GOODS, SERVICES, AND OPERATIONS MANAGEMENT

•Operations management (OM) is the science and art of ensuring that goods and services are
created and delivered successfully to customers.
•The principles of OM help one to view a business enterprise as a total system, in which all
activities are coordinated, not only vertically throughout the organization, but
also horizontally across multiple functions.

United Performance Metals

•United Performance Metals (UPM), located in Hamilton, Ohio, is a supplier of stainless steel
and high temperature alloys for the specialty metal market.
•UPM’s primary production operations include slitting coil stock and cutting sheet steel to
customer specifications with rapid turnaround times from order to delivery.
•Bob Vogel is the Vice President of Operations at UPM. He is involved in a variety of daily
activities that draw upon knowledge of not only OM and engineering, but also finance,
accounting, organizational behavior, and other subjects.

While understanding specialty metals is certainly a vital part of Mr. Vogel’s job, the ability to
understand customer needs, apply approaches to continuous improvement, understand and
motivate people, work cross-functionally across the business, and integrate processes and
technology within the value chain define Scott’s job as an operations manager.

OM in the Workplace
Brooke Wilson is a Process Manager for J.P. Morgan Chase in the Credit Card Division. Among
his OM-related activities are:

•Planning and budgeting: Representing the plastic card production area in all meetings,
developing annual budgets and staffing plans, and watching technology that might affect the
production of plastic credit cards.

•Inventory management: Overseeing the management of inventory for items such as plastic
blank cards, inserts such as advertisements, envelopes, postage, and credit card rules and
disclosure inserts.
•Scheduling and capacity: Daily to annual scheduling of all resources (equipment, people,
inventory) necessary to issue new credit cards and reissue cards that are up for renewal, replace
old or damaged cards, and ones that are stolen.

•Quality: Embossing the card with accurate customer information and quickly getting the card in
the hands of the customer.
•A good is a physical product that you can see, touch, or possibly consume. Examples of goods
include: oranges, flowers, televisions, soap, airplanes, fish, furniture, coal, lumber, personal
computers, paper, and industrial machines.

•A durable good is a product that typically lasts at least three years. Vehicles, dishwashers, and
furniture are some examples of durable goods.

•A non-durable good is perishable and generally lasts for less than three years. Examples are
toothpaste, software, shoes, and fruit.

•A service is any primary or complementary activity that does not directly produce a physical
product.

Similarities Between Goods and Services

1.Goods and services provide value and satisfaction to customers who purchase and use them.
2.They both can be standardized or customized to individual wants and needs.
3.A process creates and delivers each good or service, and therefore, OM is a critical skill.

Differences Between Goods and Services

1. Goods are tangible while services are intangible.
2. Customers participate in many service processes, activities, and transactions.
3. The demand for services is more difficult to predict than the demand for goods.
4. Services cannot be stored as physical inventory.
5. Service management skills are paramount to a successful service encounter.
6. Service facilities typically need to be in close proximity to the customer.
7. Patents do not protect services.

Understanding Goods and Services

•Service management integrates marketing, human resources, and operations functions to
plan, create, and deliver goods and services, and their associated service encounters.

•A service encounter is an interaction between the customer and the service provider.

Service encounters consist of one or more moments of truth – any episodes, transactions, or
experiences in which a customer comes into contact with any aspect of the delivery system,
however remote, and thereby has an opportunity to form an impression.
•Here, a service encounter includes the impression an empty parking lot has on whether the
customer goes
into a facility or the interaction with other customers such as while waiting in line.
Customer Benefit Packages
•A customer benefit package (CBP) is a clearly defined set of tangible (goods-content) and
intangible (service-content) features that the customer recognizes, pays for, uses, or experiences.
•In simple terms, a CBP is some combination of goods and services configured in a certain way
to provide value to customers.
•A CBP consists of a primary good or service, coupled with peripheral goods and/or services.

A primary good or service is the “core” offering that attracts customers and responds to their
basic needs. For example, the primary service of a personal checking account is the capability to
do convenient financial transactions.
•Examples of a primary good or service: an airline flight, a personal digital assistance (PDA)
device, a checking account, a brief case, a football game, tax preparation advice, and so on.

Peripheral goods or services are those that are not essential to the primary good or service, but
enhance it.
•Examples of peripheral goods or services for a personal checking account: on-line access and
bill payment, debit card, designer checks, paper or electronic account statement, etc.
•Remember each primary or peripheral good or service requires a process to create and deliver it
to customers.

Customer Benefit Packages

•A variant is a CBP attribute that departs from
the standard CBP and is normally location- or firm-specific.
•A variant allows for adding unique goods or services such as a fishing pond or pool at an
automobile dealership where kids can fish while the parents shop for vehicles.
•Once a variant is incorporated and standardized into all CBP delivery sites on a continuous
basis, it becomes a permanent peripheral good or service.

Customer Benefit Packages

•It is very important that you understand the difference between customer wants and needs
versus the CBP features selected by management to fulfill those needs.
•Processes create CBP features such as the (a) physical vehicle itself or (b) a leasing package that
fits what the customer can afford. These CBP features fulfill certain customer’s wants and needs
such as (a) physical transportation from point A to B, or (b) how can I pay for the vehicle?
 Biztainment is the practice of adding entertainment content to a bundle of goods and services
in order to gain competitive advantage

Pal’s Sudden Service

•Pal’s uses extensive market research to fully understand customer requirements: convenience;
ease of driving in and out; easy-to-read menu; simple, accurate order-system; fast service;
wholesome food; and reasonable price.
•Every process is flowcharted and analyzed for opportunities for error, and then mistake-proofed
if at all possible.

Entry-level employees – mostly high school students in their first job – receive 120 hours of
training on precise work procedures and process standards in unique self-teaching, classroom,
and on-the-job settings, reinforced by a “Caught Doing Good” program that provides recognition
for meeting quality standards and high performance expectations.
•Pal’s collect performance measures such as complaints, profitability, employee turnover, safety,
and productivity.

Current Challenges in OM

•Technology

•Globalization

•Changing cunsumer expectations

•A changing workforce

•Global manufacturing

•Sustainability

Sustainability refers to an organization’s ability to strategically address current business needs

and successfully develop a long-term strategy that embraces opportunities and manages risk for
all products, systems, supply chains, and processes to preserve resources for future generations.

Sustainability – Three Dimensions

•Environmental sustainability focuses on OM activities such as remanufacturing, waste
management, green supply chains, and energy conservation.

•Social sustainability requires organizations to continually evaluate the impacts of their products
and operations on society as a part of the organization’s overall corporate responsibilities, such as
creating a zero carbon footprint product or supply chain.

•Economic sustainability revolves around making sound financial and operational decisions
about workforce capability and capacity, resource acquisitions, technology, knowledge, core
competencies, work systems, facilities, and equipment, as well as preparation for real-time or
short-term emergencies.

Value Chains
•The underlying purpose of every organization is to provide value to its customer and
stakeholders.
•
•Value is the perception of the benefits associated with a good, service, or bundle of goods and
services (i.e., the customer benefit package) in relation to what buyers are willing to pay for
them.

•The decision to purchase a good or service, or a customer benefit package, is based on an

assessment by the customer of the perceived benefits in relation to its price.
•
•The customer's cumulative judgment of the perceived benefits leads to either satisfaction or
dissatisfaction.

One of the simplest functional forms of value is:

Value = Perceived benefits/Price (cost) to the customer

If the value ratio is high, the good or service is perceived favorably by customers, and the
organization providing it is more likely to be successful. To increase value, an organization
must:

(a) increase perceived benefits while holding price or cost constant,

(b) increase perceived benefits while reducing price or cost, or
(c) decrease price or cost while holding perceived benefits constant.
Value Chains
A value chain is a network of facilities and processes that describes the flow of goods, services,
information, and financial transactions from suppliers through the facilities and processes that
create goods and services and deliver them to customer.

A value chain is a “cradle-to-grave” model of the operations function (see Exhibit 2.1).

The value chain begins with suppliers. Suppliers might be distributors, employment agencies,
dealers, financing and leasing agents, information and Internet companies, field maintenance and
repair services, architectural and engineering design firms, and contractors, as well as
manufacturers of materials and components.

•The inputs suppliers provide might be physical goods such as:

-automobile engines or microprocessors provided to an assembly plant;
-meat, fish, and vegetables provided to a restaurant;
-trained employees provided to organizations by universities and technical schools; or
-information such as computer specifications or a medical diagnosis.

-Inputs are transformed into value-added goods and services through processes or networks of
work activities, which are supported by such resources as land, labor, money, and information.

-The value chain outputs—goods and services—are delivered or provided to customers and
targeted market segments.
Examples of Goods-Producing and Service-Providing Value Chains
(slide 1)

Pre- and Postservice View of the Value Chain

A Service View of a Business
•Nestle once defined its business from a physical good viewpoint as "selling coffee machines."
Using service management thinking, they redefined their business from a service perspective
where the coffee machine is more of a peripheral good.
•
•They decided to lease coffee machines and provide daily replenishment of the coffee and
maintenance of the machine for a contracted service fee. This "primary leasing service" was
offered to organizations that sold more than 50 cups of coffee per day.

A Service View of a Business

•The results were greatly increased Nestle coffee sales, new revenue opportunities, and much
stronger profits.
•
•Nestle's service vision of their business required a completely new service and logistical value
chain capability.

Buhrke Industries, Inc. Value Chain

•Buhrke Industries Inc., located in Arlington Heights, Illinois, provides stamped metal parts to
many industries, including automotive, appliance, computer, electronics, hardware, housewares,
power tools, medical, and telecommunications.
•
•Buhrke’s objective is to be a customer’s best total-value producer with on-time delivery, fewer
rejects, and high-quality stampings. However, the company goes beyond manufacturing goods;
it prides itself in providing the best service available as part of its customer value chain.

The Value Chain at Buhrke Industries

Buhrke Industries, Inc. Value Chain
•Service is more than delivering a product
on-time. It's also partnering with customers
by providing personalized service for fast, accurate response; customized engineering designs to
meet customer needs; preventive maintenance systems to ensure high machine uptime;
experienced, highly trained, long-term employees; and troubleshooting by a knowledgeable sales
staff.

A supply chain is the portion of the value chain that focuses primarily on the physical movement
of goods and materials, and supporting flows of information and financial transactions through
the supply, production, and distribution processes.
•
Many organizations use the terms “value chain” and “supply chain” interchangeably; however,
we differentiate these two terms in this book.

A value chain is broader in scope than a supply chain, and encompasses all pre- and post-
production services (see Exhibit 2.3) to create and deliver the entire customer benefit package.
•
A value chain views an organization from the customer's perspective—the integration of goods
and services to create value—while a supply chain is more internally-focused on the creation of
physical goods.

Value Chain Design and Management

Outsourcing is the opposite of vertical integration in the sense that the organization is shedding
(not acquiring) a part of its organization.

•Vertical integration refers to the process of acquiring and consolidating elements of a value
chain to achieve more control.
•
•Outsourcing is the process of having suppliers provide goods and services that were previously
provided internally.

•Backward integration refers to acquiring capabilities at the front-end of the supply chain (for
instance, suppliers), while forward integration refers to acquiring capabilities toward the
back-end of the supply chain (for instance, distribution or even customers).
•
•Companies must decide whether to integrate backward (acquiring suppliers) or forward
(acquiring distributors), or both.

The U.S. has experienced three waves of outsourcing:

•The first wave involved the exodus of goods-producing jobs from the U.S. in many industries
several decades ago. Gibson Guitars, for example, produces its Epiphone line in Korea.
•The second wave involved simple service work, such as standard credit card processing, billing
and other forms of transaction processing, keying information into computers, and writing simple
software programs. Accenture, for example, does much of its bookkeeping operations in Costa
Rica.

•The third, and current wave, involves skilled knowledge work, such as engineering design,
graphic artists, architectural plans, call center customer service representatives, and computer
chip design. For example, Massachusetts General Hospital uses radiologists located in
Bangalore, India, to interpret CT scans.

Solved Problem
Suppose that a manufacturer needs to produce a custom aluminum housing for a special
customer order. Because it currently does not have the equipment necessary to make the
housing, it would have to acquire machines and tooling at a fixed cost (net of salvage value after
the project is completed) of $250,000. The variable cost of production is estimated to be $20 per
unit. The company can outsource the housing to a metal fabricator at a cost of $35 per unit. The
customer order is for 12,000 units. What should they do?

Solution
VC1 = Variable cost/unit if produced = $20
VC2 = Variable cost/unit if outsourced = $35
FC = fixed costs associated with producing the part = $250,000
Q = quantity produced
Using Equation 2.1 we obtain:
Q = 250,000/($35 - $20) = 16,667
In this case, because the customer order is for only 12,000 units, which is less than the
break-even point, the least cost decision is to outsource the component.

Value chain integration is the process of managing information, physical goods, and services to
ensure their availability at the right place, at the right time, at the right cost, at the right quantity,
and with the highest attention to quality.

Value chain integration in services—where value is in

the form of low prices, convenience, and access to special
time-sensitive deals and travel packages—takes many
forms. Examples include:

Third-party integrators for the leisure and travel industry value chains include Orbitz, Expedia,
Priceline, and Travelocity.
Many financial services use information networks provided by third-party information
technology integrators, such as AT&T, Sprint, IBM, and Verizon, to coordinate their value
chains.
Hospitals also use third-party integrators for both their information and physical goods, such as
managing patient billing and hospital inventories.

Offshoring is the building, acquiring, or moving of process capabilities from a domestic location
to another country location while maintaining ownership and control.
 According to one framework, foreign factories can be classified into one of six categories:
1.Offshore factories established to gain access to low wages and other ways to reduce costs, such
as avoiding trade tariffs. An offshore factory is the way most multinational firms begin their
venture into global markets and value chains.
2.Outpost factories established primarily to gain access to local employee skills and knowledge.
Such skills and knowledge might include software programming or call center service
management.

3.Server factories established to supply specific national or regional markets.

4.Source factories, like offshore factories, established to gain access to low cost production but
also have the expertise to design and produce a component part for the company's global value
chain.
5.Contributor factories established to serve a local market and conduct activities like product
design and customization. Primary manufacturing, accounting, engineering design, and
marketing and sales processes often reside at contributor factories.
6.Lead factories established to innovate and create new processes, products, and technologies.
Lead factories must have the skills and knowledge to design and manufacturer "the next
generation of products."

Issues for Managing Global Value Chains

·Global supply chains face higher levels of risk and uncertainty, requiring more inventory and
day-to-day monitoring to prevent product shortages. Workforce disruptions, such as labor strikes
and government turmoil in foreign countries, can create inventory shortages and disrupting
surges in orders.
·Transportation is more complex in global value chains. For example, tracing global shipments
normally involves more than one mode of transportation and foreign company.
·
·The transportation infrastructure may vary considerably in foreign countries. The coast of
China, for example, enjoys much better transportation, distribution, and retail infrastructures than
the vast interior of the country.

·Global purchasing can be a difficult process to manage when sources of supply, regional
economies, and even governments change. Daily changes in international currencies necessitate
careful planning and in the case of commodities, consideration of futures contracts.
·
·International purchasing can lead to disputes and legal challenges relating to such things as price
fixing and quality defects.
·
·Privatizing companies and property is another form of major changes in global trade and
regulatory issues.

T or F

FALSE- Operations management is focused primarily on the application of technology in

manufacturing.
True 2. To apply the principles of operations management, managers need to understand people,
processes, and technology.
True 3. Every job entails some aspect of operations management.
False 4. Employees who work in financial and accounting functions of organizations need little
knowledge of operations management.
false 5. Ensuring that a credit card has accurate customer information and is delivered quickly to
the customer is an example of inventory management in OM.
True 6. A product that typically lasts at least three years is called a durable good.
True 7. A toothbrush is an example of a nondurable good.
False. 8. All services can be managed much the same as goods in a factory.
False 9. Customer participation in many manufacturing processes and activities is generally high
True 10. Customers and service providers often work together to co-produce a service.
True 11. Services always involve direct customer contact.
True 12. Moments of truth consist of one or more service encounters.
True 13. A service encounter is any interaction between a customer and a service provider.
False 14. The demand for services is usually easier to predict than the demand for goods.

Truc 16. The greater the customer participation, the more uncertainty the firm has with respect to
service time.
True 17. A customer benefit package (CBP) consists of a primary good or service coupled with
peripheral goods and/or services.
False 18. The ability to download music onto a cell phone would be considered a primary
service.

True 19. Peripheral goods and services are not essential to a primary good or service.
True 20. Many products that appear to be only physical goods often include bundled services.
True 21. Process thinking is the traditional way of viewing an organization by function.
True 22. Value creation processes focus on primary goods and services.
False 23. A process can be designed by operations managers independently of the choice of a
customer benefit package, which is chosen exclusively by marketing staff.
True 24. Taking a customer order at a quick service restaurant would generally be considered as
a support process.
False 25. Quality has always been a principal focus of operations management since the
industrial revolution.
True 26. The reason that many Japanese firms captured major shares of world markets in the
1970s was the result of their focus on quality rather than efficiency.
True 27. As manufacturers sought to customize products for global markets and increase goods
and service variety, they were able to leverage the mass production methods that are very
efficient and cost-effective.
True 28. Today, about 60% of the Philippine economy is involved in service industries.
false 29. Many business-to-business manufactures think of the physical good they produce as
peripheral to their service offerings.
True 30. Time-based competition means providing new and innovative products that surprise and
delight customers,
True 31. Augustinian graduates are expected to become critical thinkers, lovers of Truth, agents
of transformation, and responsible community builders.
false 32. The BSBA major in Financial Management graduates should assume top managerial
responsibilities within their organization within 3-5 years after graduation.
True 33. One of the program outcomes of BSBA-FM is to apply the basic concepts of operations
management, together with other functional areas, in various business situations.

False 34. Operations management focuses on integrating the numerous activities and processes
necessary to market goods and services in a highly competitive global environment.

True 35. The University of San Agustin envisions to be a premier academic community of
life-long learners working with one mind and one heart to search for, discover and share the
Truth (Gaudium de Veritate) for the promotion of authentic human and societal development.