OPERATIONS AND PRODUCTIVITY Tangible: The seat itself

C.1 Product can usually be kept in inventory (beauty

Operations for Goods and Services care products)

 Manufacturers produce tangible product, Similar products produced (iPods)

services often intangible Limited customer involvement in production
 Services: Repair and Maintenance,
Government, Food and Lodging, Product standardized (iPhone)
Transportation, Insurance, trade, financial, Standard tangible product tends to make automation
real estate, education, medical, legal, feasible
entertainment.
 Operations activities for both - often very Product typically produced at a fixed facility
similar: both have high Quality standards; Many aspects of quality for tangible products are
customers; employed people easy to evaluate (strength of a bolt)
 Distinction not always clear
Product often has some residual value
 Few pure services i.e. Counseling

Differences Between Goods and Services Productivity Challenge

Productivity is the state of being able to create,
CHARACTERISTICS OF SERVICES
particularly at a high quality and quick speed.
Intangible: Ride in an airline seat
More efficient – more productive – more value
Produced and consumed simultaneously: Beauty added to the good or service
salon produces a haircut that is consumed as it is
 Productivity is the ratio of outputs (goods
produced
and services) divided by the inputs
Unique: Your investments and medical care are (resources such as labor and capital)
unique  Outputs / Inputs - The objective is to
Unique: Your investments and medical care are improve productivity!
unique Important Note- Production is a measure of
Inconsistent product definition: Auto Insurance output only and not a measure of efficiency
changes with age and type of car The objective is to improve productivity
Often knowledge based: Legal, education, and  Improving productivity means improving
medical services are hard to automate efficiency.
Services dispersed: Service may occur at retail  2 ways:
store, local office, house call, or via internet - Reducing inputs while keeping output
constant
Quality may be hard to evaluate: Consulting, - Increasing output while keeping inputs
education, and medical services constant
 Economics: inputs are labor, capital and
Reselling is unusual: Musical concert or medical
management; outputs are goods and
care z
services
CHARACTERISTICS OF GOODS
 The Economic System Multifactor productivity – indicates the ratio of
goods and services produced (outputs) to many or
all resources (inputs)
Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day: 4x8= 32 labor hrs

Productivity Measurement 8 titles/day

Productivity = Units produced / Input used Payroll cost = $640/day

- Measure of process improvement Overhead = $400/day

- Represents output relative to input Old Labor productivity = 8 titles per day / 32
- High production means producing many labor hrs = 0.25 titles per labor hr
units, while
- High productivity means producing units
efficiently New System:
Productivity Calculations 14 titles/day
Labor Productivity Overhead = $800/day
Productivity = Units produced / Labor-hours Staff of 4 works 8 hrs per day
used
New Labor productivity = 14 titles per day/ 32
Ex. 1,000 / 250 hrs = 4 units per labor- hr labor hrs = 0.4375 titles per labor hour
One resource input → single-factor productivity.
Labor productivity has increased from .25
Single-factor productivity – indicates the ratio of
to .4375.
goods and services produced (outputs) to one
resource (input). The change is (.4375 - .25) >.25 = 0.75, or a
75% increase in labor productivity.

Multi-Factor Productivity COLLIN TITLE PRODUCTIVITY

MULTIFACTOR: OLD
Productivity= Output / Labor + Material +
Energy + Capital + Miscellaneous Staff of 4 works 8 hrs/day: 4x8= 32 labor hrs

- Also known as total factor productivity 8 titles/day

- Output and inputs are often expressed in Payroll cost = $640/day
dollars
Overhead = $400/day
Multiple resource inputs → multi-factor
productivity. Old Multifactor productivity = 8 titles per day /
$640 + 400 = .0077 titles per dollar
MULTIFACTOR NEW: -Contributes about 38% of the annual
increase
14 titles/day
3. Management
Overhead = $800/day - contributes about 52% of the annual
increase
Payroll cost = $640/day
Key Variables for Improved Labor Productivity
New Multifactor Productivity = 14 titles per
day / $640 + 800 = .0097 titles per dollar 1. Basic education appropriate for the labor force

Multifactor productivity has increased 2. Diet of the labor force

from .0077 to .0097. 3. Social overhead that makes labor available i.e.
This change is (.0097 - .0077) >.0077 = 0.26, or transportation and sanitation
a 26% increase in multifactor productivity.
- Challenge is in maintaining and enhancing skills
in the midst of rapidly changing technology and
Use of productivity measures aids managers in knowledge
determining how well they are doing.
CAPITAL
Between the two factors, Multifactor productivity
- Increase in productivity is increase of
is usually better and provide better trade-offs among
investment
factors
MANAGEMENT
While in single factor productivity, the result of
capital spending, measuring just labor distorts the Ensures labor and capital are effectively used to
results. increase productivity
- Use of knowledge
- Application of technologies
Measurement Problems with productivity
Knowledge societies
1. Quality
- may change while the quantity of inputs - refers to labor force who migrated from
and outputs remains constant manual to computer-based technology.
2. External
Difficult challenge
- elements may cause an increase or
decrease in productivity - High productivity and high quality
3. Precise units outputs require high-quality inputs,
- of measure may be lacking including good operations managers

Productivity Variables
-Productivity increases are dependent on
three productivity variables
1. Labor
- contributes about 10% of the annual
increase on the quality of labor
2. Capital
 Ethics, Social Responsibility, and Sustainability
Challenges facing operations managers:
- Develop and produce safe, high-quality
green products
- Train, retrain, and motivate employees
in a safe workplace
- Honor stakeholder commitments

OPERATIONS STRATEGY IN A
GLOBAL ENVIRONMENT C.2
Global Strategies
- An approach a company develops to
extend into the global market
Globalization
- Means customers, talent and suppliers
worldwide.
- The new standards of global
competitiveness impact quality, variety,
customization, convenience, timeliness,
and cost.
- Globalization strategies contribute
C. (new productivity- old productivity) * 100 / efficiency, adding value to products and
old productivity = percentage increase / decrease services.

New Challenges in OM Reasons to Globalize

- Global focus: international 1. Improve the supply chain
collaboration 2. Reduce costs (labor, tariffs) and exchange rate
- Supply-chain partnering: joint ventures; risks
alliances
- Sustainability: green products; recycle, 3. Improve operations
reuse 4. Understand markets
- Rapid product development: design
collaboration 5. Improve products
- Mass customization: customized
6. Attract and retain global talent
products
- Just-in-time performance: ------------------------------------------------------
- Empowered employees
1. Improve the Supply Chain
- Continuous improvement and
- Locating facilities closer to unique
elimination of waste
resources such as human resource
expertise, low-cost labor or raw
material.
 - a business's ability to use resources, 4. Understand Markets
technology, and expertise in order to - Interacting with foreign customers,
minimize logistics costs and maximize suppliers, competition can lead to new
profits. opportunities for new products or
- Auto design to California services
- Perfume manufacturing in France - Cell phone design moved from Europe
to Japan and India
- Extend the product life cycle
2. Reduce Costs 5. Improve Products
 Risks associated with currency exchange
Remain open to free flow of ideas
rates
 Reduce direct and indirect costs - Toyota and BMW manage joint research
(environment control, health and safety) and development on green cars
- Reduced risk, state-of-the-art design,
Trade agreements can lower tariffs lower costs
- World Trade Organization (WTO) – - Samsung and Bosch jointly produce
promotes world trade by lowering lithium-ion batteries that will benefit
barriers to the free flow of goods across both
borders
- North American Free Trade Agreement
(NAFTA) – free trade agreement 6. Attract and Retain Global Talent
between Canada, Mexico and US
Offer better employment opportunities
- APEC - Pacific Rim countries
- SEATO – (Australia, New Zealand, - Better growth opportunities and
Japan, Hong Kong, South Korea, New insulation against unemployment
Guinea, and Chile) - Relocate unneeded personnel to more
- MERCOSUR ((Argentina, Brazil, prosperous locations during economic
Paraguay, and Uruguay), downturn.
- CAFTA - (Central America, Dominican
Republic, and United States)
- European Union (EU) – 28 member Developing Missions and Strategies
states Mission statements tell an organization where it is
going.
3. Improve Operations
- Understand differences between how - The purpose of an organization’s
business is handled in other countries existence to satisfy customer’s needs and
- Japanese – improved inventory wants
management Mission - where is the organization going?
- Germans – used robots
- Scandinavians – improve ergonomics  Organization’s purpose for being an
answers to what the society needs
International operations can improve response time  Provides boundaries and focus, and purpose
and customer service. of existence.
Providing quick and adequate service is often
improved by locating facilities in the customer’s
home country.
Factors Affecting Mission

The Strategy tells the organization how to get

there.
- How the organization expects to achieve
its mission and goals
Strategic Process

Strategy
Strategies require managers to
▶ Develop action plan to achieve mission
▶ Ensure functional areas have supporting
strategies for achieving the mission
▶ Exploit opportunities and strengths, neutralize
Sample Missions threats, and avoid weaknesses

Strategies for Competitive Advantage

Strategies approached to CA:
1. Differentiation – better, or at least different
2. Cost leadership – cheaper
3. Response – more responsive
Example:
- operations managers are called on to
deliver goods and services that are (1)
better, or at least different, (2) cheaper,
and (3) more responsive.

Competitive Advantage
The creation of unique advantage over competitors - A way of life at Hewlett-Packard
- The idea of creating product with Reliability is meeting schedules
additional value propositions to the
customers. - German machine industry
Quickness in design, production, and delivery
Competing on Differentiation
- Johnson Electric, Pizza Hut
Uniqueness can go beyond both the physical
characteristics and service attributes to encompass OM’s Contribution to Strategy
everything that impacts customer's perception of
value
▶ Safeskin gloves – leading edge products;
hypoallergenic product;
▶ Walt Disney Magic Kingdom – experience
differentiation
▶ Hard Rock Cafe – dining experience

Experience Differentiation
Engaging a customer with a product through
imaginative use of the five senses, so the customer
“experiences” the product
▶ Theme parks use sight, sound, smell, and Issues In Operations Strategy
participation 1. Resource’s view
▶ Movie theatres use sight, sound, moving seats, Availability of financial, physical, human, and
smells, and mists of rain technological resources
▶ Restaurants use music, smell, and open kitchens Ensuring that the potential strategy is compatible
Competing on Cost with those resources

Provide the maximum value as perceived by - Capability of firms to create or acquire

customer. Does not imply low quality. these resources affects their performance
and competitiveness over their
▶ Southwest Airlines – secondary airports, no frills competitors.
service, efficient utilization of equipment - A view in which managers evaluate the
resources at their disposal and manage
▶ Walmart – small overhead, shrinkage, and
or alter them to achieve competitive
distribution costs
advantage
▶ Franz Colruyt – no bags, no bright lights, no
music
2. Value-chain analysis
Competing on Response
Value-chain analysis is used to identify activities
Flexibility is matching market changes in design that represent strengths, or potential strengths, and
innovation and volumes may be opportunities for developing competitive
advantage.
 - These are areas where the firm adds its Strategy Development Process
unique value through product research,
design, human resources, supply-chain
management, process innovation, or
quality management.
3. Porter’s Five Forces model
A way to analyze the five forces in the competitive
environment.
- These potential competing forces are
immediate rivals, potential entrants,
customers, suppliers, and substitute
product. Strategy Development and
4. Operating in a system with many external
factors Implementation

These factors range from economic, to legal, to - Identify key success factors
cultural. - Integrate OM with other activities
- Build and staff the organization\
- They influence strategy development - The operations manager’s job is to
and execution and require constant implement an OM strategy, provide
scanning of the environment competitive advantage, and increase
5. Firm’s Constant change productivity
- Everything from resources, to Key Success Factors (KSFs)
technology, to product life cycles is in
flux - Activities or factors that are key to
achieving competitive advantage and
=============================== achieve its goals.
- Key success factors can be so significant
SWOT Analysis that a firm must get them right to
survive.
Core Competencies
- the set of unique skills, talents, and
capabilities that a firm does at a
worldclass standard
- To set itself apart and develop a
competitive advantage.
Strategic Planning, Core Competencies,
and Outsourcing
Outsourcing – implies an agreement (with
legal binding contract) with external
organization.
- Subcontracting production activities
- Ex: J&J, core competency is R&D, often
farms out manufacturing to contactors.
Outsourcing accelerate due to
 1) Increased technological expertise
2) More reliable and cheaper transportation
3) Rapid development and deployment of
advancements in telecommunications and
computers
Subcontracting – contract manufacturing
Outsourced activities- Legal services, IT
services, Travel services, Payroll,
Production, Surgery
Theory of Comparative Advantage
- If an external provider can perform Global Operations Strategy Options
activities more productively than the
purchasing firm, then the external 1. International business—A firm that
provider should do the work engages in cross-border transactions.
- Purchasing firm focuses on core 2. Multinational corporation (MNC)—A
competencies firm that has extensive involvement in
- Drives outsourcing international business, owning or controlling
facilities in more than one country.
Risks of Outsourcing
The four operations strategies for approaching
global opportunities can be classified according
to local responsiveness and cost reduction:
1. International strategy—A strategy in
which global markets are penetrated using
exports and licenses with little local
responsiveness.
Potential risks of outsourcing include 2. Multidomestic strategy—A strategy in
which operating decisions are decentralized
1. A drop in quality or customer service
to each country to enhance local
2. Political backlash that results fro
responsiveness.
outsourcing to foreign countries
3. Global strategy—A strategy in which
3. Negative impact on employees
operating decisions are centralized and
4. Potential future competition
headquarters coordinates the standardization
5. Increased logistics and inventory costs
and learning between facilities.
Rating Outsourcing Providers 4. Transnational strategy—A strategy that
combines the benefits of global-scale
Reasons for the failure of outsourcing agreements: efficiencies with the benefits of local
- Insufficient analysis most common responsiveness. These firms transgress
reason for failure national boundaries.
- Factor-rating method used
- Points are assigned for each factor for
each provider
- Weights are assigned to each factor

Rating Provider Selection Criteria

 Distinguishing Differences
1. Medium/long range forecasts deal with more
comprehensive issues and support management
decisions regarding planning and products, plants
and processes.
Ex: opening new manufacturing plant
2. Short-term forecasting usually employs different
methodologies than longer-term forecasting. Ex:
launching new products
Methodologies: Moving averages,
Exponential Smoothing or trend extrapolation
3. Short-term forecasts tend to be more
accurate than longer-term forecasts because
CHAPTER 3: FORECASTING of demand changes every day.
- Forcasting provides competitive
advantage Influence of Product Life Cycle

Forecasting
- Process of predicting a future event
Good forecasts are an essential part of efficient
service and manufacturing operations.
• Data: historical data (past sales); projecting using
mathematical model.
• Manager’s good judgment
• Based on demand-driven data (customer plans to
purchase -> projecting them into the future 3 Types of Forecasts
1. Economic forecasts- Predict the future
• Combinations of judgement & m. model condition of the economy
- address the business cycle by predicting
inflation rates, money supplies, housing
Forecasting Time Horizons starts, and other planning indicators.
- Planning indicators – valuable in
1. Short-range forecast- Time span : up to 1
helping organizations prepare medium-
year, generally less than 3 months
to long-range forecasts.
- Purchasing, job scheduling, workforce
2. Technological forecasts- are concerned
levels, job assignments, production
with rates of technological progress, which
levels
can result in the birth of exciting new
2. Medium-range forecast or Intermediate-
products, requiring new plants and
Time span: 3 months to 3 years
equipment
-Sales and production planning, budgeting
- Long-term forecast
3. Long-range forecast- 3+ years, New product 3. Demand forecasts
planning, facility location, capital expenditures, - Predict sales of existing products and
research and development services
- They need demand-driven forecasts,
where the focus is on rapidly identifying
and tracking customer desires.
- These forecasts may use recent point-of-
sale (POS) data, retailer-generated
reports of customer preferences, and any
other information that will help to
forecast with the most current data
possible.
Seven Steps in Forecasting