Chapter 1

Operations and Competitiveness

Operations
OperationsManagement
Management

Roberta Russell & Bernard W. Taylor, III

Md. Tariqul Islam

Assistant Professor, Dept. of Management Studies, BAM, PSTU
 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

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 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

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 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

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 Operations as a Transformation
Process

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

Feedback
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 Operations Function

• Operations
• Marketing
• Finance and
Accounting
• Human
Resources
• Outside Suppliers

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How is Operations Relevant to my
Major?

• Accounting • “As an auditor you must understand

the fundamentals of operations
management.”
• Information
Technology • “IT is a tool, and there’s no better
place to apply it than in operations.”
• Management • “We use so many things you learn in
an operations class—scheduling, lean
production, theory of constraints, and
tons of quality tools.”

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How is Operations Relevant to my
Major?

• Economics • “It’s all about processes. I live by

flowcharts and Pareto analysis.”
• Marketing
• “How can you do a good 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.”

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 Evolution of Operations
Management

• Craft production
• process of handcrafting products or services for
individual customers (Before 1700)
• Division of labor (Adam Smith, 1776)
• dividing a job into a series of small tasks each
performed by a different worker
• Interchangeable parts (Eli Whitney, 1790)
• standardization of parts initially as replacement
parts; enabled mass production

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 Evolution of Operations
Management (cont.)

• Scientific management (F.W Taylor, 1900)

• systematic analysis of work methods
• Mass production
• high-volume production of a standardized
product for a mass market
• Lean production (Toyto)
• adaptation of mass production that prizes quality
(quantity) and flexibility (efficiency)

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 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

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 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
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 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

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 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

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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.
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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

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 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)
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Impact of E-Business on Operations
Management

Benefits of E-Business Impact on Operations

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

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Impact of E-Business on Operations
Management (cont.)

Benefits of E-Business Impact on Operations

• Access to customers • Demand increases; order fulfillment and
worldwide logistics become major issues; production
moves overseas
• Logistics change from delivering to a store
• Middlemen are or distribution center to delivering to
individual homes; consumer demand is
eliminated more erratic and unpredictable than
business demand
• Access to suppliers • Outsourcing increases; more alliances and
partnerships among firms are formed;
worldwide supply is less certain; global supply chain
issues arise

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Impact of E-Business on Operations
Management (cont.)
Benefits of E-Business
• Online auctions and e-
marketplaces
• Better and faster decision
making
Impact on Operations
• Competitive bidding lowers cost of
materials; supply needs can be found
in one location
• More timely information is 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
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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 chains
warehousing, transportation and
delivery become focus of operations
management; risk is spread out;
trade barriers fall

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 Globalization and Competitiveness

• Favorable cost
• Access to international
markets
• Response to changes in
demand
• Reliable sources of supply

World Trade Compared to World GDP

Source: “Real GDP and Trade Growth of OECD Countries, 2001–03,”
International Trade Statistics 2003, World Trade Organization,
www.wto.org 1-22
 Globalization and Competitiveness
(cont.)

Germany:
Germany: $26.18
$26.18

USA:
USA: $21.33
$21.33

Taiwan:
Taiwan: $5.41
$5.41

Mexico:
Mexico: $2.38
$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:
China: $0.50
$0.50
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 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
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 Risks of Globalization

• Cultural differences
• Supply chain logistics
• Safety, security, and stability
• Quality problems
• Corporate image
• Loss of capabilities

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 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

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Competitiveness and Productivity
(cont.)

Measures of Productivity

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 Changes in Productivity for
Select Countries

Internet-enabled
Internet-enabled
productivity
productivity

-- Dot
Dot com
com bust
bust
-- 9/11
9/11 terrorist
terrorist attacks
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
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 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

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 Competitiveness and
Productivity

Breakthrough
Breakthrough
Performance
Performance

More
More Efficient
Efficient

Retrench
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
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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
10. Australia 2003–2004, World Economic Forum,
January 2004, www.weforum.org

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 Operations–Oriented Barriers to
Entry

• Economies of Scale
• Capital Investment
• Access to Supply and Distribution Channels
• Learning Curve

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Primary Topics in Operations
Management

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Primary Topics in Operations Management
(cont.)

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