Chapter 1

Competing with Operations

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Operations Management

 The systematic design, direction, and

control of processes that transform inputs
into services and products for internals, as
well as external, customers
Transformation Processes
Inputs (Adding value) Outputs

 Processes can be linked together to form a

supply chain – interrelated processes within
a firms and across different firms that
produce a service or product to the
satisfaction of the customers
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Across the Organization
Finance
Acquires financial
resources and capital
for inputs

Material & Sales

Service Inputs Revenue

Support Functions
• Accounting
• Information Systems
• Human Resources
Operations • Engineering Marketing
Translates Generates sales
materials and of outputs
service into
outputs
Product &
Figure 1.1 Service Outputs
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A Process View
External environment

Internal and external

customers

Inputs Outputs
Processes and
• Workers operations • Goods
• Managers • Services
• Equipment 1 3
• Facilities
5
• Materials
• Land 2 4
• Energy

Information on
performance

Figure 1.2

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Service Processes and
Manufacturing Processes

Manufacturing processes change

materials in one or more of the following
dimensions:
 Physical properties
 Shape

 Fixed dimensions
 Surface finish
 Joining parts and materials
If a process isn’t doing at least one of these, then
it is a service (non-manufacturing) process.
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A Process View

More like a More like a

manufacturing 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

Figure 1.3
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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
Yes Gap?
Operations Strategy

Competitive Capabilities
Decisions
• Current
• Managing processes
• Needed
• Managing supply chains
• Planned
Figure 1.5
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Competitive Priorities
TABLE 1.2 | DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE
PRIORITIES
COST Definition Process Considerations Example
1. Low-cost Delivering a service or a Processes must be designed and Costco
operations product at the lowest operated to make them efficient
possible cost
QUALITY
2. Top quality Delivering an outstanding May require a high level of Ferrari
service or product customer contact and may require
superior product features
3. Consistent Producing services or Processes designed and McDonald’s
quality products that meet design monitored to reduce errors and
specifications on a prevent defects
consistent basis
TIME
4. Delivery speed Quickly filling a Design processes to reduce lead Dell
customer’s order time
5. On-time Meeting delivery-time Planning processes to increase United Parcel
delivery promises percent of customer orders Service (UPS)
shipped when promised
6. Development Quickly introducing a new Cross-functional integration and Li & Fung
speed science or a product involvement of critical external
suppliers

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Competitive Priorities
TABLE 1.2 | DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE
PRIORITIES
FLEXIBILITY Definition Process Considerations Example
7. Customization Satisfying the unique Low volume, close customer Ritz Carlton
needs of each customer contact, and easily reconfigured
by changing service or
products designs
8. Variety Handling a wide Capable of larger volumes than Amazon.com
assortment of services or processes supporting
products efficiently customization
9. Volume Accelerating or Processes must be designed for The United States
flexibility decelerating the rate of excess capacity Postal Service
production of service or (USPS)
products quickly to
handle large fluctuations
in demand

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Productivity

Productivity is the value of outputs

(services and products) produced, divided
by the value of input resources(wages,
costs of equipment, etc.)

Output
Productivity =
Input

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Productivity

 Single-factor productivity
o Labor productivity
 Output per person or per hour
o Machine productivity
 Output per machine
 Multi-factor productivity
o Output provided by more than one
resource

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Productivity Improvement
EXAMPLE 1.1
Calculate the productivity for the following operations:

a. Three employees process 600 insurance policies in a week.

They work 8 hours per day, 5 days per week.

SOLUTION
Policies processed
a. Labor productivity =
Employee hours

600 policies
= = 5 policies/hour
(3 employees)(40 hours/employee)

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Productivity Improvement
EXAMPLE 1.1
Calculate the productivity for the following operations:

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.

SOLUTION
Value of output
a. 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
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 2,475,73 2,175,447
= 24.66/hr 8 = 21.91/hr = $18.91/hr
employment 112,000 115,000
113,000

 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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Solved Problem 1

Student tuition at Boehring University is $150 per semester

credit hour. The state supplements school revenue by $100 per
semester credit hour. Average class size for a typical 3-credit
course is 50 students. Labor costs are $4,000 per class,
material costs are $20 per student per class, and overhead
costs are $25,000 per class.

a. What is the multifactor productivity ratio for this course

process?
b. If instructors work an average of 14 hours per week for 16
weeks for each 3-credit class of 50 students, what is the
labor productivity ratio?

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 Solved Problem 1
SOLUTION

a. Multifactor productivity is the ratio of the value of output to

the value of input resources.
$150 tuition +
50 student 3 credit hours $100 state support
of output =
class student credit hour

= $37,500/class

of inputs = Labor + Materials + Overhead

= $4,000 + ($20/student  50 students/class) + $25,000
= $30,000/class

Output $37,500/class
Multifactor productivity = = = 1.25
Input $30,000/class

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 Solved Problem 1
SOLUTION

b. Labor productivity is the ratio of the value of output to

labor hours. The value of output is the same as in part (a),
or $45,000, so

14 hours 16 weeks
of input =
week class

= 224 hours/class

Output $45,000/class
ductivity = =
Input 224 hours/class

= $200.89/hour

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Solved Problem 2

Natalie Attire makes fashionable garments. During a particular

week employees worked 360 hours to produce a batch of 132
garments, of which 52 were “seconds” (meaning that they were
flawed). Seconds are sold for $90 each at Attire’s Factory Outlet
Store. The remaining 80 garments are sold to retail distribution
at $200 each. What is the labor productivity ratio of this
manufacturing process?

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 Solved Problem 2

SOLUTION

Value of output = (52 defective  90/defective)

+ (80 garments  200/garment)

= $20,680

ours of input = 360 hours

Output $20,680
or productivity = =
Input 360 hours

= $57.44 in sales per hour

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