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

implements corporate strategy and helps
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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 Operations Strategy
Corporate Strategy
• Environmental scanning Market Analysis
• Core competencies • Market segmentation
• Core processes • Needs assessment
• Global strategies
Competitive Priorities
• Cost
• Quality
• Time
• Flexibility

New Service/
Product Development
• Design
• Analysis No
• Development
• Full launch
Performance
Gap?
Operations Strategy Yes

Competitive Capabilities
Decisions
• Current
• Managing processes
• Needed
• Managing supply chains
• Planned
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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.

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 Order Winners and Qualifiers

Order Winners Order Qualifiers

The criterion customers use The minimum level required
to differentiate the services from a set of criteria for a firm
or products of one firm from to do business in a particular
those of another. market segment.

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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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 Operations Strategy
OPERATIONS STRATEGY ASSESSMENT OF THE BILLING AND PAYMENT PROCESS
Competitive
Measure Capability Gap Action
Priority
Low-cost  Cost per  $0.0813  Target is  Eliminate microfilming
operations billing $0.06 and storage of billing
statement statements
 Weekly  $17,000  Target is  Develop Web-base
postage $14,000 process for posting
bills
Consistent quality  Percent  0.90%  Acceptable  No action
errors in bill
information

 Percent  0.74%  Acceptable  No action

errors in
posting
payments
Delivery speed  Lead time to  48 hours  Acceptable  No action
process
merchant
payments
Volume flexibility  Utilization  98%  Too high to  Acquire temporary
support rapid employees
increase in
volumes
 Improve work methods

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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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 Application 1.1
This Year Last Year Year Before Last
Factory unit sales 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,00
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
–Japanese Earthquake in March 2011
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Trends in Operations Management
• Ethical, Workforce Diversity, and
Environmental Issues
– Ethical decision-making in different countries

– Environmental concerns

– Sustainability initiatives

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