Using Operations

to Create Value

Chapter 1

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 What is Operations Management?
Operations Management
The systematic design, direction, and control of processes
that transform inputs into services and products for
internal, as well as external, customers
• Process: Any activity or group of activities that takes
one or more inputs, transforms them, and provides
one or more outputs for its customers
• Operation :A group of resources performing all or part
of one or more processes

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 What is Supply Chain Management?
Supply Chain Management
The synchronization of a firm’s processes with those of its
suppliers and customers to match the flow of materials,
services, and information with customer demand

Supply Chain
An interrelated series of processes within and
across firms the produces a service or product to
the satisfaction of customers

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 Role of Operations in an Organization

Integration
between
Different
Functional
Areas of a
Business

Figure 1.1

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 How Processes Work

Figure 1.2

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 How Processes Work
• Every process and every person in the
organization has customers
– External customers
– Internal customers
• Every process and every person in the
organization relies on suppliers
– External suppliers
– Internal suppliers
• Nested Process
– The concept of a process within a process

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 Service and Manufacturing Processes
Differ Across Nature of Output and Degree of
Customer Contact

More like a More like

manufacturing a service
process process

• Physical, durable output • Intangible, perishable output

• Output can be inventoried • Output cannot be inventoried
• Low customer contact • High customer contact
• Long response time • Short response time
• Capital intensive • Labor intensive
• Quality easily measured • Quality not easily measured
Figure 1.3

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 A Supply Chain View
Each activity in a process should add value to the
preceding activities; waste and unnecessary cost
should be eliminated.

Figure 1.4

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 The Supply Chain
• Supplier relationship process – A process that selects the suppliers
of services, materials, and information and facilitates the timely
and efficient flow of these items into the firm
• Order fulfillment process – A process that includes the activities
required to produce and deliver the service or product to the
external customer
• New service/product development – A process that designs and
develops new services or products from inputs from external
customer specifications or from the market
• Customer relationship process – A process that identifies, attracts
and builds relationships with external customers and facilitates
the placement of orders by customers
• Support Processes - Processes like Accounting, Finance, Human
Resources, Management Information Systems and Marketing that
provide vital resources and inputs to the core processes
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 Supply Chain Process
• Supply Chain Processes
– Business processes that have external customers
or suppliers
– Examples
• Outsourcing
• Warehousing
• Sourcing
• Customer Service
• Logistics
• Crossdocking

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 Operations Strategy
• Operations Strategy
– The means by which operations implements the
firm’s corporate strategy and helps to build a
customer-driven firm

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 Operations Strategy
Corporate Strategy
• Environmental scanning Market Analysis
• Core competencies • Market segmentation
• Core processes • Needs assessment
• Global strategies
Competitive Priorities
• Cost
• Quality
• Time
• Flexibility

New Service/
Product Development
• Design
• Analysis No
• Development
• Full launch Performance
Operations Strategy Yes Gap?

Decisions Competitive Capabilities

• Managing processes • Current
• Managing supply chains • Needed
Figure 1.5 • Planned

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 Corporate Strategy
• Corporate Strategy
– Provides an overall direction that serves as the
framework for carrying out all the organization’s
functions
• Environmental Scanning
• Core Competencies
• Core Processes
• Global Strategies

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 Market Analysis
• Market Analysis
– Understand what the customers want and how
to provide it.
• Market Segmentation
• Needs Assessment

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 Competitive Priorities and Capabilities

Competitive Competitive
Priorities Capabilities
The critical dimensions The cost, quality, time, and
that a process or flexibility dimensions that a
supply chain must process or supply chain
possess to satisfy its actually possesses and is
internal or external able to deliver.
customers, both now
and in the future.

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 Order Winners and Qualifiers

Order Winners Order Qualifiers

A criterion Minimum level
customers use to required from a set of
differentiate the criteria for a firm to
services or products do business in a
of one firm from particular market
those of another. segment.

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 Order Winners and Qualifiers
COST Definition Process Considerations Example
1.Low-cost Delivering a service Processes must be Costco
operations or a product at the designed and operated to
lowest possible cost make them efficient

QUALITY

2.Top quality Delivering an May require a high level of Rolex

outstanding service customer contact and may
or product require superior product
features
3.Consistent Producing services or Processes designed and McDonald’s
quality products that meet monitored to reduce errors
design specifications and prevent defects
on a consistent basis

Table 1.3

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 Order Winners and Qualifiers
TIME Definition Process Considerations Example

4.Delivery speed Quickly filling a Design processes to reduce Netflix

customer’s order lead time

5.On-time Meeting delivery- Planning processes used to United Parcel

delivery time promises increase percent of Service (UPS)
customer orders shipped
when promised

6.Development Quickly Cross-functional integration Zara

speed introducing a new and involvement of critical
service or a external suppliers
product

Table 1.3

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 Order Winners and Qualifiers
FLEXIBILITY Definition Process Considerations Example
7.Customization Satisfying the unique Low volume, close Ritz Carlton
needs of each customer customer contact, and
by changing service or easily reconfigured
product designs
8.Variety Handling a wide Capable of larger Amazon.com
assortment of services volumes than
or products efficiently processes supporting
customization
9.Volume Accelerating or Processes must be The United
flexibility decelerating the rate of designed for excess States Postal
production of services capacity and excess Service (USPS)
or products quickly to inventory
handle large
fluctuations in demand

Table 1.3

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 Relationship of Order Winners to
Competitive Priorities

Figure 1.6

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 Operations Strategy
OPERATIONS STRATEGY ASSESSMENT OF THE BILLING AND PAYMENT PROCESS

Competitive Priority Measure Capability Gap Action

Low-cost operations
 Cost per billing  $0.0813  Target is $0.06  Eliminate microfilming
statement and storage of billing
statements
 Weekly postage  $17,000  Target is  Develop Web-based
$14,000 process for posting bills

Consistent quality  Percent errors in  0.90%  Acceptable  No action

bill information
 Percent errors in  0.74%  Acceptable  No action
posting
payments
Delivery speed  Lead time to  48 hours  Acceptable  No action
process
merchant
payments
Volume flexibility  Utilization  98%  Too high to  Acquire temporary
support rapid employees
increase in  Improve work methods
volumes

Table 1.5

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 Addressing the Trends and Challenges in
Operations Management
Measuring Productivity

Output
Productivity =
Input

The Role of Management

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 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.
Policies processed
Labor productivity =
Employee hours

600 policies
= = 5 policies/hour
(3 employees)(40 hours/employee)

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 Example 1.1
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.

Value of output
Multifactor productivity =
Labor cost + Materials cost
+ Overhead cost
(400 units)($10/unit) $4,000
= = = 2.35
$400 + $1,000 + $300 $1,700

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 Application 1.1
This Year Last Year Year Before Last
Factory unit sales 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,000
Sales of manufactured $49,363 $40,831 —
products ($)
Total manufacturing cost $39,000 $33,000 —
of sales ($)

 Calculate the year-to-date labor productivity:

This Year Last Year Year Before Last
factory unit sales 2,762,103 2,475,738 2,175,447
= 24.66/hr = 21.91/hr = $18.91/hr
employment 112,000 113,000 115,000

 Calculate the multifactor productivity:

This Year Last Year
sales of mfg products $49,363 $40,831
= 1.27 = 1.24
total mfg cost $39,000 $33,000

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 Addressing the Trends and Challenges
in Operations Management
• Global Competition

• Ethical, Workforce Diversity, and

Environmental Issues

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