Chapter 1

Operations and Competitiveness

Operations Management - 5th Edition

Roberta Russell & Bernard W. Taylor, III

Lecture outline
 What do operations managers do?
 Operations function
 Evolution of operations management
 Operations management and e–business
 Globalization and competitiveness
 Primary topics in operations management
 Learning objectives for this course
What Do Operations
Managers Do?
 What is operations?
 a function or system that transforms inputs into
outputs of greater value
 What is a transformation process?
 a series of activities along a value chain
extending from supplier to customer
 activities that do not add value are superfluous
and should be eliminated
 What is operations management?
 design, operation, and improvement of
productive systems
Transformation Process
 Physical: as in manufacturing operations
 Locational: as in transportation
operations
 Exchange: as in retail operations
 Physiological: as in health care
 Psychological: as in entertainment
 Informational: as in communication
Operations as a
Transformation Process

INPUT
•Material
TRANSFORMATION OUTPUT
•Machines
•Goods
•Labor PROCESS
•Services
•Management
•Capital

Feedback
Operations Function
 Operations
 Marketing
 Finance
and
accounting
 Human
resources
 Outside
suppliers
How is operations relevant to my
major?
 Accounting  “As an auditor you must
understand the fundamentals of
operations management.”
 Information  “IT is a tool, and there’s no better
Technology place to apply it than in
operations.”
 “We use so many things you learn
 Management in an operations class—
scheduling, lean production,
theory of constraints, and tons of
quality tools.”
How is operations relevant to my
major?
 Economics  “It’s all about processes. I
live by flowcharts and
Pareto analysis.”
 “How can you do a good
 Marketing job marketing a product if
you’re unsure of its quality
or delivery status?”
 Finance  “Most of our capital
budgeting requests are
from operations, and most
of our cost savings, too.”
Evolution of Operations
Management
 Craft production
 process of handcrafting products or services
for individual customers
 Division of labor
 dividing a job into a series of small tasks
each performed by a different worker
 Interchangeable parts
 standardization of parts initially as
replacement parts; enabled mass
production
Evolution of Operations
Management (cont.)
 Scientific management
 systematic analysis of work methods
 Mass production
 high-volume production of a
standardized product for a mass
market
 Lean production
 adaptation of mass production that
prizes quality and flexibility
 Historical Events in
Operations Management

Era Events/Concepts Dates Originator

Steam engine 1769 James Watt
Industrial
Division of labor 1776 Adam Smith
Revolution
Interchangeable parts 1790 Eli Whitney
Principles of scientific
1911 Frederick W. Taylor
management
Frank and Lillian
Scientific Time and motion studies 1911 Gilbreth
Management Activity scheduling chart 1912 Henry Gantt
Moving assembly line 1913 Henry Ford
 Historical Events in
Operations Management
(cont.)
Era Events/Concepts Dates Originator
Hawthorne studies 1930 Elton Mayo
Human 1940s Abraham Maslow
Relations Motivation theories 1950s Frederick Herzberg
1960s Douglas McGregor
Linear programming 1947 George Dantzig
Digital computer 1951 Remington Rand
Simulation, waiting
Operations Operations research
line theory, decision 1950s
Research groups
theory, PERT/CPM
1960s, Joseph Orlicky, IBM
MRP, EDI, EFT, CIM
1970s and others
 Historical Events in
Operations Management
(cont.)

Era Events/Concepts Dates Originator

JIT (just-in-time) 1970s Taiichi Ohno (Toyota)
TQM (total quality W. Edwards Deming,
1980s
management) Joseph Juran
Quality
Strategy and Wickham Skinner,
Revolution 1990s
operations Robert Hayes
Business process Michael Hammer,
1990s
reengineering James Champy
 Historical Events in Operations
Management (cont.)
Era Events/Concepts Dates Originator
Globalization WTO, European Union, 1990s Numerous countries
and other trade 2000s and companies
agreements
Internet Internet, WWW, ERP, 1990s ARPANET, Tim
Revolution supply chain Berners-Lee SAP,
management i2 Technologies,
ORACLE,
PeopleSoft
E-commerce 2000s Amazon, Yahoo,
eBay, and others
Continuum from
Goods to Services

Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff,

Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.
Operations Management
and E-Business
Business Consumer
Business

B2B B2C
Commerceone.com Amazon.com
Consumer

C2B C2C
Priceline.com eBay.com

Categories of E-Commerce
An Integrated Value Chain

 Value chain: set of activities that create and

deliver products to customer

Customer Manufacturer Supplier

Flow
Flow of
of information
information (customer
(customer order)
order)
Flow of product (order fulfillment)
 Impact of E-Business on
Operations Management

Benefits of E-Business Impact on Operations

 Comparison shopping  Customer expectations escalate;
quality must be maintained and
by customers costs lowered
 No more guessing about demand
is necessary; inventory costs go
 Direct contact with down; product and service design
customers improves; build to-order products
and services is made possible
 Transaction costs are lower;
 Business processes customer support costs
conducted online decrease; e-procurement saves
big bucks
Impact of E-Business on
Operations Management (cont.)

Benefits of E-Business Impact on Operations

 Access to customers  Demand increases; order fulfillment
and logistics become major issues;
worldwide production moves overseas
 Logistics change from delivering to a
store or distribution center to
 Middlemen are delivering to individual homes;
eliminated consumer demand is more erratic and
unpredictable than business demand
 Outsourcing increases; more alliances
 Access to suppliers and partnerships among firms are
worldwide formed; supply is less certain; global
supply chain issues arise
 Impact of E-Business on
Operations Management (cont.)

Benefits of E-Business Impact on Operations

 Online auctions and e-  Competitive bidding lowers cost
of materials; supply needs can be
marketplaces found in one location
 Better and faster  More timely information is
decision making available with immediate access
by all stakeholders in decision-
making process; customer orders
and product designs can be
clarified electronically; electronic
meetings can be held;
collaborative planning is
facilitated
 Impact of E-Business on
Operations Management (cont.)

Benefits of E-Business Impact on Operations

 IT synergy  Productivity increases as
information can be shared more
efficiently internally and
between trading partners
 Order fulfillment, logistics,
 Expanded supply warehousing, transportation and
chains delivery become focus of
operations management; risk is
spread out; trade barriers fall
Globalization and
Competitiveness
 Favorable cost
 Access to international
markets
 Response to changes
in demand
 Reliable sources of
supply
 14 major trade
agreements in 1990s World Trade Compared to World GDP
Source: “Real GDP and Trade Growth of OECD Countries, 2001–
 Peak: 26% in 2000 03,” International Trade Statistics 2003, World Trade Organization,
www.wto.org
 Globalization and
Competitiveness (cont.)

Germany: $26.18

USA: $21.33

Taiwan: $5.41

Mexico: $2.38

Hourly Wage Rates for Selected Countries

Source: “International Comparisons of Hourly Compensation Costs for Production Workers in
Manufacturing,” Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003. China: $0.50
Globalization and
Competitiveness (cont.)

Trade with China: Percent of each country‘s trade

Source: “Share of China in Exports and Imports of Major Traders, 2000 and 2002,”
International Trade Statistics 2003, World Trade Organization, www.wto.org
Risks of Globalization
 Cultural differences
 Supply chain logistics
 Safety, security, and
stability
 Quality problems
 Corporate image
 Loss of capabilities
Competitiveness and
Productivity
 Competitiveness
 degree to which a nation can produce goods and
services that meet the test of international markets
 Productivity
 ratio of output to input
 Output
 sales made, products produced, customers served,
meals delivered, or calls answered
 Input
 labor hours, investment in equipment, material
usage, or square footage
Competitiveness and
Productivity (cont.)

Measures of Productivity
 Changes in Productivity for
Select Countries

Internet-enabled
productivity

- Dot com bust

- 9/11 terrorist attacks

Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor
Statistics, U.S. Department of Labor, September 2003. U.S. figures for 2002–2003 from “Major Sector Productivity and
Costs Index,” Bureau of Labor Statistics, U.S. Department of Labor, March 2004
Productivity Increase

 Become efficient
 output increases with little or no increase in input
 Expand
 both output and input grow with output growing
more rapidly
 Achieve breakthroughs
 output increases while input decreases
 Downsize
 output remains the same and input is reduced
 Retrench
 both output and input decrease, with input
decreasing at a faster rate
 Competitiveness and
Productivity

Breakthrough
Performance

More Efficient

Retrench

Productivity as a Function of Inputs and Outputs, 2001–2002

Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of
Labor Statistics, U.S. Department of Labor, September 2003
Global Competitiveness Ranking
1. Finland
2. United States
3. Sweden
4. Denmark
5. Taiwan
6. Singapore
7. Switzerland
8. Iceland
9. Norway Source: Global Competitiveness Report
2003–2004, World Economic Forum,
10.Australia January 2004, www.weforum.org
Operations–Oriented Barriers
to Entry
 Economies of Scale
 Capital Investment
 Access to Supply and Distribution
Channels
 Learning Curve
Primary Topics in
Operations Management
Primary Topics in Operations
Management (cont.)
Operations Strategy
 Strategy: Chapter 2
 Maintaining an operations strategy to support firm’s
competitive advantage
 Quality: Chapters 3 and 4
 Focusing on quality in operational decision making
 Product and Services: Chapter 5
 Designing quality products and services
 Processes, Technologies, and Capacity:
Chapter 6
 Setting up process so that it works smoothly and
efficiently
Operations Strategy (cont.)
 Facilities: Chapter 7
 Setting up facility so that it works smoothly
and efficiently
 Human Resources: Chapter 8
 Designing jobs and work to produce quality
products
 Project Management: Chapter 9
 Managing complex projects
Supply Chain Management
 Supply Chain: Chapter 10
 Managing supply chain
 Forecasting: Chapter 11
 Predicting customer demand
 Aggregate Planning: Chapter 12
 How much to produce and when to produce
it
 Inventory Management: Chapter 13
 How much to order and when to order
Supply Chain Management
(cont.)
 Resource Planning: Chapter 14
 Planning capacity and other resources
 Lean Production: Chapter 15
 Designing efficient production lines
 Scheduling: Chapter 16
 Job and task assignments
 Waiting Lines: Chapter 17
 Minimizing waiting time of customers and
products
Learning Objectives of this
Course
 Gain an appreciation of strategic importance of
operations in a global business environment
 Understand how operations relates to other
business functions
 Develop a working knowledge of concepts and
methods related to designing and managing
operations
 Develop a skill set for quality and process
improvement