1

COMPETING WITH OPERATIONS

11

Across the Organization

Finance
Acquires financial resources and capital for inputs

Material & Service Inputs

Sales Revenue

Support Functions
Accounting Information Systems Human Resources Engineering

Operations
Translates materials and service into outputs
Figure 1.1

Marketing
Generates sales of outputs

Product & Service Outputs

12

Operations Management
The systematic design, direction, and control of processes that transform inputs into services and products for internals, as well as external, customers Processes can be linked together to form a supply chain interrelated processes within a firms and across different firms that produce a service or product to the satisfaction of the customers

13

A Process View
External environment
Internal and external customers Inputs Workers Managers Equipment Facilities Materials Land Energy Outputs Goods Services 5 2 4

Processes and operations

Information on performance
Figure 1.2
14

Process view vs departmental view

A process is any activity or group of activities that takes one or more inputs, transforms and adds value to them, and provides one or more outputs for its customers. Why?
Departments

typically have their own set of objectives, set of resources with capabilities to achieve those objectives, and managers and employees responsible for their performance. The concept of a process, however, can be much more expansive. A process can have its own set of objectives, involve a work flow that cuts across departmental boundaries, and 5 require resources from several departments.
15

Processes
Processes should add value. Processes can be broken down into sub-processes, which in turn can be broken down further. Any process that is part of a larger process is considered a nested process.

Each process and each nested process has inputs and outputs.

16

Process View of an Ad Agency

Accounting process

Inputs

Advertisement design and planning process

Create the ad to the needs of the client and prepare a plan for media exposure

Client interface process

Clients

Communicate with client, get needs, and coordinate progress

Production process

Prepare ad for publication and deliver to media outlets

7
17

Nested Processes
Advertisement Design and Planning Process

Creative design process

Receive work request Create team Prepare several designs Receive inputs from Account Executive Prepare final concept Revise concept per clients inputs

Media planning process

Receive work request Prepare several media plans Receive inputs from Account Executive Prepare final plan Revise plan per clients inputs

8
18

The Supply Chain View

Support Processes

External suppliers

New service/ product development

Customer relationship management

External customers

Supplier relationship process

Order fulfillment process

Figure 1.4
19

Customer-Supplier Relationship
External customers end customers or users buying the firms products and services Internal customers employees or processes inside the firms that rely on inputs from other employees or processes External suppliers employees or businesses who provide resources for the firms Internal suppliers employees or processes that supply inputs to the other 10 employees or processes inside the firm
1 10

The Supply Chain View

Core processes are sets of activities that deliver value to external customers
1. Supplier relationship process 2. New service/product development process 3. Order fulfillment process 4. Customer relationship process

Support processes provide vital resources and inputs to the core processes

1 11

Core Processes
Core process A chain of activities that delivers value to external customers

1) Customer relationship process

Identifies, attracts, builds relationships with external customers, and facilitates the placement of orders by customers.

2) New service/product development process

3) Order fulfillment process 4) Supplier relationship process

Designs and develops new services or products from inputs received from external customer specifications or from the market in general through the customer relationship process.
Includes the activities required to produce and deliver the service or product to the external customer Selects the suppliers of services, materials, and information and facilitates the timely and efficient flow of these items into the firm.

1 12

Support Processes
TABLE 1.1 | EXAMPLES OF SUPPORT PROCESSES The provision of financial resources for the organization to do its work and to execute its strategy The process of deciding how funds will be allocated over a period of time The acquisition of people to do the work of the organization The assessment and payment of people for the work and value they provide to the company The preparation of people for their current jobs and future skills and knowledge needs The processes that ensure that the company is meeting all laws and legal obligations Capital acquisition

Budgeting Recruitment and hiring Evaluation and compensation

Human resource support and development Regulatory compliance

Information systems

The movement and processing of data and information to expedite business operations and decisions
The systems and activities that provide strategic direction and ensure effective execution of the work of the business

Enterprise and functional management

1 13

A Process View

More like a manufacturing process

More like a service process

Physical, durable output Output can be inventoried Low customer contact Long response time Capital intensive Quality easily measured

Intangible, perishable output Output cannot be inventoried High customer contact Short response time Labor intensive Quality not easily measured

Figure 1.3
1 14

Service Processes and Manufacturing Processes

Manufacturing processes change materials in one or more of the following dimensions:
Physical Shape Fixed

properties

dimensions finish

Surface Joining

parts and materials

If a process isnt doing at least one of these, then it is a service (non-manufacturing) process.

1 15

Manufacturing and Service

Goods Production
Tangible Can be inventoried Low customer contact Capital Intensive Quality easily measured

Service Production
Intangible Cant be inventoried High customer contact Labor Intensive

Quality hard to measure

1 16

Service vs Manufacturing
Differences

The nature of output

Service intangible, perishable outputs Manufacturing physical, durable outputs

Products can be produced, stored, and transported in anticipation of future demands

The degree of customer contact

Service a higher degree of customer contact Manufacturing less customer contact, leaving the primary contacts with customer to retailers or distributors.

Similarities

Some service and manufacturing provide both products and services. (80 percent of the jobs in business are in services). Services related to products now represent 10 to 30 times the annual dollar volume of sales). Both must be concerned with issues of process design, quality, productivity, capacity, staffing levels, forecasting, location, and layout. Some services do need inventory such as hotel and hospital.
1 17

Services VS Manufacturing

Today the service sector accounts for 80 percent of U.S. economic output, and the goods producing sector accounts for the remaining 20 percent.
1 18

Operations Strategy
Specifies the means by which operations implements corporate strategy and helps build a customer-driven firm Corporate strategy provides an overall direction that serves as the framework for carrying out all the organization's functions

1 19

Operations Strategy
Corporate Strategy Environmental scanning Core competencies Core processes Global strategies

Market Analysis Market segmentation Needs assessment

Competitive Priorities Cost Quality Time Flexibility New Service/ Product Development Design Analysis Development Full launch Yes

No Performance Gap?

Operations Strategy Competitive Capabilities Current Needed Planned

1 20

Decisions Managing processes Managing supply chains

Figure 1.5

Corporate Strategy
Environmental scanning Developing core competencies
1. Workforce 2. Facilities 3. Market and financial know-how 4. Systems and technologies

Developing core processes

Global strategies

1 21

Market Analysis
Market segmentation

Needs assessment
Service

or product needs system needs

Delivery

Volume
Other

needs

needs

1 22

Competitive Priorities
TABLE 1.2 COST 1. Low-cost operations QUALITY | DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE PRIORITIES Definition Delivering a service or a product at the lowest possible cost Process Considerations Processes must be designed and operated to make them efficient Example Costco

2. Top quality

Delivering an outstanding service or product

Producing services or products that meet design specifications on a consistent basis Quickly filling a customers order Meeting delivery-time promises

May require a high level of customer contact and may require superior product features
Processes designed and monitored to reduce errors and prevent defects

Ferrari

3. Consistent quality

McDonalds

TIME 4. Delivery speed 5. On-time delivery Design processes to reduce lead time Planning processes to increase percent of customer orders shipped when promised Dell United Parcel Service (UPS)

6. Development speed

Quickly introducing a new science or a product

Cross-functional integration and involvement of critical external suppliers

Li & Fung

1 23

Competitive Priorities
TABLE 1.2 FLEXIBILITY 7. Customization | DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE PRIORITIES Definition Satisfying the unique needs of each customer by changing service or products designs Handling a wide assortment of services or products efficiently Process Considerations Low volume, close customer contact, and easily reconfigured Example Ritz Carlton

8. Variety

Capable of larger volumes than processes supporting customization

Amazon.com

9. Volume flexibility

Accelerating or decelerating the rate of production of service or products quickly to handle large fluctuations in demand

Processes must be designed for excess capacity

The United States Postal Service (USPS)

1 24

Order Winners and Qualifiers

Order Winner

Sales ($)

Order Qualifier

Low

High

Achievement of competitive priority

Sales ($) Low

Threshold

High

Achievement of competitive priority Figure 1.6

1 25

Trends in Operations Management

Productivity improvement Global competition Ethical, workforce, and environmental issues

1 26

Productivity Improvement
EXAMPLE 1.1 Calculate the productivity for the following operations:

a. Three employees process 600 insurance policies in a week. They work 8 hours per day, 5 days per week.

SOLUTION Policies processed a. Labor productivity = Employee hours 600 policies = = 5 policies/hour (3 employees)(40 hours/employee)

1 27

Productivity Improvement
EXAMPLE 1.1 Calculate the productivity for the following operations:

b. A team of workers makes 400 units of a product, which is sold in the market for $10 each. The accounting department reports that for this job the actual costs are $400 for labor, $1,000 for materials, and $300 for overhead.
SOLUTION Value of output a. Multifactor productivity = Labor cost + Materials cost + Overhead cost = (400 units)($10/unit) $4,000 = = 2.35 $400 + $1,000 + $300 $1,700
1 28

Application
This Year Last Year Year Before Last

Factory unit sales ($)

Employment (hrs)

2,762,103
112,000

2,475,738
113,000

2,175,447
115,00

Sales of manufactured products ($)

Total manufacturing cost of sales ($)

$49,363
$39,000

$40,831
$33,000

Calculate the year-to-date labor productivity:

This Year factory unit sales employment 2,762,103 112,000 = 24.66/hr

Last Year
2,475,738 113,000 = 21.91/hr

Year Before Last

2,175,447 115,000 = $18.91/hr

Calculate the multifactor productivity:

This Year
sales of mfg products total mfg cost $49,363 $39,000 = 1.27

Last Year
$40,831 $33,000 = 1.24

1 29

Solved Problem 1
Student tuition at Boehring University is $150 per semester credit hour. The state supplements school revenue by $100 per semester credit hour. Average class size for a typical 3-credit course is 50 students. Labor costs are $4,000 per class, material costs are $20 per student per class, and overhead costs are $25,000 per class.
a. What is the multifactor productivity ratio for this course process? b. If instructors work an average of 14 hours per week for 16 weeks for each 3-credit class of 50 students, what is the labor productivity ratio?

1 30

Solved Problem 1
SOLUTION a. Multifactor productivity is the ratio of the value of output to the value of input resources.
Value of output = 50 student class 3 credit hours student $150 tuition + $100 state support credit hour

= $37,500/class Value of inputs = Labor + Materials + Overhead = $4,000 + ($20/student 50 students/class) + $25,000 = $30,000/class

Multifactor productivity =

Output Input

$37,500/class = 1.25 $30,000/class

1 31

Solved Problem 1
SOLUTION b. Labor productivity is the ratio of the value of output to labor hours. The value of output is the same as in part (a), or $45,000, so
14 hours week 16 weeks class

Labor hours of input =

= 224 hours/class Labor productivity = Output $45,000/class = Input 224 hours/class

= $200.89/hour

1 32

Solved Problem 2
Natalie Attire makes fashionable garments. During a particular week employees worked 360 hours to produce a batch of 132 garments, of which 52 were seconds (meaning that they were flawed). Seconds are sold for $90 each at Attires Factory Outlet Store. The remaining 80 garments are sold to retail distribution at $200 each. What is the labor productivity ratio of this manufacturing process?

1 33

Solved Problem 2
SOLUTION
Value of output = (52 defective 90/defective) + (80 garments 200/garment) = $20,680 Labor hours of input = 360 hours Output $20,680 Labor productivity = = Input 360 hours = $57.44 in sales per hour

1 34

Exercises 1.1:
Student tuition at Boehring University is $100 per semester credit hour. The state supplements school revenue by matching student tuition dollar for dollar. Average class size for a typical threecredit course is 50 students. Labor costs are $4,000 per class, materials are $20 per student per class, and overhead costs are $25,000 per class. a) What is the multifactor productivity ratio for this course process? b) If instructors work an average of 14 hours per week for 16 weeks for each three-credit class of 50 students, what is the labor productivity ratio?

1 35

Exercise 1.2
Under Coach Bjourn Toulouse, several football seasons for the Big Red Herrings have been disappointing. Only better recruiting will return the Big Red Herrings to winning form. Because of the current state of the program, Boehring University fans are unlikely to support increases in the $192 season ticket price. Improved recruitment will increase overhead costs to $30,000 per class tuition from the current $25,000 per class section. The universitys budget plan is to cover recruitment costs by increasing the average class size to 75 students. Labor costs will increase to $6,500 per three-credit course. Material costs are about $25 per student for each three-credit course. Tuition will be $200 per semester credit, which is matched by state support of $100 per semester credit. a) What is the productivity ratio? Compared to the previous exercise 1.2, did productivity increase or decrease for the course process?

b) If instructors work an average of 20 hours per week for 16 weeks for each three-credit class of 75 students, what is the labor productivity radio?

1 36

Exercise 1.3
CD Players are produced on an automated assembly line process. The standard cost of CD players is 150 per unit (labor: 30, materials: 70, and overhead: 50). The sales price is 300 per unit. a) To achieve a 10% multifactor productivity improvement by reducing materials costs only, by what percentage must these costs be reduced? b) To achieve a 10% multifactor productivity improvement by reducing labor costs only, by what percentage must these costs be reduced?

c) To achieve a 10% multifactor productivity improvement by reducing overhead costs only, by what percentage must these costs be reduced?

1 37