Using Operations to Compete

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.

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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.
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The Role of Operations in the Organization

Integration
between
Different
Functional
Areas of a
Business

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 A Process View
Process
Any activity or
group of
activities that
takes one or
more inputs,
transforms
them, and
provides one or
more outputs
for its
customers.
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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
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 The Supply Chain View
Each activity in a process should add value to the
preceding activities; waste and unnecessary cost
should be eliminated.

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 The Supply Chain View
Supplier relationship process – A process to select the
suppliers of services, materials, and information and
facilitate the flow of these into the firm.

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 The Supply Chain View
New service/product development – A process to
design and develop new services or products from
customer or market inputs.

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 The Supply Chain View
Order fulfillment process – A process to produce and
deliver services or products to the external
customer.

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 The Supply Chain View
Customer relationship process – A process that
identifies, attracts and builds relationships with external
customers and facilitates the placement of orders.

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 The Supply Chain View
Support Processes - Processes like Accounting, Human
Resources, Engineering, and Information Systems that
provides vital resources and inputs to the core processes

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 Operations Strategy

• Specifies the means by which operations

implement corporate strategy and help
build a customer-driven firm

• Corporate strategy provides an overall

direction that serves as the framework for
carrying out all the organization's functions

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 Customer Expectations

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 Production Environments
Engineer-to-order (ETO): Products require a unique engineering
design based on customer specifications.
Make-to-order (MTO): Manufacturing does not start until an order
is received. The product is usually made from standard raw material
and possibly some custom-designed components, but does not
require as much design lead-time as in engineer-to-order
Assemble-to-order (ATO): The product is made from standard
components/subassemblies held in inventory awaiting a customer
order for final assembly
Make-to-stock (MTS): The manufacturer produces products and
sells them from finished goods inventory. The supply is available
before receipt of a customer order.
Mass customization: The product is made in many different
configurations from stock components, but assembled quickly and in
high volume

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 Competitive Priorities and Capabilities

Competitive Priorities Competitive capabilities

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

01 - 16
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 Examples
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 Processes designed and McDonald’s

quality or products that monitored to reduce errors
meet design and prevent defects
specifications on a
consistent basis
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 Examples
TIME Definition Process Considerations Example

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

customer’s order lead time

5.On-time Meeting delivery- Planning processes 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

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

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 Order Winners and Qualifiers

Order Winners Order Qualifiers

are those criteria that win are those criteria that a
the order. Companies company must meet for a
need to be better than their customer to even consider it
competitors. as a possible supplier.
Companies need only be as
good as competitors.

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Relationship of Order Qualifiers to
Competitive Priorities

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Relationship of Order Winners to
Competitive Priorities

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Trends in Operations Management

Productivity

The value of outputs (services and products)

produced divided by the values of input
resources (wages, costs of equipment, etc.)

Productivity = Output
Input

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 Example 1.1
Calculate the Labor Productivity:

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
Calculate the Multifactor Productivity:
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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• Total Cost = Direct material cost + direct labor
cost + manufacturing overheads

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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 $39,000 $33,000 —
cost of sales ($)

▪ 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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 Trends in Operations Management
• Global Competition
– Advantages:
• Increased market penetration
• Comparative cost advantages
– Disadvantages:
• Political risks
• Lower skilled workers
• Vulnerability to supply chain disruptions

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 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?
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 Solved Problem 1
SOLUTION

a. Multifactor productivity is the ratio of the value of output to

the value of input resources.
$150 tuition +
50 student 3 credit hours $100 state support
Value of output =
class student credit hour

= $37,500/class
Value of inputs = Labor + Materials + Overhead
= $4,000 + ($20/student  50 students/class) + $25,000
= $30,000/class
Output $37,500/class
Multifactor productivity = = 1.25
Input $30,000/class
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 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
$37,500/class, so

14 hours 16 weeks
Labor hours of input =
week class
= 224 hours/class

Labor productivity = Output $37,500/class

Input 224 hours/class

= $167.41/hour

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 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 Attire’s 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?
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 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

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