CHAPTER 4: OPERATIONS STRATEGY
or service that the customer must believe in, but
COMPETITIVE ADVANTAGE
▶Denotes a firm’s ability to achieve market
and financial superiority over its competitors.
▶In the long run, a sustainable competitive
advantage provides above-average
performance and is essential to survival of
the business.
UNDERSTANDING CUSTOMER
REQUIREMENTS:
▶Because the fundamental purpose of an
organization is to provide goods and services
of value to customers, it is important to first
understand customer needs and
requirements, and also to understand how
customers evaluate goods and services.
▶However, a company usually cannot
satisfy customers with the same goods and
services.
▶Often, customers must be segmented into
several natural groups, each with unique
wants and needs.
▶These segments must be based on buying
behavior, geography, demographics, sales,
volume, profitability, or expected levels of
service.
▶By understanding differences among such
segments, a company can design the most
appropriate customer benefit packages,
competitive strategies, and processes to
create the goods and services to meet the
unique needs of each segment.
▶To correctly identify what customers
expect requires being “close to the
customer”.
▶ There are many ways to do this, such as
having employees visit and talk to
customers, having managers talk to
customers, and formal marketing research.
3 CLASSES OF CUSTOMER REQUIREMENTS
BY NORIAKI KANO
1. Dissatisfier- are requirements that are
expected in a good or service.
2. Satisfier- are requirements that customers
say they want.
3. Excite/delighters- are new or innovative
good or service features that customers do
not expect.
EVALUATING GOODS & SERVICES
▶ Search attributes- are those that a customer can
determine prior to purchasing the goods and or
services.
▶ Experience attributes- are those that can be
discerned only after purchase or during
consumption or use.
▶ Credence attributes- are any aspects of a good
cannot personally evaluate even after purchase and
consumption.
COMPETITIVE PRIORITIES
▶Represent the strategic emphasis that a firm place
on certain performance measures and operational
capabilities within a value chain.
▶Understanding competitive priorities and their
relationships with customer benefit packages
provides a basis for designing the processes that
create and deliver goods and services.
▶A strong competitive advantage is difficult to copy,
often because of firm’s culture, habits, or sunk costs.
5 KEY COMPETITIVE PRIORITIES
1. Cost
▶Low cost can result from high
productivity and high-capacity
utilization. More importantly,
improvements in quality lead to
improvements in productivity, which
in turn lead to lower costs.
▶Thus, strategy of continuous
improvement is essential to achieve
a low-cost competitive advantage.
2. Quality
▶The role of quality in achieving
competitive advantage was
demonstrated by several research
studies. Researchers have found that:
❖ Business offering premium
quality goods usually have large
market shares and were early
entrants into their markets.
❖ Quality is positively and
significantly related to a higher
return on investment for almost
all kinds of market situations.
❖ A strategy of quality improvement
usually leads to increased market
share, but at a cost in terms of
reduced short-run profitability.
❖ Producers of high-quality goods
can usually charge premium
prices.
3. Time
▶In today’s society, time is perhaps
the most important source of
competitive advantage.
▶Customers demand quick
response, short waiting times,
and consistency in performance.
▶Reduction in flow time serve two
purposes:
▶ First, they speed up work
processes so that customer
response is
improved. Deliveries can be made
faster, and more often on-time.
 ▶ Second, reductions in flow time
can only be accomplished by
streamlining and simplifying
processes and value chains to
eliminate non-value-added steps
such as rework and waiting time.
4. Flexibility
▶Success in globally competitive
markets requires a capacity for both
design and demand flexibility.
▶Flexibility is manifest in mass
customization strategies that are
becoming increasingly prevalent
today.
▶Mass customization- is being able
to make whatever goods and
services the customer wants, at any
volume, at any time for anybody, and
for a global organization, from any
place in the world.
5. Innovation
▶Is the discovery and practical
application or commercialization of a
device, method, or idea that differs
from existing norms.
▶Innovation in all forms summarize
human knowledge.
▶Many firms focus on research and
development for innovation as a core
component of their strategy.
OM & STRATEGIC PLANNING
▶STRATEGY- is a pattern or plan that integrates an
organization’s major goals, policies, and action
sequences into a cohesive whole.
▶Basically, a strategy is the approach by which an
organization seeks to develop the capabilities
required for achieving its competitive advantage.
▶CORE COMPETENCIES- are the strengths that
are unique to an organization.
OPERATIONS STRATEGY
▶Defines how an organization will execute its
chosen business strategies.
▶Developing an operations strategy involves
translating competitive priorities into operational
capabilities by making a variety of choices and
trade-offs for design and operating decisions.
CHAPTER 5: GOODS & SERVICE DESIGN
Customer Benefit Package (CBP) Design &
Configuration
- CBP design and configuration choices
revolve around a solid understanding of
customer needs and target markets, and the
value that customers place on attributes,
such as:
•Time: reduce waiting time, be more responsive to
customer needs.
•Place: select location for customer convenience.
•Information: provide product support, user
manuals.
•Entertainment: enhance customer experience.
•Exchange: multiple channels used for purchases.
•Form: how well the physical characteristics of a
good address customer needs.
Reliability
- is the probability that a manufactured good,
piece of equipment, or system performs its
intended function for a stated period of time
under specified operating conditions.
Quality Function Deployment (House of Quality)
Quality function deployment (QFD) is both a
philosophy and a set of planning and
communication tools that focus on customer
requirements in coordinating the design,
manufacturing, and marketing of goods or services.
QFD fosters improved communication and
teamwork among all constituencies in the design
process.
The House of Quality
QFD translates customer wants and needs into
technical requirements of a product or service.
Building the House of Quality:
- Determine customer requirements through
the voice of the customer (VOC).
- Define technical requirements of the product.
- Determine interrelationships between the
technical requirements.
- The relationship matrix defines what
technical requirements satisfy VOC needs.
- Customer priorities and competitive
evaluation help select which VOC
requirements the product should focus on.
Product and Process Design in Manufacturing
PROTOTYPE TESTING
- is the process by which a model (real or
simulated) is constructed to test the good’s
physical properties or use under actual
operating conditions, as well as consumer
reactions to the prototype.
- Goods that are insensitive to external
sources of variation are called robust.
QUALITY ENGINEERING
- refers to a process of designing quality into a
manufactured good based on a prediction of
potential quality problems prior to
production.
FAILURE-MODE-AND-EFFECTS-ANALYSIS
(FMEA)
- is a technique in which each component of a
product is listed along with the way it may
fail, the cause of failure, the effect or
consequence of failure, and how it can be
corrected by improving the design.
- FMEA can uncover serious design problems
prior to manufacturing and improve the
quality and reliability of a product
considerably.
VALUE ENGINEERING
- refers to cost avoidance or cost prevention
before the good or service is created.
Product and Process Design in Manufacturing
PRODUCT AND PROCESS SIMPLIFICATION
- is the process of trying to simplify designs to
reduce complexity and costs, and thus
improve productivity, quality, flexibility, and
customer satisfaction.
Design for Environmental Quality
- A focus on improving the environment by
better good or service design is often called
green manufacturing or green practices.
Green manufacturing example: packaging
for fast food restaurants.
Service delivery system design includes the
following:
- Facility location and layout
- The service scape
- Process and job design
- Technology and information support
systems
- Organizational structure
Service Delivery System Design According to G.
Lynn Shostack
- The design of a “service” cannot be done
independently from the “process” by which
the service is delivered.
- A service is a dynamic, living process; it is
performed and rendered.
- The process by which the service is created
and delivered is, in essence, the service
itself.
- A service cannot be stored or shipped; only
the means for creating it can.
Service Delivery System Design
- A poor choice on any one of these service
delivery system design components, such as
technology or job design, can degrade service
system efficiency and effectiveness.
- Integrating all of these elements is necessary to
design a service that provides value to customers
and can create a competitive advantage.
Service Delivery System Design
Facility location and layout:
- Location creates customer’s convenience.
- Great store layout, process design, and
service encounter design are meaningless if
the store is in the wrong location.
- Example facilities: health clinics and clubs,
retail stores, rental car firms, libraries, hotels,
emergency service facilities, branch banks,
post offices, gasoline stations, airports, and
so on.
- The Internet is making physical locations
less important for some information-
intensive services
Servicescape:
- All of the physical evidence a customer might
use to form an impression.
- The service scape provides the behavioral
setting where service encounters take place.
- Standardization of service scape and service
processes enhances efficiency, especially
for multiple site organizations.
Servicescape 3 dimensions :
Ambient conditions – manifest by sight, sound,
smell, touch, and temperature; five human senses;
e.g., leather chairs in the lobby, cartoon characters
in children’s hospital, music at a coffee shop.
Spatial layout and functionality – how furniture,
equipment, and office spaces are arranged; also
streets, parking lots, stadiums, etc.
Signs, symbols, and artifacts – explicit signals that
communicate an image of the firm; e.g., diplomas
hanging on the wall in a medical clinic, company
logos and uniforms, artwork, mission statements.
SERVICE PROCESS DESIGN
- is the activity of developing an efficient
sequence of activities to satisfy internal and
external customer requirements.
- Specifications on how work is done at job
and process levels.
- Flowcharts of process flows integrate layout,
technology, servicescape, and
organizational structure (see Chapter 7).
Technology and information support systems:
- What technology does each job require?
- What information technology best integrates
all parts of the value chain?
- Technology ensures speed, accuracy,
customization, and flexibility.
SERVICE ENCOUNTER DESIGN
- focuses on the interaction, directly or
indirectly, between the service provider and
the customer.
The Principal dimensions include:
- Customer contact behavior and skills
- Service provider selection, development,
and empowerment
- Recognition and reward
- Service recovery and guarantees
CUSTOMER CONTACT- refers to the physical or
virtual presence of the customer in the service
delivery system during a service experience.
Customer contact is measured by the percentage of
time the customer must be in the system relative to
the total time it takes to provide the service.
Systems in which the percentage is high are called
high-contact systems; those in which it is low are
called low-contact systems.
- Examples of high-contact systems are estate
planning and hotel check-in.
- Examples of low-contact systems are
construction services and package sorting
and distribution.
- High customer contact areas of the
organization are sometimes described as the
"front room or front office" and low customer
contact areas as "back room or back office."
- Hire the right people, train them well,
empower them, give recognition and reward.
EMPOWERMENT
- simply means giving people authority to
make decisions based on what they feel is
right, to have control over their work, to take
risks and learn from mistakes, and to
promote change.
- Ritz-Carlton Hotel employees can spend up
to $2,000 to resolve customer complaints
with no questions asked.
RECOGNITION & REWARD
- Attract, retain, and motivate
- Keep good employees
- Rewards such as free trips, parking spots,
team recognition, and discounts
Recovery & Guarantees
A SERVICE UPSET
- is any problem a customer has—real or
perceived—with the service delivery system
and includes terms such as service failure,
error, defect, mistake, or crisis.
SERVICE RECOVERY
- is the process of correcting a service upset
and satisfying the customer.
CHAPTER 6: TECHNOLOGY AND
OPERATIONS MANAGEMENT
Technology– both physical and information –has
dramatically changed how work is accomplished in
every industry—from mining to manufacturing to
education to health care.
Technology is the enabler that makes today’s
service and manufacturing systems operate
productively and meet customer needs better than
ever.
Understanding Technology in Operations
Hard Technology- refers to equipment and devices
that perform a variety of tasks in the creation and
delivery of goods and services.
Examples:
- Computers
- Computers chips and microprocessors
- Communication lines
- Satellites
- Robots
- Automated machines
- Bar-code scanners
Soft Technology- refers to the application of the
internet, computer software, and information
systems to provide data, information, and analysis
and to facilitate the accomplishment of creating and
delivering goods and services.
Examples: Database system, artificial intelligence
programs, and voice recognition software.
SERVICE TECHNOLOGY
Service technologies - are used behind the scenes
to facilitate your experience as a customer.
E-service - refers to using the Internet and
technology to provide services that create and
deliver time, place, information, entertainment, and
exchange value to customers and/or support the
sale of goods.
EXAMPLES OF SERVICE INDUSTRY
Financial Services
- Electronic fund transfer
- Automated teller machine (ATM)
- Online stock trading and mortgage services
Utility & Government Services
- Online libraries
- Automated one-person garbage trucks
Retail and Wholesale Services
- Supermarket's automated self- checkout and
smart carts
- Auto call distribution system
Health care
- Fetal monitors
- Pacemakers
INTEGRATED OPERATING SYSTEM (IOS)
- An IOS focus is on the main problem
structure and processes of a specific
industry, such as home insurance, airlines,
family practice medical doctors, or
automobile manufacturers.
- An IOS addresses key decisions that need to
be made to serve the customer in the best
possible way
- An IOS involves the collection, storage,
analysis, and dissemination of data and
information via information technology to
improve decision- making within the
organization.
- An IOS is capable of making key decisions in
a synchronous and timely way anywhere
along the value chain.
Computer-integrated manufacturing systems
(CIMS)
- represent the union of hardware, software,
database management, and
communications to automate and control
production activities.
- A robot is a programmable machine
designed to handle materials or tools in the
performance of a variety of tasks.
CAD/ CAE- (Computer-aided drafting/
computer- aided engineering)
- enables engineers to design, analyze, test
simulate, and “manufacture” products before
they physically exist.
CAM (Computer-aided manufacturing)
- is the use of software and computer-
controlled machinery to automate a
manufacturing process.
Flexible manufacturing systems (FMS)
- consist of two or more computer-controlled
machines linked by automated handling
devices.
Enterprise Resource Planning (ERP)
- systems integrate all aspects of a business—
accounting, customer relationship
management, supply chain management,
manufacturing, sales, human resources—
into a unified information system and provide
more timely analysis and reporting of sales,
customer, inventory, manufacturing, human
resource, and accounting data.
Enterprise Resource Planning (ERP)
Two prominent vendors of ERP software are SAP
and Oracle.
- ERP allows departments to share
information and communicate with each
other easily.
- ERP is not about software, but about
changing the way the organization and its
operations are managed.
Customer relationship management (CRM)
- is a business strategy designed to learn
more about customers’ wants, needs, and
behaviors in order to build customer
relationships and loyalty, and ultimately
enhance revenues and profits.
Revenue Management System (RMS)
- consists of dynamic methods to forecast
demand, allocate perishable assets across
market segments, decide when to overbook
and by how much, and determine what price
to charge different customer (price) classes.
Four Components of RMS:
- Forecasting
- Allocation
- Overbooking
- Pricing
•RMS is used to determine price for hotel rooms,
airline seats, rental cars, sporting events or concert
seats, cruise line rooms, broadcast advertising,
power generation, and so on.
Benefits and Challenges of Adopting
Technology
Creates new industries and job opportunities.
Restructures old and less productive industries
Increases marketplace competitiveness and maintains
the survival of the firm.
Provides the capability to focus on smaller target
market segment (customize)
Lower cost
Raises world’s standard of living
Higher employee skill required, such as information
technology and service management skills.
Integration of old (legacy) and new technology and
systems.
Less opportunity for employee creativity and
empowerment.
Protecting the employee’s and customer’s privacy and
security.
Information overload.
Global outsourcing and impact on domestic job
opportunities.
 CHAPTER 7: PROCESS SELECTION, DESIGN, AND - Characteristics: one-of-a-kind, large scale,
ANALYSIS complex, resources brought to site; wide
variation in specs and tasks.
Process design is an important operational decision - Examples of projects: legal defense
that affects the cost of operations, customer preparation, construction, customer
service, and sustainability. jewelry, consulting, and software
development.
THREE TYPES OF GOODS AND SERVICES
• CUSTOM JOB SHOP PROCESSES
• OPTION-ORIENTED - Job shop processes are organized around
• STANDARD particular types of general-purpose
equipment that are flexible and capable of
CUSTOM/MAKE-TO-ORDER GOODS AND SERVICES customizing work for individual customers.
- Produced and delivered as one of a kind or - Characteristics: Significant setup and/or
in a small quantities, and are designed to changeover time, batching, low to moderate
meet specific customer’s specification. volume, many routes, many different
- Example: ships, weddings, certain jewelry, products, high work-force skills, and
estate plans, buildings, and surgery. customized to customer’s specs.
- Examples: Many small manufacturing
OPTION/ASSEMBLE-TO-ORDER GOODS AND companies are set up as
SERVICES job shops, as are hospitals,
legal services, and some restaurants.
- Configuration of standard parts,
subassemblies, or services that can be
FLOW SHOP PROCESSES
selected by customers from a limited set.
- Flow shop processes are organized around a
- Example: Dell computers, Subway fixed sequence of activities and process steps,
sandwiches, machine tools, and travel agent such as an assembly line, to produce a limited
services. variety of similar goods or services.
- Characteristics: Little or no setup time,
STANDARD/MAKE-TO-STOCK GOODS AND dedicated to small range of goods or services
SERVICES that are similar, similar sequence of process
- Made according to a fixed design, and the steps, moderate to high volume. An assembly
customer has no options from which to line is a common example of a flow shop
process. Many option-oriented and standard
choose.
goods and services are produced in flow-shop
- Example: appliances, shoes, sporting goods,
settings.
credit cards, online Web-based courses, and
- Examples: automobiles, appliances, insurance
bus service. policies, checking account statements, and
hospital laboratory work.
FOUR PRINCIPAL TYPES OF PROCESS
• PROJECTS PROCESSES CONTINUOUS SHOP PROCESSES
• JOB SHOP PROCESSES - A continuous flow process creates highly
• FLOW SHOP PROCESSES standardized goods or services, usually around
the clock in very high volumes.
• CONTINUOUS FLOW PROCESSES
- Characteristics: not made from discrete parts,
very high volumes in a fixed processing
ROJECT PROCESSES
sequence, high investment in system, 24-
- Projects are large-scale, customized hour/7- day continuous operation, automated,
initiatives that consist of many smaller tasks dedicated to a small range of goods or services.
and activities that must be coordinated and - Examples: chemical, gasoline, paint, toy, steel
completed to finish on time and within factories; electronic funds transfer, credit card
budget. authorizations, and automated car wash.
PRODUCT-PROCESS MATRIX
- Model that described the alignment of process
choice with characteristics of manufactured
goods.
PROCESS CHOICE IN SERVICES
- A pathway is a unique route through a service
system. Pathways can be customer- or provider-
driven, depending on the level of control that
the service firm wants to ensure.
- The service encounter activity sequence consists
of all the process steps and associated service
encounters necessary to complete a service
transaction and fulfill customer’s wants and
needs.
SERVICE POSITIONING MATRIX
- Customer-routed services are those that offer
customers broad freedom to select the
pathways that are best suited for their
immediate needs and wants, from many
possible pathways through the service delivery
system. The customer decides what path to take
through the service delivery system with only
minimal guidance from management.
- Examples include searching the Internet,
museums, health clubs, and amusement parks.
SERVICE POSITIONING MATRIX
- Provider-routed services constrain customers to
follow a very small number of possible and
predefined pathways through the service
system.
- A newspaper dispenser is an extreme example of
a service system design with only one pathway,
thus allowing a single service encounter activity
sequence.
- Logging on to your secure online bank account is
provider-routed.
The hierarchy of work is defined as:
• Task
• Activity
• Process
• Value Chain
A TASK is a specific unit of work required to create an
output. An example is drilling a hole in a steel part or
completing an invoice.
An ACTIVITY is a group of tasks (sometimes called a
workstation) needed to create and deliver an
intermediate or final output. Workstations might be a
position on an assembly line, a manufacturing cell, or an
office cubicle.
PROCESS is a group of activities.
VALUE CHAIN is a network of process.
PROCESS DESIGN AND FLOWCHARTING
- A PROCESS MAP (flowchart) describes the
sequence of all process activities and tasks
necessary to create and deliver a desired output
or outcome.
- A process map can include the flow of goods,
people, information, or other entities, as well as
decisions that must be made and tasks that are
performed.
- Process maps document how work either is, or
should be, accomplished, and how the
transformation process creates value.
- Process maps delineate the boundaries of a
process. A process boundary is the beginning or
end of a process.
- A process flowchart is the basis for value stream
mapping, service blueprinting, and service maps.
- Service blueprints add a “line of visibility” that
separates the back and front office (rooms) as
shown in Exhibit 7.5.
- Many names are used for the analysis and
development of process flowcharts, so don’t let
corporate fads and buzzwords confuse you—the
basics of process analysis don’t change, just the
buzzwords and consultant’s sales pitch!
VALUE STREAM MAPPING & FLOWCHARTING
- The value stream refers to all value-added
activities involved in designing, producing, and
delivering goods and services to customers.
- A value stream map (VSM) shows the process
flows in a manner similar to a traditional process
flowchart or service blueprint.
- Traditional flowcharting, service blueprinting,
and value stream mapping all try to analyze wait
and process times, bottleneck work stations,
process throughput, and so on.
- However, the difference between VSM and
these other flowcharting and analysis
approaches lies in that value stream maps
highlight value-added versus non-value-added
activities, and include costs associated with work
activities for both value- and non-value added
activities.
- That is, VSM tries to include the economics of
the process on the flowcharts.
- There are many formats for VSM.
Examples of non-value-added activities include:
- Transferring materials between two
nonadjacent workstations
- Overproducing
- Waiting for service or work to do
- Not doing work correctly the first time
 - Requiring multiple approvals for a low cost - Understanding resource utilization is an
electronic transaction important aspect of process design and
- Eliminating non-value-added activities in a improvement.
process design is one of the most important
responsibilities of operations managers. Utilization (U) = Resources Demanded /
Resource Availability
Steps to Analyze a Process
PROBLEM:
1. Define the purpose and objectives of the process. An inspection station for assembling printers receives 40
2. Create a detailed process or value stream map that and has two inspectors, each of whom can inspect 30
describes how the process is currently performed. printers per hour. What is the utilization of the
3. Evaluate alternative process designs. Identify and inspectors? What service rate would be required to have
define appropriate performance measures for the a target utilization of 85 percent?
process. Solution:
4. Select the appropriate equipment and technology. The labor utilization at this inspection station is
5. Develop an implementation plan to introduce the new calculated to be 40/(2 ×30) = 67%. If the utilization rate
or revised process design.22 is 85%, we can calculate the target service rate by solving
the equation:
Process Analysis and Improvement 85% = 40/(2 ×SR)
1.7 × SR = 40
- Few processes are designed from scratch. Many SR = 23.5 printers/hour
process design activities involve redesigning an
existing process to improve performance. Process Design and Resource Utilization
Management strategies to improve process
designs usually focus on one or more of the - The average number of entities completed per
following: unit time—the output rate—from a process is
• Increasing revenue by improving called throughput.
process efficiency in creating goods and - Throughput might be measured as parts per day,
services and delivery of the customer benefit transactions per minute, or customers per hour,
package. depending on the context.
• Increasing agility by improving flexibility - A bottleneck is the work activity that effectively
and response to changes in demand and limits throughput of the entire process.
customer expectations.
• Increasing product and/or service quality LITTLE’S LAW
by reducing defects, mistakes, failures, or - Little’s Law is a simple formula that explains the
service upsets. relationship among flow time (T), throughput (R) and
work-in-process (WIP).
•Decreasing costs through better
- WORK-IN-PROCESS = THROUGHPUT × FLOW TIME Or
technology or elimination of non-value-
- WIP = R × T
added activities.
- Flow time, or cycle time, is the average time it takes
• Decreasing process flow time by reducing to complete one cycle of a process.
waiting time or speeding up movement - Little’s Law provides a simple way
through the process and value chain. of evaluating average process
performance.
Reengineering and Creative Destruction - If we know any two of the
- Reengineering has been defined as “the three variables, we can compute the third using
fundamental rethinking and radical redesign of Little's Law.
business processes to achieve dramatic
Problem:
improvements in critical, contemporary Suppose that a voting facility processes an average of 50 people per
measures of performance, such as cost, quality, hour and that, on average, it takes 10 minutes. What is the average
service, and speed.” number of voters in the process? for each person to complete the v
-
Solution
Process Design and Resource Utilization WIP = R x T
=50 voters/hr. x (10 minutes/60 minutes per hour)
- Utilization is the fraction of time a workstation = 8.33 voters
or individual is busy over the long run.