Using Operations

to Create Value

Chapter 1
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
 Operations Management
• Process
– Any activity or group of activities that takes one
or more inputs, transforms them, and provides
one or more outputs for its customers

• Operation
– A group of resources performing all or part of
one or more processes
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
 Supply Chain Management
• Supply Chain
– An interrelated series of processes within and
across firms the produces a service or product to
the satisfaction of customers
 Role of Operations in an Organization

Integration
between
Different
Functional
Areas of a
Business

Figure 1.1
 How Processes Work

Figure 1.2
 How Processes Work
• Every process and every person in the
organization has customers
– External customers
– Internal customers

• Every process and every person in the

organization relies on suppliers
– External suppliers
– Internal suppliers
 Nested Processes
• Nested Process
– The concept of a process within a process
 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
Figure 1.3
 A Supply Chain View
Each activity in a process should add value to the
preceding activities; waste and unnecessary cost
should be eliminated.

Figure 1.4
 The Supply Chain View
Supplier relationship process – A process that selects the
suppliers of services, materials, and information and facilitates
the timely and efficient flow of these items into the firm

Figure 1.4
 The Supply Chain View
New service/product development – A process that designs and
develops new services or products from inputs from external
customer specifications or from the market

Figure 1.4
 The Supply Chain View
Order fulfillment process – A process that includes the
activities required to produce and deliver the service or
product to the external customer

Figure 1.4
 The Supply Chain View
Customer relationship process – A process that identifies, attracts
and builds relationships with external customers and facilitates
the placement of orders by customers
(customer relationship management)

Figure 1.4
 The Supply Chain View
Support Processes - Processes like Accounting, Finance, Human
Resources, Management Information Systems and Marketing
that provide vital resources and inputs to the core processes

Figure 1.4
 Supply Chain Process
• Supply Chain Processes
– Business processes that have external customers
or suppliers
– Examples
• Outsourcing
• Warehousing
• Sourcing
• Customer Service
• Logistics
• Crossdocking
 Operations Strategy
• Operations Strategy
– The means by which operations implements the
firm’s corporate strategy and helps to build a
customer-driven firm
 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
Operations Strategy Yes Gap?

Decisions Competitive Capabilities

• Managing processes • Current
• Managing supply chains • Needed
Figure 1.5 • Planned
 Corporate Strategy
• Corporate Strategy
– Provides an overall direction that serves as the
framework for carrying out all the organization’s
functions
• Environmental Scanning
• Core Competencies
• Core Processes
• Global Strategies
 Market Analysis
• Market Analysis
– Understand what the customers want and how
to provide it.
• Market Segmentation
• Needs Assessment
 Competitive Priorities and Capabilities

Competitive Competitive
Priorities Capabilities
The critical dimensions The cost, quality, time, and
that a process or flexibility dimensions that a
supply chain must process or supply chain
possess to satisfy its actually possesses and is
internal or external able to deliver.
customers, both now
and in the future.
 Order Winners and Qualifiers

Order Winners Order Qualifiers

A criterion Minimum level
customers use to required from a set of
differentiate the criteria for a firm to
services or products do business in a
of one firm from particular market
those of another. segment.
 Order Winners and Qualifiers
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 or Processes designed and McDonald’s
quality products that meet monitored to reduce errors
design specifications and prevent defects
on a consistent basis

Table 1.3
 Order Winners and Qualifiers
TIME Definition Process Considerations Example

4.Delivery speed Quickly filling a Design processes to reduce Netflix

customer’s order lead time

5.On-time Meeting delivery- Planning processes used 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

Table 1.3
 Order Winners and Qualifiers
FLEXIBILITY Definition Process Considerations Example
7.Customization Satisfying the unique Low volume, close Ritz Carlton
needs of each customer customer contact, and
by changing service or easily reconfigured
product designs
8.Variety Handling a wide Capable of larger Amazon.com
assortment of services volumes than
or products efficiently processes supporting
customization
9.Volume Accelerating or Processes must be The United
flexibility decelerating the rate of designed for excess States Postal
production of services capacity and excess Service (USPS)
or products quickly to inventory
handle large
fluctuations in demand

Table 1.3
 Relationship of Order Winners to
Competitive Priorities

Figure 1.6
 Relationship of Order Qualifiers to
Competitive Priorities

Figure 1.6
 Operations Strategy
OPERATIONS STRATEGY ASSESSMENT OF THE BILLING AND PAYMENT PROCESS

Competitive Priority Measure Capability Gap Action

Low-cost operations  Cost per billing  $0.0813  Target is $0.06  Eliminate microfilming
statement and storage of billing
statements
 Weekly postage  $17,000  Target is  Develop Web-based
$14,000 process for posting bills

Consistent quality  Percent errors in  0.90%  Acceptable  No action

bill information
 Percent errors in  0.74%  Acceptable  No action
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

Table 1.5
 Addressing the Trends and Challenges in
Operations Management
Measuring Productivity

Output
Productivity =
Input

The Role of Management

 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.
Policies processed
Labor productivity =
Employee hours

600 policies
= = 5 policies/hour
(3 employees)(40 hours/employee)
 Example 1.1
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
 Application 1.1
This Year Last Year Year Before Last
Factory unit sales 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,000
Sales of manufactured $49,363 $40,831 —
products ($)
Total manufacturing cost $39,000 $33,000 —
of sales ($)

 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
 Addressing the Trends and Challenges
in Operations Management
• Global Competition

• Ethical, Workforce Diversity, and

Environmental Issues
 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?
 Solved Problem 1
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
Value of output =
class student credit hour

= $37,500/class
Value of inputs = Labor + Materials + Overhead
= $4,000 + ($20/student  50 students/class) + $25,000
= $30,000/class
Multifactor Output $37,500/class
= = 1.25
productivity Input $30,000/class
 Solved Problem 1
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
$37,500/class, so

14 hours 16 weeks
Labor hours of input =
week class

= 224 hours/class
Output $37,500/class
Labor productivity =
Input 224 hours/class

= $167.41/hour
 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?
 Solved Problem 2

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

+ (80 garments  200/garment)
= $20,680

Labor hours of input = 360 hours

Output $20,680
Labor productivity =
Input 360 hours

= $57.44 in sales per hour