Chapter 1

The Nature of Operations

Chapter 1: The Nature of Operations

Introduction

Chapter 1: The Nature of Operations

McDonalds Corp

Facing increased competition

Smarter and more demanding customers
Less brand loyal
Switched to hamburger bun that does
not require toasting.
Customers prefer taste of new bun
Saves time and money
Chapter 1: The Nature of Operations

Olympic Flame

10,000 runners
15,000 miles through 42 states in 84 days
Two years of planning
Must plan for no-show runners and rush
hour traffic
Cost of this operation in the neighborhood
of $20 million
Chapter 1: The Nature of Operations

Kmart Versus Wal-Mart

Both chains started in 1962

In 1987, Kmart had 2,223 stores to WalMarts 1,198.
Kmarts sales were $25.63 billion to WalMarts $15.96 billion
By 1991, Wal-Marts sales exceeded
Kmarts
Kmart still had more stores
Chapter 1: The Nature of Operations

Kmart Versus Wal-Mart continued

In year ending January 1996, WalMarts sales were $93.6 billion to

Kmarts $34.6 billion.
During this time Kmart emphasized
marketing and merchandising (such as
national TV ad campaigns).
Wal-Mart was investing millions in its
operations to lower cost.
Chapter 1: The Nature of Operations

Kmart Versus Wal-Mart

continued

Wal-Mart developed sophisticated distribution

system that integrated its computer system
with its distribution system.
Kmarts employees lacked skills needed to
plan and control inventory.
Period from 1987 to 1995 Kmart's market
share declined from 34.5 percent to 22.7
percent.
Wal-Mart's increased from 20.1 percent to
41.6 percent
Chapter 1: The Nature of Operations

Kmart Versus Wal-Mart continued

Fast forward to 2004

Kmart appears to have adopted a new

strategy

Merge with Sears, Roebuck & Co.

Potential synergies between Kmarts

convenient locations and Sears strong
brands

Chapter 1: The Nature of Operations

Diversity and Importance of

Operations

Improvements in operations can

simultaneously lower costs and improve
customer satisfaction.
Improving operations often dependent on
advances in technology.
Can obtain competitive advantage by
improving operations.
Diversity of operations
Chapter 1: The Nature of Operations

Operations

Heart of every organization

Operations are the tasks that create
value

Chapter 1: The Nature of Operations

10

The Production System

Chapter 1: The Nature of Operations

11

Systems Perspective

Inputs
Transformation System

Alter
Transport
Store
Inspect

Outputs
Environment
Chapter 1: The Nature of Operations

12

Inputs

Inputs include facilities, labor, capital,

equipment, raw materials, and
supplies.
A less obvious input is knowledge of
how to transform the inputs into
outputs.

Chapter 1: The Nature of Operations

13

Transformation System

The part of the system that adds value

to the inputs.
Four major ways

Alter physical change

Transport - relocate
Store - protect
Inspect better understanding
Chapter 1: The Nature of Operations

14

Outputs

Two types of outputs commonly result

from a production system

Services (abstract or nonphysical)

Products (physical goods)

Chapter 1: The Nature of Operations

15

Chapter 1: The Nature of

Operations

16

Facilitating Good Concept

Often confusion in trying to classify

organization as manufacturer or service
Facilitating good concept avoids this
ambiguity
All organizations defined as service
The tangible part of the service is defined
as facilitating good
Pure services
Chapter 1: The Nature of Operations

17

The Range From Services to Products

Chapter 1: The Nature of Operations

18

Classification and Evolution of Economic

Offerings

Chapter 1: The Nature of Operations

19

Comparison of Alternative
Economic Offerings
Economic
Offering

Commodities

Goods

Services

Experiences

Value added
by

Extracting

Producing

Delivering

Staging

Form of output

Fungible

Tangible

Intangible

Memorable

Key
characteristics

Natural

Standardized

Customized

Personalized

Buyer

Market

User

Client

Guest

Chapter 1: The Nature of Operations

20

Chapter 1: The Nature of

Operations

21

Operations Activities

Strategy
Output Planning
Capacity Planning
Facility Location
Facility Layout
Aggregate Planning

Inventory
Management
Materials
Requirements
Planning
Scheduling
Quality Control

Chapter 1: The Nature of Operations

22

Functional View of Organizations

Three Core Functions

Operations
Marketing
Finance/Accounting

Other Important Functional Activities

Human Resource Management

Information Systems
Engineering
Chapter 1: The Nature of Operations

23

Chapter in Perspective

Two alternative ways for organizing

work activities

Functional approach, companies

organize activities on the basis of the
type of work performed
Organizing activities on the basis of
specific value-creating processes.

Chapter 1: The Nature of Operations

24

Process View of
Organizations
An Evolution

Chapter 1: The Nature of Operations

25

Traditional Functional Organization

Chapter 1: The Nature of Operations

26

Value Chain Approach

Chapter 1: The Nature of Operations

27