RA 9299 Republic of the Philippines June 25,2004

NEGROS ORIENTAL STATE UNIVERSITY

Bayawan- Sta. Catalina Campus, Bayawan City

E-mail Address: [email protected] , [email protected]

COLLEGE OF BUSINESS ADMINISTRATION

REPORT

OPERATIONS MANAGEMENT (TQM)

CHAPTER 1

MWF 10:00AM – 11:00AM

SUBMITTED TO:
SETH ANTHONETTE O. MANGUILIMOTAN, MBA

PREPARED BY: GROUP 1 – B

Alaban, Gazelle
Alasan, Rebecca
Demonteverde, Blessie
Espares, Raymart
Galan, Pearlyn
Macabinguel, Mekie Joy
Nuique, Jake
Padillo, Ronalyn
Rico, Sherry Ann
Rondael, Emelyn
Sua, Elmie
Taunes, Joyme

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 RA 9299 Republic of the Philippines June 25,2004

NEGROS ORIENTAL STATE UNIVERSITY

Bayawan- Sta. Catalina Campus, Bayawan City

E-mail Address: [email protected] , [email protected]

COLLEGE OF BUSINESS ADMINISTRATION

1. OPERATIONS MANAGEMENT & VALUE CHAINS

1.1. Operations Management & OM in the Workplace

1.1.1. Operations Management
1.1.2. OM in the Workplace

1.2. Understanding Goods and Services

1.3. The Concept of Value & Value Chains

1.3.1. The Concept of Value
1.3.2. Customer Benefit Packages
1.3.3. Value Chains
1.3.3.1. Processes

1.4. Value Chain Frameworks

1.4.1. Value Chains: An Input – Output Framework
1.4.2. The Value Chain at Buhrke Industries Inc.
1.4.3. Value Chain: Pre and Postproduction Services Framework
1.4.4. The Value Chain at Amazon
1.4.5. Value Chains: Hierarchical Supply Chain Framework

1.5. OM: History of Change and Challenges

1.5.1. A Focus on Efficiency
1.5.2. The Quality Revolution
1.5.3. Customization and Design
1.5.4. Time-Based Competition
1.5.5. The Service Revolution
1.5.6. Sustainability
1.5.7. Data and Analytics

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1: OPERATIONS MANAGEMENT AND VALUE CHAINS

Learning Objectives
1-1 Explain the concept and importance of operations management.
1-2 Describe what operations managers do.
1-3 Explain the differences between goods and services.
1-4 Define the concept of value and explain how the value of goods and services can be en-
hanced.
1-5 Describe a customer benefit package.
1-6 Explain the difference between value chains and identify three general types of process in a
business.
1-7 Contrast the three different frameworks for describing value chains.
1-8 Summarize the historical development of OM.
1-9 Describe key challenges facing OM.

Apple has mastered the art of blending physical goods with services to create value for its cus -
tomers. Think iPod+Tunes, iPhone/iPad + apps, Apple stores + Genius Bar; well, you get the pic-
ture. Managing all operations involved from the creation of goods and services through their de-
livery to the customer and postsale services is one of Apple's core competencies
"Operations expertise is as big an asset for Apple as product innovation or marketing." says Mike
Fawkes, the former supply chain chief at Hewlett-Packard. "They've taken operational excellence
to a level never seen before."
Managers and engineers often work at global supplier and manufacturer sites to refine their oper-
ations, and designers work with suppliers to create new tooling equipment. When the iPad 2 de-
buted, Apple employees monitored every handoff point-suppliers, production, loading dock, air-
port, truck depot, and distribution center to make sure each unit was accounted for and of the
highest quality.
Apple's retail stores give it a final operational advantage. The company can track demand by the
store and by the hour and adjust production forecasts daily. If it becomes clear that a given part
will run out, teams are deployed and given approval to spend millions of dollars on extra equip-
ment to undo the bottleneck. Apple's significant profit margins are in large part due to this focus
on its global supply chain and operational excellence.

1.1. OPERATIONS MANAGEMENT

Creating and delivering goods and services to customers depends on an effective system of
linked facilities and processes, and the ability to manage them effectively around the world. Ap-
ple, for example, manages a large, global network of suppliers in countries such as Malaysia and
Indonesia, and factories in the United States, China, and other countries to produce its physical
goods, which must be coordinated with the development and production of software and other
digital content, retail sales, and service and support. As the opening anecdote suggests, coordi-
nating these goods-producing and service-providing processes can be challenging. Operations
management (OM) is the science and art of ensuring that goods and services are created and de-
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livered successfully to customers. OM includes the design of goods, services, and the processes
that create them; the day-to-day management of those processes; and the continual improvement
of these goods, services, and processes

1.1.2 OM IN THE WORKPLACE

Operations management (OM) is a crucial skill for anyone in any job, regardless of their role.
OM principles are applied in various areas such as accounting, human resources management, le-
gal work, financial activities, marketing, environmental management, and service activities.
Shelly Decker, an accounting and information systems major, used OM skills in her venture to
create and sell natural soaps and body products. She focused on process design, inventory man-
agement, scheduling, and quality management. Tom James, a senior software developer, used
OM skills to address quality and customer service issues, manage project tasks, and improve effi-
ciency. Both Shelly and Tom emphasize the importance of understanding OM and applying its
tools and concepts in their respective jobs
Process Design:
When a company creates a new product, they need to figure out the best way to make it. This
means planning all the steps needed to produce it in the most efficient way.
Inventory Management:
The company carefully tracks how many products or materials they have to avoid waste and un-
necessary costs. Every four weeks, they count their inventory and update their system to keep
records accurate.
Scheduling:
The company planned when and how much product to make so there was always enough for
both stores and big buyers. They checked how much was already in stock and how much they
could produce to avoid making too little or too much.
Quality Management:
Every product was checked to make sure it met high-quality standards. If something was wrong,
like the wrong color, packaging, label, weight, size, or shape, it was removed and not sold.

1.2. UNDERSTANDING GOODS AND SERVICES

Good - is a physical product that you can see, touch, or possibly consume.
- Ex: cellphones, appliances, food, flowers, soap, airplanes, furniture, coal, lumber, per-
sonal computers, paper, and industrial machines
A. Durable Good - is one that does not quickly wear out and typically lasts at least
three years.
Ex.: Vehicles, dishwashers, and furniture
B. Nondurable Good - is the one that is no longer useful once it’s used or lasts for less
than 3 years.
Ex.: Toothpaste, software, clothing and shoes, and food.
Service - is any primary or complementary activity that does not directly produce a physical
product. Services represent the nongoods part of a transaction between a
buyer (customer) and seller (supplier).

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Designing and managing operations in a goods-producing firm is quite different from that in a
service organization, thus it is important to understand the nature of goods and services and par-
ticularly the difference between them.

Significant Differences between goods and services:

1. Goods are tangible, whereas services are intangible.
- Goods are consumed but services are experienced.
2. Customers participate in many service processes, activities and transactions.
- Many services require that the customer be present either, physically, on a
telephone or online for service to commence. The higher the customer partici-
pation, the more uncertainty the firm has with respect to service time, capac-
ity, scheduling, quality performance, and operating cost.
Service encounter
- Is an interaction between the customer and the service provider.
- Ex.: Hotel reservation, making a purchase on a website.
- It consists of one or more moments of truth – any episodes, transactions or
experiences in which a customer comes into contact with any aspect of the de-
livery system, however remote, and thereby has an opportunity to form an im-
pression.
3. The demand for services is more difficult to predict than the demand for goods.
- The demand for service is time-dependent, especially over the short term (by
hour or day). This places many pressures on service firm managers to ade-
quately plan staffing levels and capacity.
4. Services cannot be stored as physical inventory.
- In goods – producing firms, inventory can be used to decouple customer de-
mand from the production process or between stages of the production process
and ensure constant availability despite fluctuations in demand.
5. Service managements skills are paramount to a successful service encounter.
- Employees who interact with customers require service management skills
such as knowledge and technical expertise (operations), cross-selling other
products and services (marketing), and good human interaction skills (human
resources).
Service Management
- Integrates marketing, human resources and operations functions to plan, create
and deliver goods and services, and their associated service encounters.
6. Service facilities typically need to be in close proximity to the customer.
- When customers must physically interact with a service facility – for example,
post offices, hotels and branch banks – they must be in a location convenient
to the customer. A manufacturing facility on the other hand, can be located on
the other side of the globe, if a goods are delivered to customers in timely
fashion.
7. Patents do not protect services.
- A patent on a physical good or software code can provide protection from
competitors. The intangible nature of a service makes it more difficult to keep
a competitor from copying a business concept, facility layout, or service en-
counter design.

5
These differences between goods and services have important implications to all areas of an or-
ganization, and especially to operations.

1.3. THE CONCEPT OF VALUE AND VALUE CHAINS

1.3.1. The Concept of Value

Today's consumers demand innovative products, high quality, quick response, impeccable ser-
vice, and low prices; in short, they want value in every purchase or experience. One of the most
important points that we emphasize in this book is that the underlying purpose of every organiza-
tion is to provide value to its customers and stakeholders.
Value is the perception of the benefits associated with a good, service, or bundle of goods and
services in relation to what buyers are willing to pay for them. The decision to purchase a good
or service or a customer benefit package is based on an assessment by the customer of the per-
ceived benefits in relation to its price.

1.3.2. Customer Benefit Packages

"Bundling" goods, services, and digital content in a certain way to provide value to customers
not only enhances what customers receive but can also differentiate the product from competi-
tors.
Such a bundle is often called a customer benefit package. A customer benefit package (CBP) is a
clearly defined set of tangibles (goods-content) and intangible (service-content) features that the

6
customer recognizes, pays for, uses, or experiences. The CBP is a way to conceptualize and visu-
alize goods and services by thinking broadly about how goods and services are bundled and con-
figured together:
A CBP consists of a primary good or service coupled with peripheral goods and/or ser-vices, and
sometimes variants.

1.3.3 Value Chains

A value chain is a network of facilities and processes that describes the flow of materials, fin-
ished goods, services, information, and financial transactions from suppliers, through the facili-
ties and processes that create goods and services, and those that deliver them to the customer.
Value chains involve all major functions in an organization. This includes not only operations but
also purchasing, marketing and sales, human resource management, finance and accounting, in-
formation systems and technology, distribution, and service and support.
It is important for you to understand how operations management influences the design and man-
agement of value chains. Today's organizations face difficult decisions in balancing cost, quality,
service, and sustainability objectives to create value for their customers and stakeholders, and in
coordinating the many activities that take place within value chains. Mod-ern firms increasingly
deliver goods and services to multiple markets and operate in a global business environment. As
a result, many companies have reconfigured their value chains and moved some operations out
of the United States to keep costs competitive, remain profit-able, and improve customer service.
As one chief financial officer wrote in a CFO Magazine survey, "You cannot compete globally
unless you use global resources."" Thus, we emphasize the importance of understanding the
global business environment and local culture, and their impact on value chain design and opera-
tions

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1.3.3.1 Processes
Each good or service within a customer benefit package requires a well-defined process to ensure
its creation and delivery to customers. A process is a structured sequence of activities designed to
achieve a specific outcome, whether it involves the production of a tangible product, the provi-
sion of a service, or the management of information. AT&T defines a process as the means by
which work creates value for customers, highlighting its role in transforming inputs into mean-
ingful outputs. Processes are fundamental to operational efficiency, ensuring that goods and ser-
vices meet quality standards, are delivered on time, and satisfy customer expectations. They en-
compass various functions, including design, production, logistics, and customer support, all
working together to enhance the overall customer experience. By continuously improving these
processes, organizations can increase productivity, reduce costs, and maintain a competitive edge
in the marketplace.
1. Core processes focused on producing or delivering an organization's primary goods or services
that create value for customers, such as filling and shipping a customer's order, assembling a
dishwasher, or providing a home mortgage.
2. Support processes such as purchasing materials and supplies used in manufacturing, managing
inventory, installation, health benefits, technology acquisition, day care on-site services, and re-
search and development.
3. General management processes, including accounting and information systems, human re-
source management, and marketing

1.4 VALUE CHAIN FRAMEWORKS

We will describe a value chain from three different perspectives: an input-output framework, a
pre- and postproduction services framework, and a hierarchical supply chain perspective.

1.4.1 Value Chains: An Input-Output Framework

As shown in Exhibit 1.4, a value chain can be depicted as a "cradle-to-grave" input-output model
of the operations function. The value chain begins with suppliers who provide inputs to a goods-
or service-providing process or network of processes. Suppliers might be retail stores, distribu-
tors, employment agencies, dealers, financing and leasing agents, information and Internet com-
panies, field maintenance and repair services, architectural and engineering design firms, and
contractors, as well as manufacturers of materials and components. The inputs they provide
might be physical goods such as automobile engines or microprocessors provided to an assembly
plant; meat, fish, and vegetables provided to a restaurant; trained employees provided to organi-
zations by universities and technical schools; or information such as market research or a medi-
cal diagnosis.
Inputs are transformed into value-added goods and services through processes that are supported
by such resources as equipment and facilities, labor, money, and information. Note that what is
being transformed can be almost anything-for instance, people in a hospital, a physical good in
an oil refinery, information in an e-publishing business, or a mixture of people, physical goods,
and information. Value chain processes include the three types we defined: core processes (those

8
that directly create and deliver goods and services), support processes (those "behind the scenes,"
but which support core processes), and general management processes (those that are needed for
efficient and effective business performance). At a hospital, for example, value creation such as
surgery and drug administration are used.

1.4.2. The Value Chain at Buhrke Industries Inc.

Buhrke Industries Inc., located in Arlington Heights, Illinois, provides stamped metal parts to
many industries, including automotive, appliance, computer, electronics, hardware, house wares,
power tools, medical, and telecommunications.
Buhrke's objective is to be a customer's best total-value producer with on-time delivery, fewer re-
jects, and high-quality stampings. However, the company goes beyond manufacturing goods; it
prides itself in providing the best service available as part of its customer value chain.
Service is more than delivering a product on-time. It's also partnering with customers by provid-
ing personalized service for fast, accurate response; customized engineering designs to meet cus-
tomer needs; preventive maintenance systems to ensure high machine uptime; experienced,
highly trained, long-term employees; and troubleshooting by a knowledgeable sales staff.

Exhibit 1.5 Examples of Goods and Services – Providing Value Chains

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Exhibit 1.6 The Value Chain at Buhrke Industries

Value-creation processes include tooling, inspection, production, finishing, and sometimes as-
sembly into a complete subassembly. Outputs include the stamped metal parts and post-sale ser-
vice outcomes such as out-in-the-field consulting and troubleshooting by company employees.
General management processes coordinate processes, often in different functional areas, while
support processes include hiring, medical benefits, and accounting. As many as 100 processes are
required for Buhrke to perform its work and create value for its customers.
The major stages of Buhrke's value chain, shown in Exhibit 1.6, begin with a customer request
for a quotation. The estimating department processes such job parameters as specifications, met-
10
als, finishing or packaging services, the presses that will be used to run the job, and customer
deadlines in developing a quote. Next, a sales engineer is assigned to monitor each stamping job
from start to finish, so the customer may have the convenience of a single point of contact. Sales
engineers work closely with the engineering staff to convey customer needs. Engineers then de-
sign the best tooling for the job, using computer-assisted design processes to ensure precise de-
signs and timely completion. After a tool is designed and built, it is maintained in an on-site tool
room. Buhrke's toolmakers have decades of experience constructing tools for metal stamping,
and they are put on a strict maintenance regimen to ensure long life and consistent stampings.
Production of the metal parts is accomplished on a full range of presses, from 15 to 200 tons,
with speeds of up to 1,500 parts per minute. Inspection of raw materials (inputs), work-in-
process, and finished products (outputs) helps ensure zero defects. The company provides a full
range of secondary and finishing operations, from heat-treating to powder coating to tapping, and
to add value to customers. Customers do not need to ship stampings elsewhere or arrange for an -
other service provider to finish the job.
At the customer's request, Buhrke will assemble the stampings with other components to deliver
a complete subassembly. Buhrke will even procure parts for assembly, such as plastics that the
company does not manufacture. Buhrke is also able to package finished stampings or subassem-
blies. Before stampings are boxed up and shipped (and even after the incoming inspection and
in-process audits), Buhrke provides a final audit inspection. Finally, Buhrke offers the conve-
nience of shipping the finished product where and when customers want.

1.4.3. Value Chains: Pre- and Postproduction Services Framework

A second view of the value chain can be described from the pre- and post-service framework as
shown in Exhibit 1.7. Pre- and postproduction services complete the ownership cycle for the
good or service. Preproduction services include customized and team-oriented product design,
consulting services, contract negotiations, product and service guarantees, customer financing to
help purchase the product, training customers to use and maintain the product, purchasing and
supplier services, and other types of front-end services. The focus here is on "gaining a cus-
tomer."
Postproduction services include on-site installation or application services, maintenance and re-
pair in the field, servicing loans and financing, warranty and eclaim services, warehouse and in-
ventory management for the company and sometimes for its customers, training, telephone ser-
vice centers, transportation delivery services, post-sale visits to the customer's facility by knowl-
edgeable sales and technical-support people, recycling and remanufacturing initiatives, and other
back-end services. The focus here is on "keeping the customer."
This view of the value chain emphasizes the notion that service is a critical component of tradi -
tional manufacturing processes. Preproduction services for Ford Motor Company include engi-
neering design, supplier, sales, and leasing processes, and postproduction arvios include financ-
ing, maintenance and repair, warranty and claims, and customer education and training program.
Service is a key differentiating factor in the eyes of customers for many manufacturing firms.
Ford Motor Company in continuing to develop lop a competitive strategy where service is at the
core of their global strategy Note that the Boheke Industries Ine value chain can also be defined
using the pre- and post-service perspectives
Both perspectives enhance management’s understanding of when and how they create value for
customers. Automobile companies such as Ford Motor Company might use the pre- and post-ser-
vice model to highlight service processes, and associated customer service encounters and expe-
riences.

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Exhibit 1.7 Pre- and Postservice View of the Value Chain

1.4.4. The Value Chain at Amazons

Amazon's value chain is a strong example of how pre- and postproduction services create com-
petitive advantages. By integrating technology, logistics, and customer service, Amazon opti-
mizes the entire purchasing experience. Let’s break this down further. Exhibit 1.8 depicts Ama-
zon's value chain from the perspective of the model shown in Exhibit 1.7. Preproduction services
that focus on gaining a customer include:
Product variety-Amazon sells pretty much everything that you can imagine. Amazon manufac-
tures its own products and services, such as the Kindle e-book reader and the Kindle Store. Ama -
zon's virtual storefront provides much greater product selection than can be found in a typical
"bricks-and-mortar" store.
Amazon.com. website-Amazon's website facilitates the customer experience. Custom-ers can
conveniently shop by department, search products, see new releases, peruse their browsing his-
tory, access account information, manage orders and credit cards, and so on. From an efficiency
perspective, order entry uses customer labor!
Low prices-Amazon strives to offer the lowest prices possible. It does this through operations
and supply chain management-continually improving efficiencies and leveraging economies of
scale.
Seller and distributor partnerships-Amazon partners with third-party sellers who would ordinar-
ily be competitors, thus expanding its offerings and providing competitive prices and services to
its customers. Amazon also partners with third-party transportation firms such as UPS and FedEx
to deliver orders to customers.

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Key Core Processes:
 Order fulfillment -Amazon's fulfillment centers are designed for efficient order picking
and packaging, using information technology, bar code sorting, and order-matching pro-
cesses to ensure accuracy. Its information system stores the locations of individual prod-
ucts and creates routes for order pickers.
 Distribution center location -Amazon has fulfillment centers close to major metropolitan
markets. Being closer to customers not only provides faster service (e.g., same-day deliv-
ery) but also reduces transportation costs.
 Shipping options -Amazon offers free shipping for many orders over $35. Custom-ers
can split orders for faster service. For a fixed annual fee, Amazon Prime provides unlim-
ited two-day shipping and optional next-day delivery for an additional, low price.
 Customer pickup locations-Amazon has opened pickup points at numerous locations such
as college campuses (the first was opened at Purdue University) to make it easier for cus-
tomers to receive products at a secure location and at times that are convenient.
 Seller support Sellers are an important customer group. Amazon Services launched a new
version of Amazon WebStore, providing business customers with tools to easily design,
build, and manage their multichannel, e-commerce businesses using Amazon's technol-
ogy. Postproduction services, which focus on keeping the customer include:
 Order tracking-Amazon sends e-mail updates to inform customers when products ship.
Through its website, customers can view current and past orders.
 Customer service and returns-New, unopened items can be returned within 30 days. Dam-
aged or defective items will be replaced or exchanged.
Amazon provides return labels and authorization forms that can be printed.
 Product suggestions-Amazon provides customized featured recommendations based on
past orders and searches on its website and via e-mail. Items can be saved on a "Wish
List" for future reference.
 Customer loyalty Amazon Prime members receive free movies and a lending library for
e-books. Prime members typically spend more than other customers; this feature helps
develop customer loyalty,
 Payment management Customers can easily manage credit and gift cards and can store
their shipping and credit card information and order goods with just one click.

1.4.5. Value Chains: Hierarchical Supply Chain Framework

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Supply chains are the foundation of most value chains. The basic purpose of supply chain is to
coordinate the flow of materials, service and information among the elements of the supply chain
to maximize customer value.
Key Functions:
 Purchasing and procurement of materials and supplies
 Sales and order processing
 Operations
 Inventory and materials management
 Transportation and distribution
 Information management
 Finance
 Customer Service
Typically Goods-Producing Supply Chain Structure:

𝟭.5. OM: A HISTORY OF CHANGE AND CHALLENGES

In the last century, operations management has undergone more changes than any other func-
tional area of business and is the most important factor in competitiveness. That is one of the rea-
sons why every business student needs a basic understanding of the field. Exhibit 1.10 is a
chronology of major themes that have changed the scope and direction of operations manage-
ment over the last half century. To better understand the challenges facing modern business and
the role of OM in meeting them, let us briefly trace the history and evolution of these themes.

14
1.5.1. A Focus on Efficiency
During the Industrial Revolution, many inventions came into being that allowed goods to be
manufactured with greater ease and speed and led to the development of modern factories. In the
1940s, Toyota developed new ways of creating manufacturing efficiencies. The development of
computers and other forms of technology during the last 50 years has revolutionized operations.

1.5.2. The Quality of Revolution

After World War II, Japanese companies embarked on a massive effort to train the workforce, us-
ing statistical tools developed at Western Electric and other innovative management tools to
identify causes of quality problems and fix them. By the mid-1970s, the world discovered that
Japanese goods had fewer defects, were more reliable, and better met consumer needs than did
American goods. As a result, Japanese firms captured major shares of world markets in many dif-
ferent industries such as automobiles and electronics. Thereafter, quality became an obsession
with top managers of nearly every major company and continues to be so today. In 1987, the
U.S. government established the Malcolm Baldrige Award to focus national attention on quality.

𝟭.5.3. Customization and Design

As the goals of low cost and high product quality became "givens," companies began to empha-
size innovative designs and product features to gain a competitive edge. Inflexible mass-produc-
tion methods that produced high volumes of standardized goods and services using unskilled or
semiskilled workers and expensive, single-purpose equipment, though very efficient and cost-ef-
fective, were inadequate for the new goals of increased goods and service variety and continual

15
product improvement. New types of operating systems emerged that enabled companies to man-
ufacture goods and services better, cheaper, and faster than their competitors, while facilitating
innovation and increasing variety.

1.5.4. Time-Based Competition

As information technology matured, time became an important source of competitive advantage.
Quick response is achieved by continually improving and reengineering processes that is, funda-
mentally rethinking and redesigning processes to achieve dramatic improvements in cost, quality,
speed, and service. That task includes developing products faster than competitors, speeding or-
dering and delivering processes, rapidly responding to changes in customers' needs, and improv-
ing the flow of paperwork.

1.5.5. The Service Revolution

In 1955, about 50 percent of the U.S. workforce was employed in goods-producing industries
and 50 percent in service-providing industries. Today, about four of every five U.S. jobs are in
services, as summarized in Exhibit 1.11.
In addition, estimates are that at least 50 percent of the jobs in goods-producing industries are
service- and information-related, such as human resources management, accounting, financial,
legal, advertising, purchasing, engineering, and so on. Thus, today, about 90 percent of the jobs
in the U.S. economy are in service-providing processes. This means that if you are employed in
the United States, you will most likely work in a service- or information-related field.

1.5.6. Sustainability
In today's world, sustainability has become one of the most important issues that organizations
face. Sustainability refers to an organization's ability to strategically address current business
needs and successfully develop a long-term strategy that embraces opportunities and manages
risk for all products, systems, supply chains, and processes to preserve resources for future gen-
erations. Sustainability can be viewed from three perspectives: environmental, social, and eco-
nomic.
► Environmental sustainability is an organization's commitment to the long-term quality of our
environment. Environmental sustainability is important because environmental concerns are
placing increased pressure on all goods-producing and service-providing organizations across the
globe.

►Social sustainability is an organization's commitment to maintain healthy communities and a

society that improves the quality of life. Social sustainability is important because every organi -
zation must protect the health and well-being of all stakeholders and their respective communi-
ties, treat all stakeholders fairly, and provide them with essential services.

►Economic sustainability is an organization's commitment to address current business needs

and economic vitality, and to have the agility and strategic management to prepare successfully
for future business, markets, and operating environments. Economic sustainability is important
because staying in business for the long term, expanding markets, and providing jobs are vital to
national economies.

16
These three dimensions of sustainability are often referred to as the "triple bottom line." Sustain-
ability represents a broad and, to many, a new paradigm for organizational performance. Not
only do sustainability practices lead to better public perception, they can improve productivity,
eliminate waste, and help organizations become more competitive. OM plays a vital role in help-
ing organizations accomplish these goals.

1.5.7. Data and Analytics

Today, all organizations have access to an enormous amount of data and information. In OM,
data are used to evaluate operations performance, quality, order accuracy, customer satisfaction,
delivery, cost, environmental compliance, and many other areas of the business. Leveraging such
data is fast becoming a necessity in creating competitive advantage. A now discipline has
emerged in recent years called business analytics.

Business analytics is a process of transforming data into actions through analysis and insights in
the context of organizational decision making and problem solving. Business analytics is wed to
understand past and current performance (descriptive analytics), predict the future by detecting
patterns and relationships in data (prescriptive analytics), and identify the best decisions (pre-
scriptive analytics).

CASE STUDY:

Zappos Case Study

Zappos (www.zappos.com) is a Las Vegas-based online retailer that has been cited in Fortune’s
list of the Best Companies to Work For and Fast Company's list of the world’s most innovative
companies. In fact, its remarkable success resulted in Zappos being bought by Amazon for $850
million in 2009. Zappos was founded in San Francisco in 1999 and moved to Las Vegas for the
cheap real estate and abundant call center workers. The company sells a large variety of shoes
from nearly every major manufacturer and has expanded its offerings to handbags, apparel, sun-

17
glasses, watches, and electronics. Despite the crippling economic downturn, sales jumped almost
20 percent in 2008, passing the $1 billion mark two years ahead of schedule.

The company’s first core value is “Deliver WOW through service,” which is obvious if you’ve
ever ordered from Zappos. It provides free shipping in both directions on all purchases. It often
gives customers surprise upgrades for faster shipping. And it has a 365-day return policy. In
2003, Zappos made a decision about customer service: It views any expense that enhances the
customer experience as a marketing cost because it generates more repeat customers through
word of mouth. CEO Tony Hsieh never outsourced his call center because he considers the func-
tion too important to be sent overseas. Job one for these frontliners is to delight callers. Unlike
most inbound telemarketers, they don’t work from a script. They’re trained to encourage callers
to order more than one size or color because shipping is free in both directions, and to steer shop-
pers to competitors when a product is out of stock. Most important, though, they’re implored to
use their imaginations. This means that a customer having a tough day might find flowers on his
or her doorstep the next morning. One Minnesota customer complained that her boots had begun
leaking after almost a year of use. Not only did the Zappos customer service representative send
out a new pair—in spite of a policy that only unworn shoes are returnable—but she also told the
customer to keep the old ones and mailed a handwritten thank-you.

Over 95 percent of Zappos’s transactions take place on the Web, so each actual customer phone
call is a special opportunity. “They may only call once in their life, but that is our chance to wow
them,” Hsieh says.

Zappos uses a sophisticated computer system known as Genghis to manage its operations. This
includes an order entry, purchasing, warehouse management, inventory, shipping, and e-com-
merce system. Genghis tracks inventory so closely that customers can check online how many
pairs of size 12 Clarks Desert boots are available in the color sand. For employees, it automati-
cally sends daily e-mail reminders to call a customer back, coordinates the warehouse robot sys-
tem, and produces reports that can specifically assess the impact on margins of putting a particu -
lar item on sale.

Free shipping has become a customer expectation. Research has found that online customers
abandon their virtual shopping carts up to 75 percent of the time at the end of their order entry
process when they can’t get free shipping. Other online retailers have copied the free-shipping
policies of Zappos. L.L. Bean, for example, now provides free shipping and free returns with no
minimum order amount.

Case Questions:
A. Draw and describe the customer benefit package that Zappos provides. Goods? Services?
Digital content? Who manufactures the physical goods? Who is responsible for the qual-
ity and delivery of the physical goods?
B. Identify and describe the primary, support, and general management processes needed to
execute a customer order at Zappos.
C. Describe how any three of the OM activities in the box “What Do Operations Managers
Do?” impact the management of both the goods that Zappos sells and the services that it
provides.

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D. Explain how this case illustrates each of the seven major differences between goods-pro-
ducing and service-providing businesses.

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