01) Heizer, Jay H. & Render, Barry. (1999). “Operations and productivity” en Principles of operations management. USA: Prentice Hall, pp. 1 - 68. Part | introduction to Operations Management OPERATION AND PRogucTIVIty CHAPTER OUTLINE GLOBAL COMPANY PROFILE: ‘WHIRLPOOL ‘WHAT IS OPERATIONS MANAGEMENT? THE HERITAGE OF OPERATIONS. MANAGEMENT WHY STUDY OM? WHAT OPERATIONS MANAGERS DO. How This Book 's Organized ORGANIZING TO PRODUCE GOODS AND SERVICES, WHERE ARE THE OM JOBS? EXCITING NEW TRENDS IN ‘OPERATIONS MANAGEMENT ‘OPERATIONS IN THE SERVICE SECTOR Differences between Goods and Services Growth of Services Service Pay LEARNING OBJECTIVES When you complete this chapter you should be able to: Identity or Define: ‘THE PRODUCTIVITY CHALLENGE Productivity Measurement Productivity Variables Productivity and the Service Sector Production and THE CHALLENGE OF SOCIAL productivity RESPONSIBILITY, Operations eee management (OM) vey TERMS What operations SOLVED PROBLEMS lia a DISCUSSION QUESTIONS - CRITICAL THINKING EXERCISE: se era ome ‘Abit sory of CASE STUDY: NATIONAL AR EXPRESS cence BteuocRarHY ae cass INTERNET RESOURCES a mangement The future ofthe ‘sclne Meosring ‘productivity ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autrizaton de cada autor.‘smal inspection takes place as parts are packed for shipment, A focus on total quality and veduetion in serap has been « major ingredient in produetivity improvement at Whirlpoo!'s plant in Benton Harbor. Michigan. As tcaditional economic barriers callepse, Whirlpool is establishing 2 global network of plants, rom Canada to Bra and from Mexico to China. In each of these facies, Whiripool fights for increases in pro- buctivty. Productivity makes a ifer- ence to employees to customers, and to stockholders For employees, enhanced pro ductivity at Whslpoo's washing ma- chine foctory in Benton Harbor, Michigan, means that, in recent years, each employee has received ‘mote than $2,000 in extra pay. For customers, Wnitpoolcontin- esto def inflation by holding the Tine on consumer prices. Even in the face ofa consumer price index thats Lp about 16% in the last four years, some Whilpool washers have dropped in price Productivity increases have bene- fited stockholders, co, Whiipool hes The U.S. home-appliance marker is vowing annalls at 2% of less, about dulf of tt projected for Europe. Therefore, Whiripool chairmun David Whinwam’s strategy bas been to take Whiripool global, Whirlpoot acquired major imterest in tngils Linited of Canada, Viromatic of Mevico. ala 5394 stake in Philips Bleetranies NV in the Netherlanus. Has mens setts sights on Asia, with the purchase of four cumperizors in China and ve in ‘iv. Appliance giants Masta. Electrolux. and GE have sinilarte developed and implememed global sivategies 1 enable them to vompete internationals ‘Material compilado confines académicos, se prohibe su reproduccién total o parcial sina autrizacin de cada autor‘At Whirfprot's Cle, Ohio, plant washing machines are assembled with perfect parts received on time from Benton Harbor ‘grined merket share while outpacing it? First, there was a change in ati its vals in profitability. Consequently, tude by management and employ- ‘Whirlpools stock price is elso up. fees who now “live” quality as well as None ofthis happens without in- talk about it. Second, companywide creates in productivity. Parte manu: raining now stresses that employees factured perlaborhouris up and _use their heads as well as their scrap is down, How did Whirlpool do hands. Third, flexible work rules allow employees 10 work where ‘needed. Fourth, a gain-shering agreoment keeps everyone focused. fn productivity improvements. And fifth, Whirlpool has moved toward global procurement of 35 strategic ‘materials and components ‘Material compllado confines académicos, se prohibe su reproduccion total o parcial sina autrizaciin de cada autor4 Charter 1 Production The erestion (of goods and services. Operations ‘management (OM) ‘Activities that relate to the cteation of goods and services through the transformation of inputs 10 outputs. OpeRATioNs AND PropuctiviTY ‘The global business system is changing not only the way Whirlpool enkances product ity and procures materia but also the way firms throughout the world organize and com= ‘municate. New global information links connect suppliers, customers. and manufacturers ‘with the stroke of a key. the click of mouse button, or even the touch of a screen. Ideas, designs, money transfer. and orders now move in seconds instead of days or weeks. Moreover, the new information age has all but collapsed traditional barriers. Com nies now make worldwide products. Ford makes a world car. Gillette makes world razor, Microsoft makes Internet programs used around the world. MeDonald’s hamburg- rs taste the same in Moscow, Tel Aviv, Bangkok, and Chicago. These firms are just a ‘ew examples of the integrated international production system. Not only ix movement of| information by electrons cheap and fast, but huge ships and airplanes make the movement of goods less expensive and inereasingly rapid. “These changes have a tremendous impact on the operations of firms. Companies that were once local became national, then regional, and now global. The technology that ‘munifests itself in computers, communication. and lower transportation costs are terrific drivers toward the globalization of economic growth and world trade. This globalization explosion means we are living in an exciting and challenging time, with new jobs, new ‘opportunities. and wonderful new options for operations managers. ‘As we progress through this text, we will discover how to manage operations in this, global economy. An array of informative examples. charts text discussions. and pictures illustrate concepts and provide information, Examples of operations management range from Minit-Lube and MeDonald's to Whirlpool and Disney Worl, We will see how op- erations managers create the goods and services that enrich our lives. In this chapter, we ist define operations management. explaining its heritage and the iting role operations managers play in a huge vatity of businesses, Then we discuss production and productivity in both goods- and serviee-producing fies. This i followed by adiscussion of operations in the service sector and the challenge of managing an effec- tive production system, WHAT IS OPERATIONS MANAGEMENT? Production is the creation of goods and services. Operations management (OM) isthe set of aetvities that eretes goods and services through the transformation of inputs imo ‘outputs. Activities creating goods and services take place in all organizations. In mnu- facturing firms, the production activites that ereate goods are usally quite obvious. It them, we ean se the eration ofa tangible predict such asa Sony TV oF a Ford Ta fm organizations that do not create physical products the production function may be Jess obvious. It may be “hidden” from the public and even from the custome. An exam ple isthe transformation tat kes place ata bank. hospital ane offic. or eolege Ofien when services are performed, no tangible goods are produced. Instead. the prod ‘uct may take such forms asthe transfer of funds rom a savings secount toa checking 2e- count, the transplant of liver, the fling ofan emply seat onan airline, or the education of student. Regardless of whether the end product isa good or service. the production wtivities ‘hat go oni the organization are often refered 0 as operations oF operations management THE HERITAGE OF OPERATIONS MANAGEMENT “The field of OM is relatively young, but its history is rich and interesting. Our lives and the OM discipline have been enhanced by the innovations and contributions of numerous ‘Material compitado confines académicos, se prohibe su reproduccién total oparclal sin la autrizaion de cada autor.‘THE HERITAGE OF OPERATIONS MANAGEMENT individuals, We introduce a few of these people in this sect ‘cant events in operations management is shown in Figure 1.1. Eli Whitney (1800) is credited for the early popularization of interchangeable parts, Which was achieved through standardization and quality control in manufacturing ‘Through a contract he signed with the U.S. government for 10,000 muskets, he was able (ocommand a premium price because of their interchangeable parts Frederick W. Taylor (1881), known as the father of scientific management, con- tributed to personnel selection. planning and scheduling, motion study, and the now popu- lar fcld of erganomies. One of his major contributions was his belief that management should be much more resourceful and aggressive in the improvement of work methods, ‘Taylor and his colleagues, Henry L. Gantt and Frank and Lillian Gilbreth, were among, the frst to seek systematically the best way to produce. ‘Another of Taylor's contributions was the belief that management should assume more responsibility for: 1 Matching employees tothe right job. 2, Providing the proper taining. 3, Providing proper work methods and tools. 4, Establishing legitimate incentives for work to be accomplished. By 1913, Henry Ford and Charles Sorensen combined what they knew about standardized parts with the quasi-assembly lines of the meatpacking and mail-order industries and added the revolutionary concept ofthe assembly line where men stood still and material moved. Quality control is another historically significant contribution to the field of OM. ‘Walter Shewhan (1924) combined his knowledge of the need for quality i and a summary of signti- Frederick W. Taylor's Principles of Scientific Management revolutionized ‘manufacturing. A scientific approach to the analysis of daily work and the tools of industry frequently increased productivity 400%. (One of the Gillreth’s techniques was to use cameras to record movement by attaching lights to an individual's arms and legs. In that way they could track the movement of individuals while performing various jobs. Division o abor (Adam Smith 1776 and Charles Babbage 1052) ‘Standardized parts (Whitney 1800) ‘Computer-atted design (CAD) mig. (CM) ‘Sclentic management (Taylor 1888) $$$» Coordinated assembly ne (Ford'SorensenVAvery 1943)». ‘Gantt charts (Gant 1916) $$$ ‘Metin study (Feank & Lian Gibran 1622) > Quality control (Shaner 1924; Deming 1950) ——————————» (Computer (Atanasot 1996) $$$» (CPMUPERT (OuPort 1957) > Motel requirements planning (ricky 1960) ————>- Flexible mig. system (FMS) ————>- Baletige Quay Awards ——e Computer Integratea. ——> (Globaization > Internet —» 76 nas a20 ata aes “ase asx ess vero Te7e 1200 1056 1250 Te55 Bon Tra re FIGURE 1.1 w Significant Events in Operations Management ‘Material compitado confines académicos, se prohibe su reproduccién foal o parcial sina autrizaion de cada autor.6 Charter | ‘Charles Sorensen was. the man who towed an automobile chassis on 8 rope over his shoulders through the Ford plant hile others added pars, OPERATIONS AND PRopuctiviTy control and provided the foundations for statistical sampling in quality control. W. Ed ‘wards Deming (1950) believed, as did Frederick Taylor. that management must do more to improve the work enviranment and processes so that quality ean he improved Operations management will continue to progress with contrihutions fram other dis- ciplines, including indusiial engineering and management science. These disciplines long with statisties, ed substantially t0 greater productivity. Innovations from the piysical seiences (biology. also contributed to advances in OM. These advances include new aulhesives, chemical processes for printed circuit boards. gamma rays to sanitize food products snd molten tin tables on which to float higher-quality molten glass as it cools, The design of produets and ‘processes ofien depend on the biological and physical sciences. ‘An especially important contribution to OM has come from the information sciences. which we define as the systematic processing oF data to yield information, The tion sciences are contributing in a major way toward improved productivity while provid- ing society with a greater diversity of goods and services. Decisions in operations management require individuals who are well versed in man- sent science, in information science, and often in one of the biological or physical sc fences, In this chapter, we take a look athe diverse ways a student ean prepare for careers in operations managemen WHY STUDY OM? We study OM for four reasons: 1, OM is one of the thrce major functions of any organization, an itis integrally re- Jated to all the other business functions. All organizations market (sel) finance (account), and produce (operate) and it is important to know how the OM seg- ‘ment funetions. Therefore. we study low people organize themselves for produc tive emterprise, 2, We study OM because we want to know how gooxls und services are produced. ‘The production function isthe segment of our society that ereates the products we use, 3. We study OM to understand what operations managers do, By understanding what these managers do, you can develop the skills necessary to become such man- ager. This will help you explore the numerous and luerative career opportunities om. 4. We study OM because it is such a costly part of an organization, A large percent age ofthe revenue of most firms is spent in the OM function. Indeed, OM provides 8 major opportunity for an organization to improve its profitability and enhance its service to society. Example | considers how a firm might increase its profitability via the production function. BB ccamrce s Fisher Technologies ita small frm that must double its dollar contribution to fixed cost ‘and profit inorder tobe profitable enough to purchase the next generation of product ‘equipment, Management has determined tha, ithe frm fils to increase contribution. its ‘bank will not make the loan and the equipment eannot be purchased. I he fim cannot ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sin a autrizaton de cada autor.Wuat OPERATIONS MANAGERS Do. purchase the equipment. the limitations ofthe old equipment will force Fisher to go out of business and in doing so, put its employees out of work and discontinue producing goods and services for is customers. ‘Table 1.1 shows a simple profi-and-loss statement and three strategic options forthe fim, The fst option is a markering option where good management may increase sales by 50%. By increasing sues by SO", contribution wil in um inerease 7), but inreas- ing sales 505 may be more thin difficult: i may even be impossible. ‘The second option is a fnancelaccountng option where finance costs are cut in bal through good financial management. But even a reduction of SO% is sill inadequate for enerating the necessary increase in contribution. Contribution is increased by only 21%. ‘The thitd option isan OM oprion where management reduces production coxs by 20% and increases contribution by 114%, Given the conditions of eur brief example, Fischer “Technologies has increased contribution from $10,500 to $22.500 and will nose have a frank willing to lend it additonal funds. TABLE 1.1 m Options for Increasing Contribution Financo/ Marketing Accounting om Option" Option’ —_Optiont Repuce IncReASE Sates REDUCE FINANCE PRODUCTION Current REVENUESO% © Costs50% Costs 20% Sales $100,000 $100,000 $100,000, Costs of goods =#0.000 80,000 000 Gross margin ~ 20.000 720,000 36,000 Finance costs = 6,000 = 3900 = 6000 14,000 77,000 30,000 Taxes a1 25% 3.500 250 7,500 Contbutiont — F700 518,000 372.750 R500 * Increasing sales 50% increases canibution by $7,500 or 71.0% (7 500/10,500) ® Reducing finance costs 50% increases contbution by $2,250 of 21.0% (2250/10, 500, « Reducing production costs 20% increats convibution by $12,000 0 114.0% (12,000/10,500) * Contribution to fixed cost excluding nance cost) and profit Example I underscores the important role of developing an effective strategy forthe oper- ations activity of a firm, It is also the approach taken by many companies as they face growing global competition, WHAT OPERATIONS MANAGERS DO All good managers perform the basic functions of the management process. The manage- ‘ment process consists of planning, organizing, staffing, leading, and controlling. Opera tions managers apply this management process to the decisions they make in the OM function. Managers contribute (o production and operations through the decisions shown in Table 1.2. Successfully addressing each of these decisions requires planning, organiz- ing, stafing, leading, and comtrolting. Typical issues relevant to these decisions and the chapter where each is discussed are also shown. Management process ‘The application of planning, organizing, staffing, leading, and controlling to the achievement of, ‘objectives. ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autrizaion de cada autor.Charter 1 TEN DECISIONS OF OM Managing Quality Design of Goods & Services Process Strategy Location Strategies Layout Strategies Human Resources Supply-Chain Management Inventory ‘Management Scheduling Maintenance OPERATIONS AND PRopuctiviTY ‘Table 1.2 m Ten Critical Decisions of Operations Management ‘Ten Decision Areas Issues Chapter(s) Quality Who is responsible fer quality? 4.4 Supplement management low do we define the quality we wont in our service or produ’ Service und ‘What product or service should we offer? 6 product design How should we design these products and Process and ‘What process wil hese products require and in 7,7 Supplement capacity design what order? ‘What equipment and technology is necessary foe these processes? Location ‘Where should we put te facility? 8 ‘On what criteria should we base te location decision? Layout design How should we arrange the failiy? ° How large must the facility be to meet ou pan? Human resources How do we provide a reasonable work 10, 10 Supplement and job design environment? How much can we expect our employees to produce? Supply-chain| Should we make or buy this component? " ‘management ‘Who are our good suppliers and how many should we have? Inventory, material Haw mach inventory ofeach item should we 12.12 Supplement, requirements have? 4 planning, and JIT When do we rsorder? (Cjus-instime”) Intermediate, short- Is subcontracting production a good idea? 13.15.16 term, and projeet_ Are we beter off keeping people onthe payroll scheduling daring slowdowns? Maintenance ‘Who is responsible for maintenance? 0 How This Book Is Organized ‘The 10 decisions shown in Table 1.2 are activites required of operations managers. The ity 1o make good decisions in these areas and allocate resources to ensure their effec ive execution goes a long way toward an efficient operations function, The text is struc tured around these 10 decisions. Throughout the book, we will discuss the issues and tools that help managers make these 10 decisions. We will also consider the impact that these decisions can have on the fim’s strategy and productivity. ORGANIZING TO PRODUCE GOODS AND SERVICES ‘To create goods and services, all organizations perform three functions (we Figure 1.2). ‘These functions are the necessary ingredients not only for production but also for an orga- sization’s survival. They are: ‘Material compilado confines académicos, se prohibe su reproduccion total o parcial sina autrizackin de cada autor.OnGawiziNG To PropUCE Goons AND SERVICES FIGURE 1.2 m Organization Charts for Two Services and One Manufactur- ing Organization (A) A Bunk, (8) an Airline. and (C) a Manufacturing Organization. The blue areas are OM acres ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sin a autorizaton de cada autor.10 Charter | OPERATIONS AND PRopuctiviTy 1. Marketing, which generates the demand. ora least ‘or serviee (nothing happens until there isa sale. 2. Produetionoperations which creates the product. 3. Financetaccounting, which tracks how well the organization is doing. pays the bills and collceis the money. Universities, churches or synagogues. and businesses ail perform these functions. ‘Any institution, even a voluntcer group such as the Boy Scouts of America, is onga- nized to perform these three basie functions. Figure 1.2 shows how a hank, an airline, and 4: manufacturing firm organize themselves to perform these functions. The blue-shaded ‘areas of Figure 1.2 show the operations Functions in these firms, tikes the onler for. a product WHERE ARE THE OM JOBS? How does one get started on a career in operations? The 10 OM decisions identified in ‘Table 1.2 are made by individuals who work in the disciplines shown in the blue areas of Figure 1.2, Competent business students who know theie accounting, statistes. finance, and OM have an opportunity to enter the entry-level positions in all ofthese areas. As yOu read this text look atthe disciplines that can assist you in making these decisions. Then take courses in those areas. The more background an OM student has in wecounting. sta- Listes, information systems, and mathematics, the more job opportunities will be avait- able. About 40% of all jobs are in OM. The following are just a few of the areas where ‘opportunities exist for OM graduates in the year 2000! L. Technologs/metiods: The greatest opportunities today are in the fields that make use of technology and the techniques of continuous improvement, These include ‘computer applications, maintenance, process improvement, and ergonomics. Facilitiesispace wilization: The development of work cells, facility consolidation, layout improvements for storage of raw materials, warehousing, work-in-progress. and linished goods all provide tremendous opportunities. 3. Strategic issues: Identifying new opportunities. providing vision, organizational development, measurement and reporting systems, benchmarking. and creating and sustaining peak performance are ranked as major opportunities. 4. Response tine: Speed and reaction time by an organization ancl its supplicrs,re- duction of setup times, and product design times are viewed as critical in toay"s fast-paced environment. 5. Peoplelicam developmen: Throughout the production and distribation system, the topics of employce involvement and empowerment. leadership. communica- tion, and team development are all crucial for maximizing productivity opportu- Custamer service: As customers demand more customized products, as services become more important, and as technology ecomes a larger ingredient in many products, order fulfillment, altersale service. and equipment uptime all are key for ‘operational success. 7. Quality: Product quality and information quality remain erucial to operations swe- cess. 8% Cost reduction: As always. operations managers must focus on doing more with less through simplification, streamlining, and Focusing on resourees to get the job done a1 minimal costs 6 * Soares: Tompkins Arsene, Ine. Rakigh NC, ws reported in ORIMS Taker: New York Tne, Noe vember 6 1996, pCa ‘Material compilado confines académicos, se prohibe su reproduccién total o parcial sina autrizaton de cada autor.EXCITING NEW TRENDS IN OPERATIONS MANAGEMENT 9. Inventory reduction and supply-chain management: Reduction and faster move- ‘ment of inventory throughout the supply chain, cutting damage and shrinkage, and just-in-time arrival of inventory all help release assets for more proxluctive pur- poses, 10, Productivity improvement: Productivity enhancements are the only way we ean improve our standard of living. It is the operations manager's continuing (ask to see that this is done. EXCITING NEW TRENDS IN OPERATIONS MANAGEMENT ‘One of the reasons OM is such an exciting discipline is that the operations manager is confronted with an ever-changing world. Consequently. both the approach to and the re- sults of the 10 OM decisions in Table subject 10 change. These dynamics are the result of a variety of forces, from globalization of world trade to the transfer of ideas, products, and! money at electronic speeds. The direction now being taken by OM—where ithas been and where itis going—is shown in Figure 1.3. We now introduce some of the challenges shown in Figure 1.3 * Global focus: The rapid dectine ia communication and transportation costs has. of ‘made markets global, But at the same time, resources in the Form of materials, and labor have also become global. Contributing to this rapid globalization are countries throughout the world that are vying for economie growth ancl industializa- Batch (arg) shioments Cost of capt! puts pressure on me} shine shipments Lengtty product development — ew a prcsing [> Gian enphasismautes nat emma Supply ta pres > Steet cs Fan pecet dtpmet Standardized products 1 i a i i 1 ‘Mass customization ob specialization 4 ‘Changing socioeuture miteu | and information society. Empowered employees, Increasingly a knowledge teams, snd lean production FIGURE 1.3 m Changing Challenges for the Operations Manager ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autrizacin de cada autor.2 Charter | Services Those economic activities that ‘ypically produce an intangible product (such as education, entertainment, lodging, goverment, financial and health services) Orexations AND Propuctivity tion. Operations managers are responding with innovations that generate and nove ideas, pars, and finished goods rapidly, wherever and whenever needed, + Just-in-tone performance: Vast financial resources are committed to inventory. And inventory impedes response to the dynamic changes in the marketplace. Operations ‘managers are viciously cutting inventories a every level, from raw materials to fin- ished goods. + Supply-chain partnering: Shorter product life eycles, as well as rapid changes in ma- terial and process technology, require more participation by supplicrs. Suppliers usu- ally supply over half ofthe value of products. Consequently, operations managers are building long-term partnerships with critical players in the supply chain. + Rapid product development: Rapid intemational communication of news, entertain- ‘ment, and lifestyles is dramatically chopping away at the life of products, Operations _managers are responding with design technology that is faster and design manage- ment that is more effective. + Mass customization: Once we begin to consider the world as the marketplace, then the individual differences become quite obvious. Cultural differences, compounded by individual differences, in a world where consumers are increasingly aware of op- tions, places substantial pressure on firms to respond. Operations managers are re- sponding with production processes that are flexible enough to cater to individual whims of consumers. The goal is to produce individual products, whenever and Wherever needed. + Empowered employees: More sophisticated employees and a more technical work- place have combined to require more competence at the workplace. Operations managers are responding by moving more decision making to the individual worker. ‘These and many more topics that are part of the exciting challenges to operations man- agers are discussed inthis text, OPERATIONS IN THE SERVICE SECTOR “The service sector is defined differently by different people. Even the U.S. government has trouble generating a consisteat definition. Because definitions vary. much of the data, nt, However, we will define luding repair and maintenance, govermment, food and lodging. transporta- tion, insurance, trad, financial, realestate. education, legal. medical, entertainment, and ‘other professional occupations * Differences between Goods and Services LLet’s examine some of the differences between goods and services: + Services are usually intangible (for example, your purchase of a ride in an empty air- Tine seat between two cities) as opposed to a tangible good. + Services are often produced und consumed simultaneously: there is no stored inven- tory. For instance, the beauty salon produces a haircut that is “consumed” simultane- ‘ously, ofthe doctor produces an operation that is “consumed” as itis produced. We have not yet figured out how to inventory haircuts or appendectomies. * Ts dfn ie similar othe extegoiex used by he U.S. Bars of Lab tases. ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autorizacin de cada autor.OPERATIONS IN THE SERVICE SECTOR + Services are often unique. Your mix of financial coverage, such as investments and insurance policies. may not be the same ax anyone elses, just as the medical proce= dure ora haircut priced for you isnot exactly like anyone elses. + Services have high enstomer interaction. Services are often difficult to standandize, automate, and make as efficient as we would like because customer interaction de- mands uniqueness. I fact, in many eases tis uniqueness is what the customer is pay- ing for: therefore. the operations manager must ensure that the product is designed so iat ic can be delivered in the required unique manner. + Sorvices have inconsistent product definition. Product definition may be rigorous. as in the ease of an auto insurance policy, but inconsistent because policyholders change cars and mature. + Services are often knowledge-based ‘services, and therefore hard to automate + Sorvices are frequently dispersed. Dispersion oceurs because services are frequently bought to the eliencustomer via a local offic. a retail outlet, or even a house eal the case of educational, medical, and legal Table 1.3 indicatex some sudditional differences between goods snd services that impact OM decisions. Although service products are different from goods. the operations fune- tion continues to transform resources into products. Indeed, the activities of the operations Function are often very similar for both goods and services: The 10 OM decisions in Table 2 must be performed for each. For instance, both goods and services must have quality standards established. and both must be designed and processed on a schedule, in a faci lay where human resources are employed, TABLE 1.3 m Differences between Goods and Services Attributes of Goods Attributes of Services (Tangible product) (ntangible product) Product canbe resol. Reselling a servic is unusual. Product can be inventoried ‘Many services canpot be inventoried. Some aspects of quality are measurable, Many aspects of qualty are difficult, to measure, Selling is distinct from production Selling is often a part ofthe service. Produet is tansportuble. Provider, not product, soften transportable. Site of facility x important for cost ‘Site of facility is important for Often easy 0 antomate, Service is often difficult vo automate. Revenue is generated primarily from the Revenue is generated primarily from the ‘tangible product, intangible services. ade the distinction between goods and services, we should point out that in ‘many eases, the distnetion is not clear-cut, In wality. almost all services are a mixture of service and a tangible product: similarly, the sale of many goods includes or requires service. For instance. many products have the service components of financing and transportation (... automobile sales). Many also require after-sale training and maint nance (.g.. office copiers), When a tangible product is nor included in the service, we iy call i a pure service, Although there are not very many pure services, one exam- ple is co Figure 1.4 shows the range of services in a product. The range is extensive and shows the pervasiveness of service activi Pure service A service ‘that does not include a tangible product. ‘Material compitado confines académicos, se prohibe su reproduccién total oparclal sin la autorizacion de cada autor.4 CHAPTER | OPERATIONS AND PxopuctiviTY Percent of product that is a good Percent of product that isa service FIGURE 1.4 m Most Goods Contain a Service and Most Services Contain a Good Saree: For sine postion, ee Eat W, Sus, RP, Obs D. Daryl Wy cho, Mangement of Ser ee Operaions (Best: Allyn & Bacon, p. 1; and G. Lyn Shistack “Breaking Fe rn Prat Mart Ing” Jour of arbi, Ap 1987 Growth of Services Services now constitute the largest economic sector in advanced societies. For example, service-sector employment jn the United States is shown in Figure 1.5(a). Until about 1900, most Americans were employed in agriculture, Increased agricultural product allowed people to leave the farm and seek employment inthe city. Them @ © © o S88 8 8 8 Bee FIGURE 1.5 m Development of the Service Economy Suares: Apdo US. Labor Stasis Bureau: OECD: Nationa asi U.S, Commer Depart U.S Fregn Tak Highligh 195: i” Fle Homo, Robey 2,193, p63: ttn Art ofthe Unite Stes, 19S, ‘Material compliado confines académicos, se prohibe su reproduccién total o parcial sina autrizacin de cada autor.OPERATIONS IN THE SERVICE SECTOR service sectors began to grow, with services becoming the dominant employer in the early 1920s and manufacturing employm 2% in 1950. Similarly, as Figures 1LSta) and (by show, productivity increases in manufacturing have allowed more of our economic resources tw be devated 10 services. Consequently, much of the world can now ath services, entertainment, and the myriad of other 2s. Figure | tes the explosive growth of U.S. expon of services. Examples of firms and percentage of employment in the service seetor are shown, in Table 1.4, Table 1 also provides employment percentages Tor the nonservice sectons of ‘manufacturing. construction, mining. and agriculture on the bottom four lines. ‘TABLE 1.4 m Examples of Organizations in Each Sector Sector Example Percentage of All Jobs Service Sector Government US., State of Alabama, 125% ‘Cook County Eaivction New York City PS. 108, 18 ‘Notre Dame University Food, Lodging MeDonal's, Luihy’s Cafeteria, 18 “Motel 6 Hilton Hotels Enterisiament Wal Disney, Paramount W Pictures “Trade (real. Walgreen's, WalMan. 20x wholesale) Nordstrom's Uiitiies, Pacitie Gas & Elect, mM ‘Transportation ‘American Aiines, Santa Fe RAR, Roadway Express Finanee. Insurance, Citicorp. American Express, 65 Real Estate Prudential, Aetna, Trammell Cow Legal Hunton & Wiliams, local Iw 10. offices Medical Mayo Cli 85 Social Servicesand __San Diego Zoo, Smithsonian 24 Other ‘Museum Repaieand 30 ‘Maintenance ‘Xerox maintenance, Piiney-Bowes Business Services ‘Selling and Snelling, Waste 1 Management, Ine. Manufacturing Sector General Electric, Ford, US. 164 ‘Steel, intel Consteuetion Sector Bechtel, MeDermott 6 Mining Sector Homestke Mining os Agricul King Raneh 27 Source: Statistical Abstract of the United States, 1996, Table 641. Service sector That ‘segment of the economy that includes trade, financial, education, legal, medical, and other professional occupations. ‘Material compilado confines académicos, se prohibe su reproduccién total o parcial sina autrizaoton de cada autor.16 Cuarter 1 Productivity The ratio of ‘outputs (goods and services divided by one ‘or more inputs (such as labor, capital, or management) Operations AND Propucrivity Service Pay ‘Although there is a common perception that service industries are low-paying. in fact, many service jobs pay very well. Operations managers in the maintenance facility of an airline are very well paid, as are the operations managers who supervise computer ser- vies to the financial community. About 42% of all service workers receive wages above the national average. However, the service-secior average is driven down because 14 of the Commerce Department categories of the 33 scrvice industries do indeed pay below the alleprivate indusiry average. Of these. retail trade, which pays only 614% of the na- tional private industry average i large. But even considering the rcail sector, the average wage ofall service workers is about 96% of the average of all private industries" THE PRODUCTIVITY CHALLENGE ‘The creation of goods and service requires changing resources into goods and servi ‘The more efficiently we make this change the more productive we are. Product the ratio of outputs (goods and services) divided by the inputs (resources, such as labor and capital) (see Figure 1.6). The operations manager's job is to enhance (improve) this fatio of outputs to inputs. Improving productivity means improving eflciency + ‘This improvement can be achieved in two ways: a reduction in inputs while output remains constant, oF an increase in output while inputs remain constant. Both represent an improvement in preuctivity. In an economic sense, inputs are land, labor. capital. and ‘management, which are combined into a production system. Management creates this production system, which provides the conversion of inputs to outputs. Outputs are goods and services, including such diverse items as guns, butter, education, improved judicial inputs Process ‘ouputs RE] ‘The economic system =| Goods and transforms Inputs ‘sowees ‘outputs at about an annual 1% Increase ‘produetviy per year. ‘The product increase is tho result of a mix of capital (ot 16), lbor (of 19) ‘and manager (of 1%)- Feedback op FIGURE 1.6 m The Economic System Transforms Inputs to Outputs An effective feedback loop evaluates process performance against a plan. In this case, it also evaluates ‘customer satisfaction and sends signals 1o those controling the inputs and process. » sr Stein snd Muay Fass, The New Mutated Guile the American Exo (Wasingoa, D.C: The AE Press. 1988) p30, + egceney teas ding te jo well—wit a nin of rewurces an wane, Noe the diction ecen bing eficint, which impli dcing the jo wel and effective. which means ding He ih thing. Aj wt dca by applying he 10 dscisons of operations mansgsmen—elps us be fen: developing and ‘sng the comect setegy elp us be eet. ‘Material compiiado confines académicos, se prohibe su reproduccién total o parcial sina autrizaciin de cada autor.‘Tae Propuctivity CHALLENGE 7 WHAT HAPPENS WHEN PRODUCTIVITY IMPROVES? onto Spnpmon'” modeasn oven ‘When productivity improved (a) at Whirlpoo!’s Benton afm) go25[PEREM] conor MOm Harbor, Michigan, plant cost went down (b) and wages 2H pn, ry increased {c). Productivity improvements allowed in- creased retums to both labor and capital and provided 1) sean} seunno a dividend inthe form of lower prices to consumers. Source: Whidpool Corp: American Productivity and Quality 1s tu sn) Center, a ported in The Wall Steet Joural, May 4, 1992, pp. AI~Ad. Reprinted by permission of The Wall Street Jour. 2 inal, © 1992 Dow Jones & Company, Inc. All Rights Reserved. 10% ue Tone et igen se oe “9 180 10 systems, and ski resorts, Production is the total goos’s and services produced, High pro- duction may imply only that more people are working and that employment levels are bigh low unemployment, but it does not imply high praducrvi: Measurement of productivity is an excellent way 10 evaluate a country’s ability to provide an improving standant of living for its people. Only tlirougl increases in prod: tivity can the standard of living inpraxe. Moreover, only through increases in product ity can labor, capital, and mangement receive additional payments. If retums to labor. capital. or management are inereased whihovt increased productivity. prices rie. On the ther hand, downward pressure is placed on prices when productivity increases, because ‘more is being produced with the same resources. ‘The benelits of increased preductvity are illustrated in the OM in Action box, “What Happens When Productivity Improves?” For almost 100 years. the United States was able 10 increase productivity at an aver- age rate of 2.5% per year. Such growth doubled! our wealth every 30 years. Since th 1970s, however. the United States has been unable to sustain that level of produ crease, und productivity has averaged less than 1,0% per year.° From an economic-growih, Perspective, this is disastrous and explains much of the national concern with “stagnation of wages” and two-ineome families. However. thee are bright spots in the U.S. prod tivity picture. The manufacturing sector, although a decreasing portion of the U.S. ccon- ‘omy. has recently had productivity increases execeding 3% per year. For example, the nid-1990s marked the retum of the U.S. steelmaking industry after it was given up for dead a decade ago. With costs down and quality up, US. steel plants are now exporting 10 Europe and Japan, In this text, we examine how to improve productivity through the operations func= tion, Productivity isu signilicant issue for onr society and one that the operations manager is uniquely qualiied to address. Productivity Measurement “The meanuenei of prodtvity can be quite iret. Such she eve whe protiviyy canbe measied a abr-hours pr ton ofa specific ype of see o asthe energy neces sary 10 generate a kilowatt of electricity. An example of this ean be summarized in the Following equation: * Bureau of Labor Saisie U.S Deparment of Lab, 1997 The yal and ine peo assumed remain constant ‘Material compllado confines académicos, se prohibe su reproduccién total o parcial sina autorizacin de cada autor18 Carrer | Operations ann Propuctivity Units produced aa Productivity = Ue pres For example, if units produced = 1000 and labor hours used is 250. thet Units produced _ 1000 Productivity = pope Pees, = ee = 4 units per labor-hour Tie sips otic Gy — nae Bape Santas oeaneas Be ieee aaaney meaeieene Broductinty ndcates Se, whch mca all ap (enor mre eny, cal, Maer aia a a chs kane arid fata alee: Malls realty We Single-factor services produced Fated by combining the input units, as shown belo (outputs) : eS Produetiviy = Tahar = Material + Energy + Capial FMinceiancous (1-2) Multifactor productivity Indicates neo of" To a inthe campoain of muifatr productivity. he ivi inputs the den ‘many or all resources nator) ean he expressed in dollars and summed as shown in Example 2. (inputs) to the goods and aa is services produced ieee BB cv caurse 2 Collins Title Company hus a staff of 4 each working & hours per day (fr a payroll cost of ‘S640/day) and overhead expenses of $400 per day. Collins processes und closes on Bites ech day. The company recently purchased a computerized itle-search system that will allow the processing of 14 tiles per day. Although the staff their work hours. and pay willbe the same the overhead expenses are now $800 per dy. Rites per day Labor productivity with the old system: $e Pe 25 titles pe lhor-hour {4 ties per day Labor productivity with he new system: Sy PETRY w 4375 es per labor hour attr pny wih oye SLE 007 ies per ar ties per day 0+ FOO Labor productivity hus increased from 25 10 4375. The change is 4375/25 = 1.75, ora S% increase in labor productivity. Mulifactor productivity has increased from 0077 0097. This change i.0097/.0077 = 1.259, or 25.956 increase in multifactor productivity. “Mubifactor productivity with the new system: 0097 tes per dollar Use of productivity measures as managers in determining how well they are doing. The :mullifactor-productivity measures provide better information ahout the trade-offs among Factors, but substantial measurement problems remain, Some of these measurement prob- lems ate: 1, Quality may change white the 4 puts and outputs remains constant Compare a radio of th with one of the 1940s. Both are radios, but few people would deny thatthe quality has improved. The unit of measure—a radio— is the same, but the quality has changed, ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autrizaton de cada autor.‘Tue PropuctiviTY CHALLENGE 2, Emternal elements? may cause an inerease oF decrease in productivity for which the system under study may not be directly responsible. A more reliable electric power service may greatly improve production, thereby improving the firm's pro- ductivity because of this support system rather than beeause of managerial deci sions made within the firm, 3. Precise units of measures may be lacking. Not all automobiles require the inpuus: Some cats are subcompatets, others 911 Turbo Porsches. Productivity measure is particularly diffiult in the service sector, where the end product ean be hard to define, For example, the quality of your haircut, the outcome of a ‘court ease, or service at a etal store are all ignored in the economic data. In some cases, adjustments are made (or the quality of the product sold, but the quality of the sales performance or a broader product selection, each of which allows for a more intelligent purchase by the consumer, Note the quality-measurement problems in a law office, where ceach case is different, altering the accuracy of the measure “cases per lubor-hour” or “eases per employee. Productivity Variables e dependent upon three product 1. Labor, which contri ‘These three factors are crtigal 0 improved productivity. They represent the broad areas in which managers ean take action ta improve productivity. Labor in the contribution of labor to productivity is the result of ier, better-eueated, and better-nourished labor force, Some inerease may also be tuted to a shorter workweek, Historically. about 17% of the annual improvement in pro- ductivity is auributed to improvement in the quality of labor. Three key variables for improved labor productivity are 1. Basie education appropriate for an effective labor force. 2. Diet of the labor fore. 3. Social overhead that makes labor available, such as transportation and sanitation. In developed «Fount el ‘gos that the average Ameri erage Japanese al the sme aye, and about half cannot answer the questions in Figure 1.7. ‘Overcoming shortcomings in the quality of labor while other countries have a better labor force is # major challenge. (See the OM in Action box. “Getting a Job at Carver Is Like Applying (or College.”) Perhaps improvements ean be found not only through inereas- ing competence of tabor hut th item, Herter utilized labor with a stronger com ‘mitment. Teaining, motivation, lextime, team building, and the human resource strategies discussed in Chapter 10, 3s well as improved education, may be among the many techniques that will contribute o increased! labor productivity. (mprovements in labor productivity are possible: however. they can be expected to be increasingly difficult and expensive. can 17-year-old knows signi > These ae exogenous variables | vile tse of the stom under tay ha intact Productivity variables The three factors critical to productivity improvement—tabor, capital, and the arts and science of management. ‘Many American high schools have nearly @ 50% dropout rate spite of offering a wide varity of programs. ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autrizaton de cada autor.20 Chapter 1 OM GETTING A JOB AT CARRIER IS LIKE APPLYING FOR COLLEGE ‘On @ pothole-filed road across from a chicken proces- sor inthe remote town of Arkadelphia, Arkanses, sits Carrier Corp. plant that could be a blueprint forthe fu- ture of US. manufacturing The sleck, spotless plant looks more lke an insur- ance office than a factory. Full of automation, with @ lean worklorce of only 150, quiet enough to hear @ whisper, itis "probably cleaner than most of our houses," says Fred Cobb, a Carier worker. This plent, however, is distinguished by its workers, who ore 2 breed apart from most factory workers. Instead of kruckling under to foreign competition, Cater, a world-class supplier of air conditioners, is opening smell plants that require small, educsted workforces. Job applicants at Cartier must complete @ ‘grueling course. The selection process, which results in a job for only 1 of every 16 applicants yields a top- quality workforce. Orekations AnD Propuctivity ACTION “The application process starts with a standard state test for applicants who already hold high schoo! diplo- ‘mas. Only those scoring in the top third advance to having their references checked. Then applicants are interviewed by managers and assembly-ine workers to ‘see how well they would fit in. Those who survive these interviews enter 3 six-week course, For five nights 2 ‘week plus Saturdays, applicants leam blueprint resd- ing, math, computer skills, and quality control. They still receive no assurance of a job at Carrier—and they do not get paid! But if hired, they have a say in how the plant is run and have unusual authority. They can shut down pro- duction if they spot a problem and can order their ‘own supplies. Carrier and the workers at this plant ‘have found that selective recruiting and aggressive taining yield an effective workforce, improving pro- ductivity Sources: Memphis Business Joural (December 16, 196% 32; ‘The Wal Sveet Joumal, March 13, 1993, p, Ali 20d Quality Digest, May 1994, p 40, oie Toys d= y+ 15 hen y= 1 4 4 y05. _——: 6 ‘Whats the area of tis rectangle? 4 square yes. ‘Which ofthe folowing is ve about ‘6 square yes. eisetiony {10-square yds tls greator tan 100 20 square es. tis ess than 100 24 square yes. nis equeto 100 FIGURE 1.7 m About Half of the 17-Year-Olds in the United States Cannot Correctly Answer Questions of This Type Capital Human beings are 1ool-using animals. Capital investment provides thove tools Capital investment has increased in the U.S. every year except during a few very severe recession periods. Annual capital investment in the United States has inereased until e- ‘cont years a the rate of 1.5% of the base investment. This means tha the amount of capi- lal invested after allowances for depreciation has grown by 1.5% per year. Inflation and taxes increase the cost of capital, making capital investment increas- ingly expensive. When the capital invested per employee drops, as it has in recent years, We can expect a drop in productivity. Using labor rather than capital may reduce anem= ployment in the short run, but it also makes economies less productive an ‘ers wages in the long run. The trade-off between capital and labor is eon Additionally, te higher the interest rate, the more projects requi Between 20% and 30% Of U.S. workers lack the beasic skills they need for their curcent jobs. (Seurce: Nan Stone, Harvard Business Review) ‘Material compitado confines académicos, se prohibe su reproduccién total oparclal sin la autorizacton de cada autor.‘Tue Propucrivity CHALLENGE au ou: The ave not pursued hecause the potential return on investment Fr a given risk has A,panel of academics tren reduced. Managers adjust their investment plans to changes in capital eos. and business executives Called fr lightening the Management Management is a factor of production and an economic resource. Man- _ t2xtion of corporsie agement is responsible for ensuring that labor and capital are effectively used to increase Profits and broadening productivity. Management accounts for about two this of the annual one-percentin- 2x breaks for capitl Cres in produit, icles improvements mide through he application of cna. $s der raduce 6 cost of capital, spur ‘gy and the utilization of knowledge. corporate investment, This application of technology and uslizaion of new Knowledge requites training. Shed improve US. hang and education. Education will remain an important high-cost item in postindusrial socl- Standards. ties, Postndusral societies are technological socictes requiring training. education, and nowledge. Consequently they are also known as knowledge societies, Knowledge suc» Knowledge society ties are those in which much ofthe labor free has migrate! fom manual work to tech- A ocietyin which much nical and information-processng tasks requiring education and knowledge. fective op- of he laboc force has erations managers build workforce and organizations that recognize the continuing need ™igreted from manusl for education and knowlege. They ensure that technology. edvcation. and knowledge are Yr 10 werk based on used effectively narod More effective uilzaion of capital, as opposed 1 he investment of additional eapi- tal, is also important. The manager a a productivity catalyst. ix charged with the wsk of making improvements in capital productivity within existing constraints, Productivity sin in knowlege socctesrequte managers who are comfortable with technology ad management scence. “The productivity challonge is dicult. A country cannot be a workd-class competitor, with second-class inputs. Poorly educted labor. inadequate capital and dated technology axe second-class inputs, High produetvi input, ‘Although curent U.S productivity grovah is tower than those of mat other indusile ized countries, the United Stats stl eas in gros domestic product (GDP) per capita. The ‘American worker remains the most productive inthe world, producing on average 49.400 ‘in goods and serviees—$5,000 10 $10.000 more per worker than their Japanese and German counterpants. However as Figure 18 (b) shows, the U.S. lead in prodvetvity i narrowing. ci Cee ee 100 a C “ 2 ay Wm 1960-1973 Germanyt 1973-1995 “1973-1904 (cima 1973-1985 us. o lo ° 2 4 6 8 1960 '65 70 °75 "80 ‘85 "90 "95 2000 Labor productivity growth (percent) Labor productity FIGURE 1.8 m A Comparison of Productivity in the United States, Japan, and Germany Sarcer: Apts trom The Econ, Never 23, 196 p. BSS U.S, Labor Depart stistics:Curopcan Commission and ‘Sclentie American, uly 1987. ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autrizacin de cada autor.2 Charter | Playing a Mozart sting quartet stl takes four ‘musicians the same length of time. OPERATIONS AND PRopUCTIVITY Siemens, the mut-billion-dollar German conglomerate has foug ‘een known fr its appremtice rogram in its home counts. Because education is often the key 1 effciem operations int technological society. Slemens has prea ts apprentice-ruining programs tits US. plants, These programs are laying the {foundation for te highly skilled rorforce tht is essential for global conperitiveness Productivity and the Service Sector “Te service ec. provides a special chatlenge to the aecurate measurement of prductiv- ity and productivity improvement. The traditional analytics framework of economic the- ‘ory is based primarily on goods-procing activities. Consequently, most published eco- nomic data relate to goods production. Bt the data do indicate that in recent years 8 oO ‘contemporary service economy hs increased in size, we have ha slower growth in poe ductivity. As Figure 1 Sta) shows. the recent overall US productivity growth rates well below the historical 2.5% and below current productivity increases i Japan, Germany and othcr weser countces, When USS. manofacturing prodctvity i computed sep rately productivity growth is over 3%, but with services inclid, total productivity drops to less than 1%." Productivity ofthe service sector has preven dificult improve hecauseservicesee- (or work is 1. Typically lor intensive For example, coun 2. Frequently inl Often an inllectua tsk perfned by persion (or example, medical diagnosis). productivity. Low-productivity improvement in the service sector is also attributable 10 the growth of low-productivity activites in the service sector. These include activities not previously a part of the measured economy. such as child care, food preparation, house cleaning, and laundry service. These activities have moved out of the honve and into the ‘measured economy as more and more women have joined the workforce. Inclusion of these activities hax probably resulted in lower productivity for the service sector, al- though, in faet, actual productivity has probably inc now more efficiently produced than previously.” * Acconting ote US. Lab Depart U.S rotviy for 1S wa 0.04 a 196 0.75, * Allen Sinai sad Zahir Solanou, “The Service Ezonony-traasvity Growth suns” 1CS1 Washington DC) The Serie Exons Janay 182. 11-16, ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autrizacin de cada autor.THE CUALLENGE OF SoctaL REsroNsiMILITY oM 1 TACO BELL USES PRODUCTIVITY TO LOWER COSTS Founded in 1942 by Glenn Bell, Taco Bell became 2 part of PepsiCo in 1978. Since then, PepsiCo has been ‘working to Improve Taco Bell’ productivity. Like many services, Taco Bell increasingly relies on its operations, function to improve productivity and reduce cost. First, it revised the menu and designed meals that ‘were easy to prepare. Taco Bell then shifted a substan- tial portion of food preparation to suppliers who could perform food processing more efficiently than a stand- alone restaurant, Ground beef was precocked prior 10, rival and then reheated, as were many dishes that ar- tived in plastic boil bags for easy sanitary reheating, Similarly, tortillas arrived already ‘ried and onions However, in s A ON prediced. Efficient layout and automation cut to 8 sec- fonds the time needed to prepare tacos and burritos. These advances have been combined with training and empowerment to increase the span of management from one supervisor for 5 restaurants to one supervisor for 30 ot more. Operations managers at Taco Bell beliove they have ‘cut instore labor by 15 hours per day and reduced floor space by more than 50%. The result isa store that ‘can handle twice the volume with half the labor. Effec- tive operations management has resulted in productiv- ity increases that support Taco Bell's low-cost strategy. ‘Taco Bellis now the fast-food low-cost leader. Sources: Fortune, August 4, 1997, p. 27.; ORIMS Today, Oc- ‘ober 1997, pp. 20-21; and Leonard L. Berry, On Great Ser vice (New York: The Free Press, 1995) te of the foregoing discussion about the difficulty of improving pro- ductivity inthe service sector, improvements can be male, This text presents multitude of ways to do it. Indeed, recent article cconeept that managers can improve se ice proauctivi meenen 9 tohow work actually gets done. ‘Although the evid ‘and they fie! astonishing what ean be done when mans the Harvard Business Review reinforces the “The authors arg ‘mary mason why the productivity growth eate has stagnated in the service sector is ma that “the pri= nent pays attention lusrialized countries have the same prob- Jem with service productivity, the United States remains the world leader in overall pro- ductivity and service productivity. Retailing is twiee as productive in the United States a in Japan, where laws protect shopkeepers from discount chains. The U.S. telephone in= dustry is at feast Wwiee as productive ax Germany's government monopoly. The US. dunking system is oho 33% more efficient than Germany's banking oligopolies. How- ever, because proxluctivity is central to the operations manager's job and because the ser~ ‘sector is $0 large, we take special note in this text of h the service sector, (See, for instance, the OM in Action box, to Lower Cost THE CHALLENGE OF SOCIAL RESPONSIBILITY Operations managers function in a system where they are subjected to constant changes and challenges: These come from stakeholders such as customers. suppliers, owners. Tenders. and emplayees, These stakehoklers and govemment agencies require that man- agers respond in a socially responsible way in maintaining a clean environment, a safe " Micha an fc race scl "Managing Our Way eo ighorSersice-Scte Prati.” Ha ‘nd ness Review 78,4 (Jly-Augint (O97): 99. Th conclsine ent wigs. Manager drs make freee: Se or nance: Freerck abn ard Chas A. Myers Maneent ihe dsl Word ‘New Vouk: McGraw, 1989) ad Rober Hayes and Willan, Aberoaty, "Managing Out Way to eos Den Harcard Muses Review $9, 0, ly-Augun 1980 67-77 ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autrizaton de cada autor.Fy Carrer | OPERATIONS AND PronuctiVITY workplace, and ethical behavior. If operations managers keep focused on increasing pro- ductivity in an open system in which all stakeholders have a voice. thea many of these challenges are mitigated, The company will use fewer resources. the employees will he committed, and the ethical climate will be enhanced. Throughout this text, we emphasize a variety of ways in which operations managers can take cesponsible actions to address these challenges successfully. Operations, marketing, and finance/accounting are the thece functions basic to all organi zations, The operations function creates goods and services. Much of the progress of op= ‘erations management has been made in the twentieth century, hut siace the beginning of time, humankind has been attempting to improve its material well-being. Operations man- ‘agers are key players inthe battle for improved productivity. However, as societies have become increasingly affiuent, more of their resources are devoted 10 services. In the United States, three quarters of the workforce is em- ployed in the service sector. Although productivity improvements are difficult 10 achieve in the service sector. operavians management is the primary vehicle for making, that improvement. Bey 3 Production (p. 4 Operations management (OM) (p.-1) Management process (p.7) Serviees (p. £2) Pure service (p. 13) Service sector (p. 15) Productivity (p. 16) Single-Factor productivity (p. 18) Multifactor productivity (p. 18) Productivity variahles (p. /9) Knowledge society (p.2/) Key, aru fg] SOLVED PROBLEMS Solved Problem 1.1 Productivity can be measured in a variety of ways. such as by labor, capital, energy, material usage, and soon. At Modem Lumber, In.. Ant Binley, president ‘and producer of apple erates sold to growers, has been able, with his current equipment, to produce 240 erates er 100 logs. He currently purchases 100 logs per day, and each log requires 3 labor-hours to process. He be- lieves that he can hire a professional buyer who can ‘buy a better-quality log at the same cost. If this is the ‘ease. he can increase his production to 260 crates per 100 logs. His labor-hours will increase by 8 hours per cay. ‘What will be the impact on productivity (measured in crates per labor-hour) ifthe buyer is hired? Solution 240 crates (2) Current abor productivity = Typ eae Se Roa ~~ 300 crates per Iabor-hour ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autrizacin de cada autorDiscussion Questions 25 260 crates (6) Labor productivity with bayer = TEE SH SSF FRG oe = .844 crates per Iabor-hour Using current productivity (.80 from (a}) as a base, the increase will be 5.5%. (844/.8 = 1,055, ofa 5.5% increase). Solved Problem 1.2 ‘Art Binley has decided to look at his productivity from 2 multifactor (lotal factor productivity) perspective (refer to Solved Problem 1.1). To do s0, he has deter- ‘mined his labor, capital, energy, and material usage and ‘decided to use dollars as the common denominator. His {otal fabor-hours are now 300 per day and will increase Current System Labor 300 hrs @ $10 = $3,000 Material: 100 logs/day 1,000 Capital: 350 Energy: 150 Total Cost: 34500 Productivity of current system: = 240 crtes/4.500 = .0542 to 308 per day. His capital and enesgy costs will remain constant at $350 and $150 per day, respectively. Mater- costs for the 100 logs per day are $1,000 and will remain the same. Because he pays an average of $10 per hour (with fringes), Binley determines his produc- tivity increase as follows: ‘System with Professional Buyer 308 hrs. @ S10 = $3,080 1,000 350 150 34,580 Productivity of proposed system: = 260 crates/4.580 = .0567 Using current productivity (.0542) as a base, the inerease will be .047. That is, .0567/.0542 .047, oF a 4.7% increase. P)|DISCUSSION QUESTIONS 1. Define operations management in your own words. Will your definition accommodate both manufactur ing and service operations? 2. Consider the potential contribution of information sciences to OM. Why is the management of infor- ‘mation of such great importance in the management of “proxluction”? 3. Figure 1.2 outlines the operations, finanee/account- ing, and marketing functions of three organizations. Prepare a chart similar to Figure 1.2 outlining the same functions for: ange metropolitan newspaper . a local drugstore c.acollege library 4. a local service organization (such as Boy Scouts. Girl Scouts. Rotary International, Lions. Grange) a doctor's or dentist’ office fa jewelry factory 4. Do the preceding assignment for some other enter- prise of your choosing, pethaps an organization ‘where you have worked. ‘8. What is the difference between production and oper- ations? 6, Ientily three disciplines that will contribute in a ‘major way to the future development of OM, ‘Material compliado confines académicos, se prohibe su reproduccién total o parcial sina autorizacin de cada autor6 Chapter I 7. Can you itlentify the operation Funetionts) of a past ‘or current employer? Draw an organization chart For the operations funetion of that tiem. ‘8 What are the three classic Functions ofa firm 9, What departments might you tion of a home 3 transformations. ane outputs? srties. and differences. in the OPERATIONS AND PkooucTiVITY transformation process between a fastfool restau rant and a computer manufacturer? 12, Identify the transformation that takes ple in your automobile repair garage. 13. As the administrative manager in a law office, you ivity of the 15 lawyers in the oftce, What difficulties are you going tw have in do and how are you going to overcome them? CRITICAL THINKING EXERCISE, ‘As Figure 1.7 and the discussion in this chapter sug- zest the U.S. educational system is Far from the best in the world. Other nations. such as Japan and Israel. excel in academic education, and Germany is the leader in technical taining through apprenticeship pro- trams. What are the strengths and weaknesses of the U.S. educational system? What features would we ‘want to emulate from Japan, Germany. oF other na- tions? What is the role of business and the operations ‘manager when the education system Tails 10 provide ‘world-class inputs while consumers expect world-class outputs? Art and Sandy Binley m: employees invest 50 hau 8) What is their productivity? discussed reassigr b) They apple crates for resale to local growers, They and their three ng 150 crates, ‘work so the flow through the shop is smoosher. If they are correct and can do the necessary training. they think they can increase erate production to I perday. Wi ‘would be their new proxluctivity? ‘¢)._ What would be their increase in productivity? 1.2 Joanna produces Christmas tree ornaments for resale at local erat fairs and Christmas bouvaars. She is currently working a total of 1S hours per day to produce 30 omaments 8) What is Joanna's productivity bb) Joanna thinks that by redesigning the ornaments aod switching from contact cement tw a hot-glue gun she ean increase her total production to 400 omaments per day. ‘What would be her new productivity? ©) What would be the inerease in productivity? 1.3 Carl Sawyer makes billiard balls in his Dallas plant, With a recent costs have gone up and he has a newfound termining the productivity of his organization, He has di ‘current data, He would like to know if his organization is maintaining the manufacturing average of 3.05 increase in productivity. He has the following monthly da Now Production 1.000 Labor (hours) 25 Resin 45 Capital ivested ($) 10.000 11,000 Energy (BTU) 3.000 2.850 ‘Material compllado confines académicos, se prohibe su reproduccién total o parcial sina autrizacin de cada autorProntems ‘Show the productivity change for each category and then determine the annus! improve- ‘ment for Tabor-hours, the typical standard for comparison, 14 Mr. Sawyer, (Using data from Problem 1.3) determines his costs to be 3s follows: * labor $10 per hour: + resin $5 per Ib: + capital cost per month $1,000; + energy $.50 per BTU. Show the productivity change on a multifactor ba nator. 1.5 The approximate figures for serviee jobs in certain countries are shown in the following. table. Overall productivity inereases are highest in Japan, followed by Germany and then the United States. What conclusions might you draw about productivity and the percent- age of serviees in each economy? is with dollars asthe common denomi- Percentage of Jobs That Are Service Jobs United States 759% Germany a Japan 37 year’s records ean pro Lackey. the owner. does not believe things have changed much, but he did invest an adldi- tional $3,000 for mo as to the bakery's avens to make them more energy-cflicien ‘The modifications were supposed to make the ovens at least 15% more efficient, but extra Iabor-hours were required for workers to become familiar with the process changes. Lackey has asked you to elvek the energy savings of the new ovens and also to Took over cother measures of the bakery’s productivity to see if the modifications were beneficial. ‘You have the following data to work with: Last Year Now Production (dozen) 1.500 1,500 Labor thours) 350 325 Capital investment (S) 15,000 18.000, Energy (BTU) 3.000 2.750 1.7 As par of a study for the Department of Labor Statistics. you are assigned the task of evaluating the improvement in productivity of small businesses. One of the small busi- nesses you are to evaluate fs Lackey's (see Problem 1.6). Determine the multifactor pro- ductivity using the following costs: + Tabor $10 per ho + capital 1% per month of investment: + energy 8.50 per BTU. You are to provide your boss with a mul deereaxe between lst year and this year 18 Asaibrary or Internet assignment, find the US. produetvity rate forthe (a) latest quarter and (b) latest year. 1.9 Asa library of Intemct assignment. find the U.S. productivity rate (increase) last year for the (a) national economy. (b) manufacturing sector. and (c) service sector. factor indication of the productivity increase oF ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sin a autorizaion de cada autor. 728 Charter | Case Study National Air Express [National Air is a competitive ar-express firm with of- fices around the country. Frank Smith, the Chat- tanooga, Tennessee, station manager, is preparing his quarterly budget report, which will be presented at the Southeast regional meeting next week. He is very con- cerned about adding capital expense to the operation ‘when business has not increased appreciably. This has been the worst first quarter he can remember: snow= storms. earthquakes. and bitter cold. He has asked ‘Martha Lewis, field services supervisor, o help him re- view the available data and offer possible solutions. Service Methods ‘National Air offers door-to-door ovemight air-express delivery within the United States. Smith and Lewis manage a fleet of 24 trucks to handle freight in the Chattanooga area. Routes are assigned by area, usually delineated by zip code boundaries, major sieets, or key geographical features, such as the Tennessee River. Pickups are generally handled between 3:00 Pat. and 6:00 P.v.. Monday through Friday. Driver routes are a combination of regularly scheduled daily stops and pickups that the customer calls in as needed. These call-in pickups are dispatched by radio (o the driver. Commitments are made in advance, with regular pickup stops concerning the time the package will be ready. However, most call-in customers want as late a pickup as possible, just before closing (usually at 5:00 Pa). ‘When the driver arrives at each pickup location, he or she provides supplies as necessary (an envelope or box if requested) and must receive a completed air ‘waypill for each package. Because the industry is €x- tremely competitive, a professional, courteous driver is OPERATIONS AND PRopuctiviTy essential to retaining customers. Therefore, Smith has always been concerned about drivers not rushing a cus- {omer to complete his or her package and paperwork. Budget Considerations ‘Smith and Lewis have found that they have been un- able to meet their customers’ requests for a scheduled. pickup on many occasions in the past quarter. While on. average, drivers are not handling any more business, they are unable on some days to arrive at each location fn time. Smith does not think he can justify increasing, costs by $1,200 per week for additional trucks and dri- vers while productivity (measured in shipments per truck/day) has remained flat. The company has estab- lished itself asthe low-cost operator in the industry but. hhas at the same time committed itself t0 offering qual- ity service and value for its customers. Discussion Questions 1. Is the productivity measure of shipments per day per tuck sil useful? Are there allemasives that might be effective? 2, What, if anything, can be done to reduce the daily -variabilty in pickup call-ins? Can the driver be ex- Pected (0 be at several locations at once at 5:00 Pat? 3. How should we measure package pickup perfor mance? Are standards useful in an environment that i affected by the weather, taffic, and other random variables? Are other companies. having similar problems? Sowree: Adapted trom a ease by Phil Puplese unde ihe supervision ‘of Profesor Marly M. Helms, Univeniy of Teese at Chl- tamoogs Reeinted by pension, ‘Material compliado confines académicos, se prohibe su reproduccién total o parcial sina autrizacin de cada autor.InteRNer Resources 29 BIBLIOGRAPHY. Bubhage, C, On she Keonamy of Machinery and Manyfuctr- ers thd, Lamon: Charles Knight, 1435, Daucker. P. E. The Concept of the Corporation, New York ‘Mentor, 1946 “The New Productivity Challenge.” Harvard Busi- ness Review 69, 1. 6 (November-Decemiber 1991} 69. Fabricant, 8. A. Primer on Productivity. New York: Rendon House, 1969. Gale, B.T, "Can More Capital Buy Higher Produtvity?.” Har ‘urd Business Review $8, no. 4 (July-August 980): 78-86. rbigon. F. and C. A. Myers. Management in the udasvial World New York: MeCraw-Hill 1959, Hounshell, D. A, From the American System to Mase Pra ‘duction 1800-1982: The Development of Manufac- turing, Baltimore: Johns Hopkins University. Press, 1985, th, A. An Inge ito the Nature and Canses ofthe Wea ‘uf Nations, London: Strahan and Cadell. 1776, ‘Taylor, P. W. The Principles of Sciewific Management. New York: Harper & Brothers, 1911. van Biema, Michael, and Bruce Greenwald “Managing Our Way to Higher Servige-Seetor Produ Harvard Business Review 75.0. 4 (July-August 1997): 87-95, Wrege, C. D. Frederick W. Taslur, the Father of Sciewife ‘Management: Myr and Reality. Homewood. IL: Business One Irvin, 1991 Ween, D. A. The Evolution of Management Thouglt. New ‘York: Ronald Pros, 1994 and INTERNET RESOURCES Comer: ‘Center for Productivity Enhancement Massachusetts: up Adragen.epe- umbels htt U.S. Goverment Bureau of Labor Statisten: ups fatsblsgov! be Univers ‘Material compllado confines académicos, se prohibe su reproduccién total o parcial sina autrizacin de cada autor.CHAPTER OUTLINE GLOBAL COMPANY PROFILE: STRATEGY DEVELOPMENT AND Komarsu IMPLEMENTATION IDENTIFYING MISSIONS AND dont Critica Sucoss Factors ‘STRATEGIES Build and Staff the Organization Mision eaaAA Strategy KEY TERMS ACHIEVING COMPEMTIVE atten monet ADVANTAGE THROUGH OPERATIONS Se yesn QUESTIONS [Competing on Diisremtiaticn] CRITICAL THINKING EXERCISE Cempating on Cost en Competing on Response, ‘CASE STUDIES: MINIT-LUBE, INC.; TEN DECISIONS OF OM GLOBAL STRATEGY AT MOTOROLA ISSUES IN OPERATIONS STRATEGY VIDEO CASE 1; STRATEGY AT REGAL Research MARINE Preconditions INTERNET CASE STUDY Dynan BIBLIOGRAPHY INTERNET RESOURCES LEARNING. OBJECTIVES When you complete this chapter you should be able to: Identity or Define: Mission Strategy ‘Ten decisions of OM Describe or Explain: ‘Specific approaches used by OMto achieve strategic concepts Differentiation Low Cost Response 31 ‘Material compitado confines académicos, se prohibe su reproduccion total o parcial sin a autrizaciin de cada autorSs an ‘acl Sar {In direct competition with Caterpillar, Komatsu Dresser sets prxiets (crawler tractors loaders, hydraulic excavators. and whee! loaders) to construction and mining markets in North Amerie. Komatsu, long-time Japanese such as Cummins Engine and Inter- through joint ventures with Dresser manufecturerof construction and national Harvester. Ths period also Industries (to form the Komatsu mining equipment, competes world- saws strategic move toward im- Dresser Company) and manufectur- wide in some very competitive mar- proved quality. ing outside of Japan. As of tho kets, Like other organizations, Ko- Inthe 1970s, Kometsu's strategy 1990s, the strtegy includes the lat- rmatsu must constantly review how to was 0 become a global enterprise est in manufacturing technology to organize its resources for maximum and build export markets, while re- improve quality and drive down benefit. This review of resource al- ducing costs because ofthe increas- costs, as well ss added focus on cation often means modifications ining value ofthe yen. It expanded tronic engine contios for ervie Komatsu’s strategy. Over the years, into Eastern bloc countries and es- ronmental friendly engines. these modifications have taken many tablished subsidiaries in Europe and The global battle for construction forms. America, as wellas service depart- equipments fierce. World-class, Inthe 1960s, Komatsu aug ‘ments in newly industaizing coun- competitors such as Caterpilar John mented Its productline and reduced tries. Deere, Champion, and Ingersol- development costs by licensing de-__In the 1980s, Komatsu re Rand fight Komatsu for these. signs end technology from others, sponded to an even stronger yen kets, 32 ‘Material compliado confines académicos, se prohibe su eproduccién total o parcial sina autrizacin de cada autorNS a m : KOMATSU Sivategicehunges at Komarsu mewn ove emphasis on environmental issues, Here research ix being conducted on diesel engine estunst-gas emission conirol to mae Konus equipment more euvironmentaly JSriendly. ‘mn its continuing fierce worldwide ‘butte wit Caterpillar forthe obeal heavy equipment customer. Komatsu is Duilding equipmensthroughou the worl us cost ana loistes dictate. This worldwide sraregy allows Konaste10 move production as markets and exchange rates change ‘Material compliado confines académicos, se prohibe su reproduccién total o parcial sina autorizacin de cada autor4 Carrer 2 Mission The purpose ‘or rationale for an ‘organization's existence. Openations StRATEGY FoR COMPETITIVE ADVANTAGE In its continuing worldwide batle for the global heavy equipment eustomer, Komatsu is now able to build equipment throughout the workd and move production as mar- kets, cost, polities. and exchange rates dictate. The firm's constant strategic adjust- ments to its environment have allowed it to be number one or (wo in a variety of world markets, Each of Komatsu's strategies was established in light of (1) the threats and opportuni ties in the environment and (2) the strengths and weaknesses of the organization. Uhti- mately. every strategy is an attempt to answer the question," tomer?” within these vonstraints IDENTIFYING MISSIONS AND STRATEGIES ‘An elfeetive operations management effort must have a anission so it Knows where itis going and a strategy so it knows how to get ther. Mission Economie success, indeed survival, isthe result of identifying missions to satisly a eus- tomer’s needs and wants. We define the organization's mission as its purpose—what it ite {0 society. Mission statements provide boundaries and focus for organiza concept around which the firm can rally, The mission states the rationale for tion's existence. Developing a good strategy is difficult, but itis much easier if the mission has been well defined. The mission can also be thought of as the intent of the strategy—what the strategy is designed to achieve. Figure 2.1 provides two examples of mission statements. nce an orgunization’s mission has been decided. cach functional area within the firm determines its supporting mission. By “lunctional area” we mean the major disci- pines required by the firm, such as marketing financefaccounting, and production/opera ‘We bolieve our primary business isnot so much retail as itis service vinta. Contain, our customers buy merchandse In our stores. Bu hey can buy imi tes ‘lsewhee, and pahaps pay lower prices. But thoy'awiting to buy from Circle K because wa ge them added value fr thelr money. ‘That added values service and convenience. 'A83 service company, our mission i to: ‘Satiaty our customers Immediate ieeds and wants by proving them wih a wide variety (of goods and senvices at mute locallons “The misson of Merckis to provide society with superior products and servces-innavations and solstons at ino fe uty oe and Sly customer need prove “employooe wn nearing work an abvancomen! opportuniesardnwesrs wih ‘superior rata of rtur. FIGURE 2.1 @ Mission Statements for Two Organi epi wth prison from Tosco Marketing Company os. Sure: Anal spon ‘Material compllado confines académicos, se prohibe su reproduccién total o parcial sina autrizacion de cada autor.IDENTIFYING MISSIONS AND STRATEGIES tions. Missions for each Function are develope’ ‘Then within that function lower-level supporting mis Tonctions. Figure 2. provides such a hierarchy of samp {0 support the lirm’s overall mission ns are established for the OM. Sample Company Mission ee “To produce products consstont wth the company's missin asthe worldwide low-cost manutacturer. Se cS ay ‘Quetty menagement ‘Toattan he excoptional value that is consistont with our | ‘company mission and marketing objectives by close ‘ttonion o design, procurement, production, and fold service opportunites, Preduet design ‘To|oadin research and engineering competencies in all areas of cur primary business, designing and producing products and services wih outstanding ually 2nd inherent customer veh. Proves doin Te dterine and design or rouce the producton process | {nd eupmen a ibe compatise wi rest Prod. high qb ards goes quay o work a economia cot | Location setocton ‘olecate, design, and build efciont and economical facities that wil yield high value othe company, ts employees, and the community. | Layout design ‘To achive, through sill, maginaton, and resourcetuiness in layout and work methods, production efleciwveness and afllency while supporting a high quay of work i, Human resources To provide a good quatity-F-work il, wih well-designed, sate, rewarding job, stabs employmont, and equlabe pa, in ‘exchange for outstanding indvidual contbulion from fomployees a al levels ‘Suppiy-chain management To cooperate with suppliers and subcontractors to develop Innovative products and stable, effective, ad ecient sources of supply. Ieventory ‘To achive low invostment in inventory consistent with high customer sere lovale and high faci wilzalion. Scheduling ‘To achieve high levels of throughput and timely customer dolvery Cough elective scheduling. Maintonence ‘To achive high uiizton of facies and equipment by lecve preventive maintenance and prompt repair of facies and equipment. FIGURE 2.2 @ Sample Missions for a Company, the Operations Function, and ‘Major Departments in an Operations Function ‘Material compllado confines académicos, se prohibe su reproduccién total o parcial sina autrizacin de cada autor 3536 Cuapter 2 Strategy How an organization expects to achieve its missions and goals. Competitive advantage The creation of a unique advantage over competitors Differentiation To Alvin Tor quoted ransutonl Management (Gmc, He: Rica Brin, Recipe or ligne.” Iefrmatio Tas Marc 194, pp. 61-83 ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autrizacion de cada autor.Why GLOBAL OPERATIONS ARE IMPORTANT Globalization of Production ‘More and more firms are clearly dispersing parts of their produ tions around the world to take advantage of national differences inthe cost and quality of Tabor, talent, energy. facilities. and capital. Thus. i is not always meaningful to talk sibout “Japanese products.” "Betish products.” or “American products.” Consider General Motor's Pontiac Le Mans. which fs perceived to be “made in the USA.” With the globel- ination of production. GM has spread many of its Le Mans production activities abroad? ‘Asa resul, of the $20,000 pad by each buyer to GM forthe purchase of a Le Mans, + About $6,000 heauls to South Korea for the auto's assembly. + 93.500 goes to Japan for engines, axles, and electronics + 31.500 goes 10 Germany for design. + $800 goes to Taiwan, Singapore, and Japaan for smaller parts. + $504 heads o England for marketing. +3100 goes to Iretand for information technology. «The rest, $7,600, goes to GM and its U.S. bankers, insurance agents, and atlomeys: jon processes 10 lori “The Le Mans isnot alone. Ford's Mercury Capris designed in Haly; its engine and drive- train are made in Japan: and the ear itselt is assembled in Australi. Because the Cap only US. par may be its Ford nameplate. it has become, in fact, a global produet® ‘We have mentioned several reasons why vompanies global now eonsider this issue in further detail WHY GLOBAL OPERATIONS ARE IMPORTANT ‘There are many reasons why a domestic business oper form of international operation, These. ble reasons to intangible seven reasons listed in Fi will decide to change to some an be viewed as a continuum ranging from wsons (soe Figure 3.2), Let us examine. in tum, each of the FIGURE 3.2 m Reasons to Tangible Reason or Objectives Globatize Operations '» duce costs (aborts, tails, ) |] Somreea: Adapted fo M3 Feeduce risks (loreign exchange, ete) | Schniclerjans, Operations prove suphy chain Mangement Gol Contest Prove beter 9 services (New Yorks Quon Books 19N, ‘Alact new marks fa K, Fendnes“Making the Most {eam oimorove operations ‘of Focign Potro” larva parect ent estan ibe ie Business Ree (Mate Ape ‘tangle WoT TR Reduce Costs Virtually all itemational operations seck to take avamage of the tang ble opportunities in reducing their costs. Lower wage tolower dircet and indirect lnbor costs (See the OM in Action box. “U.S. Cartoon Produe= tion at Home in Manita.") Less stringent government regulations on a wide variety of op= eration practices (i, environmental contro. health and safety. ete.) can directly reduce foreign counties can help “RB. Reich, The Wark of Raton Neve York: Alle A. Kop, 1, * Chale W. LH ermal ines (Homewond IL: Richa B. lin. 198). pp. 6-7. 39. Ford treats western Europe as a single market, with parts and final auto assembly at 12 plants in 6 countries: Ireland, Britain Franco, Germany, Spain, and Holland, German apparel maker Hugo Boss AG is being forced by German labor costs to shift over haf ts ‘production to central Europe and North America, ‘Material compitado confines académicos, se prohibe su reproduccién total o parcial sina autorizaion de cada autor.co Cuapter 3 OpeRATIONS IN A GLOBAL ENVIRONMENT U.S. CARTOON PRODUCTION Mejor studios tke Dis- AT HOME IN MANILA rey, Marvel, Wamer Broth: Fred Flinstone nat fom Beock He i tual fom Manila, copital of the former American colony of the Sra na Philippines. So are Tom and Jey, Aladdin, and Donald Wack® t0 the Phiippines, Duck. About 90% of American television cartoons are eed Howetacers a) ‘send storyboards—eartoon u eton cutee and voice Anists there draw, paint, and film sbout 20,000 [produced in Asia, with the Philippines leading the wey. Satur for s dO.minute ‘With their netural adventage of English 2s en oficial lan- episode. The cost of ‘guage and a strong familarty with US. culture, anima §P50'509 eg at tion companies in Manila now employ more than 1,700 ‘episode in the Philippines compares to $160,000 in peopl. Filipinos think Wester, and "youneedtohavea — pDamr a ri group of artists that can understand the humor that goes Ke eee ca neu: ‘with "555 Bil Dennis, 3 Hanne-Barbere executive. Source: rend Sentinel, September 5, 1995p 8 Maquiladores Mexican factories located along the U.S-Mexica border that receive preferential tari eatment. GATT An international twoaty that helps promote world trade by lowering barriers to the free flow of goods across borders NAFTA 3 free trade agreement betwer Canada, Mexico, and the United States. the cost of operations in a foreign country. Opportunities 1 cut the cost of taxes and tar- iffs are also a reason to establish operations in foreign countries. In Mexico, the creation of maquiladoras (free rade zones) allows manufacturers to cut their costs of taxation by paying only on the value added by Mexican workers. If a U.S. manufacturer, such as IBM, brings « $500 computer to a maquiladora operation for assembly work costing $25. tariff duties will be charged only on the $25 of work performed in Mexico. “Trade agreements have also helped reduce tariffs and thereby reduced the cost of op crating facilities in foreign couniries. The General Agreement on Tariffs and Trade (GATT) has helped 10 reduce tariffs from 40% in 1940 to 7% in 1990.7 Another impor- tant trade agreement in the American continent is the North American Free Trade Agreement (NAFTA). Passed in 1993 by the U.S. Congress, NAFTA secks to phase out all trade and tariff barriers during the next 15 years among Canada, Mexico. and the United States." Reduce Risks Going global has become easier and less risky for international opera- tions because of interationsl rade agreements. NAFTA, in addition to reducing tari, also secks to promote conditions of fair competition and inreased investment opportun- ties as well as provide for protection on certain intellectual propery rights, For example. if we wanted 10 move a U.S. factory to Mexico, we could apply under NAFTA for proice- tion for our investment capital. This protection would obligate the US. goverment to un-

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