TOPIC 3.

UNDERSTANDING GOODS AND SERVICES

ENGAGE:
Give at least five examples of goods and services that you frequently bought.

EXPLORE:
From the list of goods and services that you frequently bought, contrast, and differentiate
goods from services.

EXPLAIN:
Companies design, produce, and deliver a wide variety of goods and services that
consumers purchase. A good is a physical product that you can see, touch, or possibly
consume. Good scan be durable or nondurable. A durable good is one that does not
quickly wear out and typically last at least three years while nondurable good is one that
is no longer useful once it is used or lasts for less than three years. Goods-producing firms are found in
industries such as manufacturing, food processing, farming, forestry, mining, construction, and fishing.

On the other hand, service is any primary or complementary activity that does not directly produce
a physical product. Services represent the non-good part of a transaction between a buyer (customer) and
the seller (supplier). Service-providing firms are found in industries such as banking, lodging, education,
healthcare, and government, to name a few.

Designing and managing operations in a goods-producing firm is quite different from that in a service
organization thus it is important to understand the nature of goods and services and particularly the
differences between them.

Goods and services share many similarities. They are driven by customers and provide value and
satisfaction to customers who purchase and use them. They can be standardized for the mass market or
customized to individual needs. They are created and provided to customers by some type of process
involving people and technology. Services that do not involve significant interaction with customers can be
managed much the same as goods in a factory, using proven principles of OM that have been refined over
the years.

Here are some of the common points of comparison:

1. Goods are tangible, whereas services are intangible. Goods are consumed, but services are
experienced. Goods-producing industries rely on machines and “hard technology” to perform
work. Goods can be moved, stored, and repaired, and generally require physical skills and
expertise during production. Services on the other hand, make more use of information systems
and other “soft technology”, requires strong behavioral skills in are often difficult to describe
and demonstrate.

2. Degree of customer contact. Many services require that the customer be present either
physically, on a telephone, or online for service to commence. In addition, the customer and
service provider often coproduce a service, meaning that they work together to create and
simultaneously consume the service between a bank teller in a customer to complete a financial
transaction.
 Operatio ns Management and TQM
First Semester 2020 -2021

3. The demand for services is more difficult to predict than the demand for goods. The demand
for services is time-dependent, especially over the short term (by hour or day). This places many
pressures on service firm managers to adequately plan staffing levels and capacity.

4. Services cannot be stored as physical inventory. In goods producing firms, inventory can be
used to decouple customer demand from the production process or between stages the
production process and ensure constant availability despite fluctuations in demand. Service
firms do not have physical inventory to absorb such fluctuations in demand. For service delivery
systems, availability depends on the system's capacity.

5. Labor content of jobs. Services often have a higher degree of labor content than manufacturing
jobs do, although automated services are an exception.

6. Uniformity of input/output. Service operations are subject to greater variability of inputs than
typical manufacturing operations. Manufacturing of goods can carefully control the amount of
variability of inputs, thus achieve low variability of output. Because high mechanization
generates products with low variability, manufacturing tends to be smooth and efficient.

7. Quality assurance. In the production of goods quality assurance can be made prior to the
delivery of the finished product to end-users. For service delivery, quality assurance is more
challenging, due to the following factors: (a) production and consumption occurs at the same
time and (b) higher variability of inputs

Page 2 of 5 | (@eremojo)
 Operatio ns Management and TQM
First Semester 2020 -2021

UNIT II. VALUE CHAIN

TOPIC 5: THE CONCEPT OF VALUE, CUSTOMER BENEFIT PACKAGE AND VALUE CHAIN

LEARNING OUTCOMES:
After completing this study unit, you should be able to:
1. Explain the concept of value and the value chain
2. Explain the transformation process.

ENGAGE:
Let’s watch this video and find out what are the activities associated in making a chocolate
moist cake.
https://youtu.be/mlLTGsUlMZw
What did you learn?

EXPLORE:
Watch https://www.youtube.com/watch?v=oqR6SV8ma_8
What did you learn?

EXPLAIN:

TRANSFORMATION PROCESS
The creation of goods or services involves transforming or converting inputs into outputs.
To better understand this concept, refer to the Figure No. 2 below, The Transformation
Process.

As you can see in Fig. No. 2, inputs could be in the form of land, capital, labor, and information that
are used to create goods or services using one or more of the transformation processes. There are different
kinds of conversion process depending on the type of goods being produced or the services to be delivered.
For instance, if you want to bake a chiffon cake, your inputs will include ingredients, labor, gas.
Transformation process includes measuring the ingredients, mixing the ingredients, pre-heating the oven,
then baking the mixture. These are some of the processes needed to produce the output, which is the chiffon
cake.

Figure No. 2. The Transformation Process

Value-Added

Inputs Transformation/ Outputs

Conversion
• Land • Goods
• Labor Process
• Services
• Capital
• Information

Measurement
and Feedback

Measurement Measurement
and Feedback and Feedback
Control

Page 3 of 5 | (@eremojo)
 Operatio ns Management and TQM
First Semester 2020 -2021

This illustration also shows that in order to ensure that the desired outputs are obtained, an
organization takes measurement at various points of the transformation process, oftentimes referred to as
feedback, and then compares them with previously established standards to determine whether corrective
action is needed. This entire process of taking feedback, comparing feedback with established standards to
determine if corrective action is needed is the control mechanism in the operations functions. This only
shows that operations management is indeed a subject matter in management that tackles the four
functions of planning what to goods to produce or services to deliver, organizing the facility and the
resources of the organization, leading the operations functions and controlling systems, processes and
results to conform to established standards.

We have been talking about the transformation process as an important aspect of the creation of
goods and services. But what is a process?

A process is a sequence of activities that is intended to create a certain result, whether it is goods,
services, or information. In other words, processes are the means by which goods and services are produced
and delivered.

CONCEPT OF VALUE AND VALUE CHAIN

An important concept that we will learn in this illustration is the concept of value. The transformation
process introduces additional value into the inputs to produce the desired results. Without these value-
adding activities (transformation process), the ingredients will remain in their original form. To understand
this better, let us define value first.

Value is the perception of the benefits associated with a good, service or bundle of goods and
services in relation to what buyers are willing to pay for them. For instance, we are willing to pay for a layer
of cake at Goldilocks or Panny’s Bakeshop, because we have a perception that it is delicious and will satisfy
us. In other words, the essence of the operations function is to add value during the transformation process.
Value-added is the term used to describe the cost of inputs and the value or price of outputs. The greater
the value-added, the greater the effectiveness of these operations.

Let us expound the concept of value by looking both the consumer and business perspective. First,
let us tackle the consumer perspective. Today’s consumers demand more sophisticated products and
services. For example, in the past people bought kalamansi and process them into kalamansi juice, but as
the COVID-19 infections increases, more and more kalamansi concentrate are now available in the market.
Nowadays, our lifestyle has changed. We are busier and have less time. We want more convenience and
comfort. Hence, we want to buy already processed and manufactured goods. This is what we call value-
added products.

Consumers are willing to pay more money for the additional features, better quality, greater
versatility, and higher quality standards of the sophisticated products and services offered.

In a globalized world, enterprises can only become (or remain) competitive, if they innovate and
provide their customers with the value-added products and services that the market demands. Value is
added when one improves or enhances the product or service such as adding features to it. Thus, from the
business perspective, every step of value addition presents a business opportunity

The concept of transformation process, value and value-added, brings us to one of the most
important concepts not just in operations management but in business as a whole, the value-chain. A value-
chain is a network of facilities and processes that describes the flow of materials, finished goods, services,
information and financial transactions from suppliers, through the facilities and processes that create goods

Page 4 of 5 | (@eremojo)
 Operatio ns Management and TQM
First Semester 2020 -2021

and services, and those that deliver them to the customer. Another definition would tell us that a value-
chain is the whole sequence of business activities in a (sub)sector, such as providing inputs, production,
processing, manufacturing, packaging, marketing, wholesale trading, exporting, distribution and retailing
functions. Thus, every business activity in an industry or sector forms part the value chain.

For example, in the cacao industry, all business activity under it forms part the cacao value chain.
This might include all cacao farms, cacao processors, input providers such as government institutions who
provides planting materials and businesses selling fertilizers and pest and disease control supplies, including
buyers of cacao beans and finished product, including resellers, distributors, retailers and the final consumer.
Let us not confuse value chain from supply chain. The value chain applies to an industry, while the supply
chain applies only to a single firm in the industry. (Note: There will be a separate chapter on Supply Chain
Management).

CUSTOMER BENEFIT PACKAGE

“Bundling” goods, services, and digital content in a certain way to provide value to customers not
only enhances what customers receive, but also differentiate the product from competitors. Such bundle is
called the customer benefit package. A customer benefit package is a clearly defined set of tangibles (goods-
content) and intangible (service-content) features that the customer recognizes, pays for, uses or
experiences.

A CBP consists of primary good or service coupled with peripheral goods and/or services, sometimes
variants. A primary good or service is the “core” offering that Attracts customers and responds to their basic
needs. Peripheral goods or services are those that are not essential to the primary good or service but
enhance it. For instance, when you a bicycle from Bohol Bike Shop during this time of pandemic out of
necessity, the bicycle is the primary product. The peripheral services would include lifetime free service. A
variant on the other hand is a CBP feature that departs from the standard CBP and is normally location or
firm specific. It is called a variant because the goods or services offered in not entirely part of the core
offering of the business. For instances, a bicycle shop offering disposable face masks and hand sanitizers
during this time of pandemic.

Prepared by: Recommending Approval:

ERWIN P. REMOJO TRISTAN JUN G. ESCLAMADO, CPA, MBA

MNGT 2 – INSTRUCTOR Dean, College of Accountancy

Page 5 of 5 | (@eremojo)