don't outsource too much of their production.
So, it's all very close by.
They are able to take the design,
convert it into finished garments and send it off very quickly.
They do a very strategic timing of their product releases and they don't send,
they don't produce a lot of the garments for the season.
So, compared to industry,
they only produce about 50 to 60% of the garments for the season in advance.
So they are able to time it in such a way that they can get stuff to
the stores when it's needed and in the kind of designs that are needed out there.
So, these are examples of companies that have done well,
and have done well based on what they have done with their operations.
And hopefully you're able to see how
operations help them achieve a competitive advantage.
Gopesh AnandAssociate Professor of Business Administration
