Business Driven Technology - Instructor’s Manual

BUSINESS PLUG-IN B8
Operations Management

Organizations that excel in operations management and specifically supply chain management
perform better in almost every financial measure of success, according to a report from Boston-
based AMR Research Inc. When supply chain excellence improves operations, companies
experience a 5 percent higher profit margin, 15 percent less inventory, 17 percent stronger “perfect
order” ratings, and 35 percent shorter cycle times than their competitors. “The basis of competition
for winning companies in today’s economy is supply chain superiority,” said Kevin O’Marah, vice
president of research at AMR Research. “These companies understand that value chain
performance translates to productivity and market-share leadership. They also understand that
supply chain leadership means more than just low costs and efficiency: It requires a superior ability
to shape and respond to shifts in demand with innovative products and services.”

LEARNING OUTCOMES
1 Define the term operations management
Books, DVDs, downloaded MP3s, and dental and medical procedures are all examples of
goods and services. Production management describes all the activities mangers do to help
companies create goods. To reflect the change in importance from manufacturing to services,
the term production often has been replaced by operations to reflect the manufacturing of
both goods and services. Operations management (OM) is the management of systems or
processes that convert or transform resources (including human resources) into goods and
services. Operations management is responsible for managing the core processes used to
manufacture goods and produce services.

2 Explain operations management role in business.

The scope of OM ranges across the organization and includes many interrelated activities,
such as forecasting, capacity planning, scheduling, managing inventories, assuring quality,
motivating employees, deciding where to locate facilities, and more.

3 Describe the correlation between operations management and information technology.

Managers can use IT to heavily influence OM decisions including productivity, costs,
flexibility, quality, and customer satisfaction. One of the greatest benefits of IT on OM is in
making operational decisions as operations management exerts considerable influence over
the degree to which the goals and objectives of the organization are realized. Most OM
decisions involve many possible alternatives that can have varying impacts on revenues and
expenses. OM information systems are critical for managers to be able to make well-informed
decisions.

Recall how decision support systems and executive information systems can help an
organization perform what-if analysis, sensitivity analysis, drill-down, and consolidation.
Numerous managerial and strategic key decisions are based on OM information systems that
affect the entire organization including:
• What: What resources will be needed, and in what amounts?

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• When: When will each resource be needed? When should the work be scheduled? When
should materials and other supplies be ordered? When is corrective action needed?
• Where: Where will the work be performed?
• How: How will the product or service be designed? How will the work be done
(organization, methods, equipment)? How will resources be allocated?
• Who: Who will perform the work?

4 Describe the five characteristics of competitive priorities.

The key to developing a competitive OM strategy lies in understanding how to create value-
added goods and services for customers. Specifically value is added through the competitive
priority or priorities that are selected to support a given strategy. There are five key
competitive priorities that translate directly into characteristics that are used to describe
various processes by which a company can add value to its OM decisions including:
1. Cost
2. Quality
3. Delivery
4. Flexibility
5. Service

CLASSROOM EXERCISE
Nike’s Operations
It drives Vice President Roland Wolfram crazy that while the rest of the world knows his company
for its swooshbuckling marketing and its association with the world's most famous athletes, the IT
world thinks of Nike as the company that screwed up its supply chain—specifically, the i2 demand-
planning engine that, in 2000, spat out orders for thousands more Air Garnett sneakers than the
market had appetite for and called for thousands fewer Air Jordans than were needed.

Too many Air Garnetts. Too few Air Jordans. Nike lost money, time and a measure of pride when
its demand-planning software led it astray. How did it recover? Patience, perseverance and, most
important, an understanding of what it was trying to accomplish in the first place

Wolfram calls the i2 problem—a software glitch that cost Nike more than $100 million in lost sales,
depressed its stock price by 20 percent, triggered a flurry of class-action lawsuits, and caused its
chairman, president and CEO, Phil Knight, to lament famously, "This is what you get for $400
million, huh?"—a "speed bump." Some speed bump. In the athletic footwear business, only Nike,
with a 32 percent worldwide market share (almost double Adidas, its nearest rival) and a $20 billion
market cap that's more than the rest of the manufacturers and retailers in the industry combined,
could afford to talk about $100 million like that.

But there was a lesson too for people who do, in fact, follow "this sort of thing," specifically CIOs.
The lesson of Nike's failure and subsequent rebound lies in the fact that it had a business plan that
was widely understood and accepted at every level of the company. Given that, and the resiliency
it afforded the company, in the end the i2 failure turned out to be, indeed, just a "speed bump."

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CLASSROOM EXERCISE
Listerine’s Supply Chain
Ask your students to sketch the journey a bottle of Listerine takes from production to the shelf at
Safeway or Walgreens. Inform your students that they are working for Listerine and need to
perform a risk assessment of the supply chain. In other words, they need to determine all areas
and potential threats that make the supply chain vulnerable. For example:
• Explain OM’s role in Listerine’s business
• Why are operations management important to Listerine’s business
• An unusually bad season in Australia causes the eucalyptus harvest to fall short of expectation
production levels, which causes the price to skyrocket
• The factory in Lititz, Pennsylvania, is destroyed by a fire
• One of its transportation ships sinks
• A hurricane causes one of its transportation ships to be delayed

CORE MATERIAL
The core chapter material is covered in detail in the PowerPoint slides. Each slide contains detailed
teaching notes including exercises, class activities, questions, and examples. Please review the
PowerPoint slides for detailed notes on how to teach and enhance the core chapter material.

MAKING BUSINESS DECISIONS

Instructor Note: There are few right or wrong answers in the business world. There are really only
efficient and inefficient, and effective and ineffective business decisions. If there were always right
answers businesses would never fail. These questions were created to challenge your students to
apply the materials they have learned to real business situations. For this reason, the authors
cannot provide you with one version of a correct answer. When grading your students’ answers, be
sure to focus on their justification or support for their specific answers. A good way to grade these
questions is to compare your student’s answers against each other.

1. OPERATIONAL MOWING
Project Purpose: To understand operations management in a small business.
Potential Solution: After losing her job, Mary Lou asked him how much he’d be willing to pay
for her to mow his lawn. Soon Mary Lou was mowing the lawns of ten neighbors. Other
neighbors wanted her to work on their lawns, but she did not feel that she could spare any
more time from her job search. However, as the rejection letters began to pile up, Mary Lou
knew she had to make a decision if she would go into business for herself or continue her job
search.

By the end of her first year in business Mary Lou was easily earning a good living. She began
performing other services such as fertilizing lawns, weeding gardens, trimming shrubs, and
installing sprinkler systems. Business was so good that Mary Lou hired several employees to
assist her and believed she could further expand her business. As Mary Lou begins to plan
her expansion she needs your assistance in answering the following questions:

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1. In what ways are Mary Lou’s customers most likely to judge the quality of her lawn care
services? Customers will most likely judge her lawn services based on the five competitive
priorities. There are five key competitive priorities that translate directly into characteristics
that are used to describe various processes by which a company can add value to its OM
decisions including:
• Cost: Dell is the low-cost provider of computers and the company strategically uses
OM from a strategic, tactical, and OP&C levels to continually drive down costs, which
drives down prices. Removing the intermediary was a primary way that the company
drives down costs.
• Quality: Dell must continuously monitor its operations to ensure it is delivering high-
quality products and support service. Nothing kills a computer company quicker than
bad products – quality is key.
• Delivery: Dell promises quick delivery – typically within 24 to 72 hours. It must
continuously monitor its operations to ensure all orders are met when promised and
delivered as quickly as possible.
• Flexibility: Customers have the ability to design systems as they want – with each
component customized. Dell must continue to meet this high-demanding customer
needs to remain in the top market space.
• Service: Customer service is key and Dell has taken a great deal of negative publicity
when its service level decreased after outsourcing its help centers to India. Without
proper service the company will lose its customers.
2. Mary Lou is the operations manager of her business. Among her responsibilities are
forecasting, inventory management, scheduling, quality assurance, and maintenance.
Managers can use IT to heavily influence OM decisions including productivity, costs,
flexibility, quality, and customer satisfaction. One of the greatest benefits of IT on OM is in
making operational decisions as operations management exerts considerable influence over
the degree to which the goals and objectives of the organization are realized. Most OM
decisions involve many possible alternatives that can have varying impacts on revenues and
expenses. OM information systems are critical for managers to be able to make well-informed
decisions. Recall how decision support systems and executive information systems can help
an organization perform what-if analysis, sensitivity analysis, drill-down, and consolidation.
Numerous managerial and strategic key decisions are based on OM information systems that
affect the entire organization including:
• What: What resources will be needed, and in what amounts?
• When: When will each resource be needed? When should the work be scheduled?
When should materials and other supplies be ordered? When is corrective action
needed?
• Where: Where will the work be performed?
• How: How will the product or service be designed? How will the work be done
(organization, methods, equipment)? How will resources be allocated?
• Who: Who will perform the work?

1. What kinds of things would likely require forecasts? Operations strategy is concerned
with the development of a long-term plan for determining how to best utilize the major
resources of the firm so that there is a high degree of compatibility between these
resources and the firm’s long-term corporate strategy. Operations strategy addresses
very broad questions about how these major resources should be configured in order

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to achieve the desired corporate objectives. Some of the major long-term issues
addressed in operations strategy include:
• How big to make the facilities?
• Where to locate the facilities?
• When to build additional facilities?
• What type of process(es) to install to make the products?
2. What inventory items does Mary Lou probably have? Name one inventory decision she
has to make periodically. She will need to keep inventory of all lawn equipment,
landscaping equipment, plants, trees, vehicles, etc. She will need to make many
inventory decisions such as when to buy a new mower and when to upgrade her
digger for the sprinkler systems.
3. What scheduling must she do? What things might occur to disrupt schedules and
cause Mary Lou to reschedule? Mary Lou must schedule her customers, employees,
maintenance on equipment, etc. Sick employees, bad weather, and defunct
equipment could all cause Mary Lou to reschedule her appointments.
4. How important is quality assurance to Mary Lou’s business? Quality will be critical to
Mary Lou’s business. This is a tough market with few entry barriers and the
competition will be fierce. If Mary Lou does not produce high-quality services her
customers will find new lawn care companies.

3. What are some of the trade-offs that Mary Lou probably considered relative to:
• Working for a company instead of for herself?
• Expanding the business?
• Launching a website?

Responsibility is the biggest trade-off for Mary Lou. She is now personally responsible for her
business, for her employees, for her insurance – business and health, etc. This is a big risk for
any person to undertake and the rewards will need to outnumber the risk. As the business
grows she will need more employees, accountants to do her taxes, and managers to help her
run the business. Growing is risky as her employees could cannibalize her customers one day
– she will need to be careful when she hires employees.

4. The town is considering an ordinance that would prohibit grass clippings at the curb for
pickup because local landfills cannot handle the volume. What options might Mary Lou
consider if the ordinance is passed? Strategic Planning: Today, many organizations,
especially larger conglomerates, operate in terms of strategic business units (SBUs),
which consist of several stand alone businesses. When companies become really large,
they are best thought of as being composed of a number of businesses (or SBUs). As
displayed in Figure 8.5, operations strategy supports the long-range strategy developed at
the SBU level. Decisions at the SBU level focus on being effective, that is, “on doing the
right things.” These decisions are sometimes referred to as strategic planning which
focuses on long range planning such as plant size, location, and type of process to be
used. This could be a great opportunity for Mary Lou to open a new line of business (SBU)
where she could off picking up and proper disposal of curb side clippings. She could also
outsource the pickup to another vendor.

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5. Mary Lou decided to offer her employees a bonus of $250 for ideas on how to improve the
business, and they provided several good ideas. One idea that she initially rejected now
appears to hold great promise. The employee who proposed the idea has left the
company and is currently working for a competitor. Should Mary Lou send the employee a
check for the idea? This is an ethical decision that each student will answer depending
on his or her ethics.

2. TOTAL RECALL
Project Purpose: To understand how operational problems can impact an entire business.
Potential Solution In mid-2000, the Firestone Tire Company issued a recall of some of its
tires – those mounted on certain sport-utility vehicles (SUV) of the Ford Motor Company. This
was done in response to reports that tire treads on some SUVs separated in use, causing
accidents, some of which involved fatal injuries as vehicles rolled over.

At first, Firestone denied there was a problem with its tires, but it issued the recall under
pressure from consumer groups and various government agencies. All of the tires in question
were produced at the same tire plant, and there were calls to shut down that facility. Firestone
suggested that Ford incorrectly matched the wrong tires with its SUVs. There were also the
suggestions that the shock absorbers of the SUVs were rubbing against the tires, causing or
aggravating the problem.

Both Ford and Firestone denied that this had been an ongoing problem. However, there was a
public outcry when it was learned that Firestone had previously issued recalls of these tires in
South America, but companies had settled at least one lawsuit involving an accident caused by
tread separation several years earlier.

This case raises a number of issues, some related to possible causes, as well as ethical
issues. Discuss each of these factors and their actual or potential relevance to what
happened:

1. Product: Firestone and Ford both produce products. When a company produces
products and services they must constantly monitor the five competitive priorities. All of
these factors could contribute to the issues with the tire. The key to developing a
competitive OM strategy lies in understanding how to create value-added goods and
services for customers. Specifically value is added through the competitive priority or
priorities that are selected to support a given strategy. There are five key competitive
priorities that translate directly into characteristics that are used to describe various
processes by which a company can add value to its OM decisions including:
• Cost
• Quality
• Delivery
• Flexibility
• Service

2. Quality control: Assuring quality: Quality is indispensable in an airline where safety is the
highest priority. Today’s travelers expect high-quality customer service during ticketing,

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check-in, curb service, and unexpected issues where the emphasis is on efficiency and
courtesy. Quality can be divided into two categories; product quality and process quality.
Product quality levels vary as to the particular market that it is aimed to serve. For
example, a generic bike is of significantly different quality than the bike of a world-class
cyclist. Higher quality products command higher prices in the marketplace. Organizations
must establish the “proper level” of product quality by focusing on the exact requirements
of their customers. Overdesigned products with too much quality will be viewed as being
prohibitively expensive. Under-designed products, on the other hand, will lose customers
to products that cost a little more but are perceived by the customers as offering greater
value.

Process quality is critical in every market segment. Regardless of whether the product is a
generic bike or a bike for an international cyclist, customers want products without defects.
Thus, the primary goal of process quality is to produce error-free products. Improving
quality is an investment that pays off in better customer relationships and higher revenues.
Many organizations have turned to the use of modern quality control standards including:
• Six sigma quality: Detects potential problems to prevent their occurrence and allows
just 3.4 defects per million opportunities. That is important to companies like Bank of
America, which makes 4 million transactions a day.
• Malcolm Baldrige National Quality Awards: In 1987 in the United States, a standard
was set for overall company quality with the introduction of the Malcolm Baldrige
National Quality Awards, named in hone of the late U.S. secretary of commerce.
Companies can apply for these awards in each of the following areas: manufacturing,
services, small businesses, education, and health care. To qualify, an organization
has to show quality in seven key areas: leadership, strategic planning, customer and
market focus, information and analysis, human resources focus, process
management, and business results.
• ISO900: The common name given to quality management and assurance standards.
The International Organization for Standardization (ISO) is a nongovernmental
organization established in 1947 to promote the development of world standards to
facilitate the international exchange of goods and services. ISO is a worldwide
federation of national standards bodies from more than 140 countries. ISO 900
standards require a company to determine customer needs, including regulatory and
legal requirements. The company must also make communication arrangements to
handle issues such as complaints. Other standards involve process control, product
testing, storage, and delivery.
• ISO 14000: A collection of the best practices for managing an organization’s impact on
the environment. ISo 14000 does not prescribe specific performance levels, but
establishes environmental management systems. The requirements for certification
include having an environmental policy, specific improvement targets, conduct audits
of environmental programs, and maintain top management review of processes.
Certification in ISO 14000 displays that a firm has a world-class management system
in both quality and environmental standards.
• CMMI: CMMI stands for Capability Maturity Model Integration. CMMI is a framework
of best practices. The current version, CMMI-DEV, describes best practices in
managing, measuring and monitoring software development processes. The CMMI
model does not describe the processes themselves; it describes the characteristics of

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good processes, thus providing guidelines for companies developing or honing their
own sets of processes.

3. Ethics: Ethics is everywhere is this dilemma. Should a company take responsibility for
product problems? The obvious answer is yes, but when the problem becomes diluted
with many different vendors involved in the issues the blame is not always clear. Student
answers to this question will vary depending on his/her personal ethics.

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