Using Operations to Compete

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.

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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.
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The Role of Operations in the Organization

Integration
between
Different
Functional
Areas of a
Business

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 A Process View
Process
Any activity or
group of
activities that
takes one or
more inputs,
transforms
them, and
provides one or
more outputs
for its
customers.
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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
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 The Supply Chain View
Each activity in a process should add value to the
preceding activities; waste and unnecessary cost
should be eliminated.

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 The Supply Chain View
Supplier relationship process – A process to select the
suppliers of services, materials, and information and
facilitate the flow of these into the firm.

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 The Supply Chain View
New service/product development – A process to
design and develop new services or products from
customer or market inputs.

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 The Supply Chain View
Order fulfillment process – A process to produce and
deliver services or products to the external
customer.

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 The Supply Chain View
Customer relationship process – A process that
identifies, attracts and builds relationships with external
customers and facilitates the placement of orders.

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 The Supply Chain View
Support Processes - Processes like Accounting, Human
Resources, Engineering, and Information Systems that
provides vital resources and inputs to the core processes

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 Operations Strategy

• Specifies the means by which operations

implements corporate strategy and helps
build a customer-driven firm

• Corporate strategy provides an overall

direction that serves as the framework for
carrying out all the organization's functions

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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
Operations Strategy Gap?
Yes

Decisions Competitive Capabilities

• Managing processes • Current
• Managing supply chains • Needed
• Planned
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 Competitive Priorities and Capabilities

Competitive Priorities Competitive capabilities

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

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 Order Winners and Qualifiers

Order Winners Order Qualifiers

The criterion customers use The minimum level required
to differentiate the services from a set of criteria for a firm
or products of one firm from to do business in a particular
those of another. market segment.

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 Examples
Process
COST Definition Example
Considerations
1.Low-cost Delivering a service Processes must be Costco: achieves low costs by
operations or a product at the designed and designing all processes for efficiency,
stacking products on pallets in warehouse-
lowest possible cost operated to make type stores, and negotiating aggressively
them efficient with their suppliers. Costco can provide low
prices to its customers because they have
designed operations
for low cost.

QUALITY

2.Top quality Delivering an May require a Rolex: is known globally for creating
outstanding service high level of precision timepieces.

or product customer contact

and may require
superior product
features
3.Consistent Producing services Processes McDonald’s: standardizes work
quality or products that designed and methods, staff training processes, and
procurement of
meet design monitored to raw materials to achieve the same consistent
specifications on a reduce errors and product and process quality from one store
to the next.
consistent basis prevent defects
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 Examples
Process
TIME Definition Example
Considerations
4.Delivery speed Quickly filling a Design processes to Dell: engineered its customer
customer’s reduce lead time relationship, order fulfillment, and supplier
relationship processes to create an
order integrated and an agile supply chain that
delivers reliable and inexpensive computers
to its customers with
short lead times.

5.On-time Meeting Planning processes to United Parcel Service

delivery delivery-time increase percent of (UPS): uses its expertise in logistics and
promises customer orders warehousing processes to deliver a very large
volume of shipments on-time across the
shipped when globe.
promised

6.Development Quickly Cross-functional Zara:is known for its ability to bring

speed introducing a integration and fashionable clothing designs from the

new service or involvement of runway to market quickly .

a product critical external
suppliers
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 Examples
FLEXIBILITY Definition Process Considerations Example
7.Customization Satisfying the Low volume, close Ritz Carlton:
unique needs of customer contact, and customizes services to individual
guest preferences.
each customer by easily reconfigured
changing service or
products designs
8.Variety Handling a wide Capable of larger Amazon.com: uses
assortment of volumes than processes information technology and
streamlined customer
services or supporting relationship and order
products efficiently customization fulfillment processes to reliably
deliver a vast variety of items to
its customers.

9.Volume Accelerating or Processes must be The United States

flexibility decelerating the designed for excess Postal Service
rate of production capacity (USPS): can have severe
of service or demand peak fluctuations at
products quickly to large postal facilities where
processes are flexibly designed
handle large for receiving, sorting, and
dispatching mail to numerous
fluctuations in branch locations.
demand
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 Relationship of Order Qualifiers to Competitive Priorities

If a minimum threshold level is not met for an order-qualifying dimension (consistent quality, for
example) by a firm, then it would get disqualified from even being considered further by its
customers. When the subcompact car Yugo built by Zastava Corporation could not sustain the
minimal level of quality, consistency, and reliability expected by customers, it had to exit the U.S.
car market in 1991 despite offering very low prices (order winner) of under $4,000.

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 Relationship of Order Winners to Competitive Priorities

For an order-winning dimension (i.e., low price driven by low-cost operations), a firm can
reasonably expect to gain appreciably greater sales and market share by continuously lowering
its prices as long as the order qualifier (i.e., consistent quality) is being adequately met. Toyota
Corolla and Honda Civic have successfully followed this route in the marketplace to become
leaders in their target market segment.

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 Operations Strategy
OPERATIONS STRATEGY ASSESSMENT OF THE BILLING AND PAYMENT PROCESS
Competitive
Measure Capability Gap Action
Priority
Low-cost ▪ Cost per ▪ $0.0813 ▪ Target is ▪ Eliminate microfilming
operations billing $0.06 and storage of billing
statement statements
▪ Weekly ▪ $17,000 ▪ Target is ▪ Develop Web-base
postage $14,000 process for posting
bills
Consistent quality ▪ Percent ▪ 0.90% ▪ Acceptable ▪ No action
errors in bill
information

▪ Percent ▪ 0.74% ▪ Acceptable ▪ No action

errors in
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
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Trends in Operations Management

Productivity

The value of outputs (services and products)

produced divided by the values of input
resources (wages, costs of equipment, etc.)

Productivity = Output
Input

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 Example 1.1
Calculate the Labor Productivity:

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)

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 Example 1.1
Calculate the Multifactor Productivity:
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
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 Application 1.1
This Year Last Year Year Before Last
Factory unit sales 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,00
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 2,475,738 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

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 Trends in Operations Management
• Global Competition
– Advantages:
• Increased market penetration
• Comparative cost advantages
– Disadvantages:
• Political risks
• Lower skilled workers
• Vulnerability to supply chain disruptions
–Japanese Earthquake in March 2011
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Trends in Operations Management
• Ethical, Workforce Diversity, and
Environmental Issues
– Ethical decision-making in different countries

– Environmental concerns

– Sustainability initiatives

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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
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
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
$37,500/class, so

14 hours 16 weeks
Labor hours of input =
week class
= 224 hours/class

Labor productivity = Output $37,500/class

Input 224 hours/class

= $167.41/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

Labor hours of input = 360 hours

Output $20,680
Labor productivity =
Input 360 hours

= $57.44 in sales per hour

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