Fourth Edition Copyright ©2003 Prentice Hall, Inc. PART Understanding the Business of Managing

Copyright ©2003 Prentice Hall, Inc Chapter 7 Managing Operations and Improving Quality

Copyright ©2003 Prentice Hall, Inc “There are many ways of going forward, but only one way of standing still.” ~ Franklin D. Roosevelt

Copyright ©2003 Prentice Hall, Inc Key Topics Operations and the utility provided by operations processes Service operations vs. goods production Operations planning Total quality management tools The supply chain strategy vs. traditional strategies for coordinating operations

Copyright ©2003 Prentice Hall, Inc Discussion What are the resources and finished products in the registration process at your university? What are the strengths and weaknesses of the process? How could the service experience be improved? Resources: staff, technology, premises, database, customers. Finished product: smooth students registration, accurate and fast, issue certificates.

Copyright ©2003 Prentice Hall, Inc Defining Operations Service Operations: Produce tangible and intangible services. Goods Production: Produces tangible products.

Copyright ©2003 Prentice Hall, Inc Discussion What are examples of tangible and intangible services? (Possibilities include entertainment, transportation, and education.) What are examples of tangible products? (Possibilities include radios, newspapers, buses, and textbooks.)

Copyright ©2003 Prentice Hall, Inc Growth in the Goods and Services Sectors in US Millions of Workers Services Goods Production $4,000$3,000$2,000$1,000 (Billions) Services Goods Production

Copyright ©2003 Prentice Hall, Inc employment in the Goods and Services Sectors Employment in the service production sector has enjoyed robust growth in recent years, and now accounts for more than 80% of the total U.S. workforce. While employment growth in the goods production sector has stagnated, efficiency has increased dramatically. The goods producing sector uses 23% of the workforce to generate more than 40% of the U.S. GDP. The soaring efficiency level is due in large part to emerging high tech manufacturing methods, and the commitment of U.S. producers to using them.

Copyright ©2003 Prentice Hall, Inc Integration of Global Operations Technology has pushed operations to become cleaner, faster, and safer…on a global scale The internet has integrated production with global suppliers and customers

Copyright ©2003 Prentice Hall, Inc Integration of Global Operations Machines can communicate with other machines in the same company via an intranet, and machines can communicate with the machines in other companies via the Internet. The Internet is helping producers of goods and services to integrate their production activities with those of both local and foreign suppliers and customers.

Copyright ©2003 Prentice Hall, Inc Products and Services Create Utility Products and services both create utility: the ability to satisfy human wants. Time utility: Making products available when consumers want them. Place utility: Making products available where convenient for consumers. Ownership utility: Making products available for customers to own and use. Form utility: Making finished goods out of raw materials. Discussion: identify specific examples of how different kinds of products and services (e.g. concrets) provide the different forms of utility. Operations managers create utility for customers through production, inventory, and quality control.

Copyright ©2003 Prentice Hall, Inc Operations Management A Resource Transformation Process InputsTransformation Activities Outputs land capital human resources material customers information Operations Managers plan organize schedule control

Copyright ©2003 Prentice Hall, Inc Operations managers Operations managers create utility by marshalling\using resources (inputs), transforming them into products or services, and monitoring the quality and quantity of finished goods (outputs).

Copyright ©2003 Prentice Hall, Inc Operations Processes Are Methods Used in Production Goods-Manufacturing: Analytic processes Synthetic processes Service Delivery High contact processes Low contact processes

Copyright ©2003 Prentice Hall, Inc Operations processes Operations processes are the methods and technologies used to produce goods and services. Goods-manufacturing processes are classified differently from service manufacturing processes: Goods Manufacturing 1. Analytic processes: Production processes in which resources are broken down into components to create finished products. 2. Synthetic\combination processes: Production processes in which resources are combined to create finished products.

Copyright ©2003 Prentice Hall, Inc Discussion identify examples of each type of goods production process. (Analytic example: Tyson transforms whole chickens into packaged parts. Synthetic example: GE combines raw materials to produce refrigerators.) Service Delivery 1. High-contact processes: The customer is part of the system during service delivery. 2. Low-contact processes: The customer does not need to be part of the system to receive the service.

Copyright ©2003 Prentice Hall, Inc Discussion identify examples of each type of service delivery. (High- contact example: delivery of education, receiving public transportation. Low-contact example: (delivery of check processing services, Gas and electric utilities.) What are the ramifications\results of high-contact vs. low- contact operations? (With high- contact processes, an effective operations manager must consider the customer experience in making decisions about issue such as location, appearance of facilities, etc.)

Copyright ©2003 Prentice Hall, Inc Service operations focus on: Performance: Customer-oriented performance is a key factor in measuring the effectiveness of a service company. Processes and outcome: While goods manufacturers focus solely on the outcome of their operations, service providers must also consider the transformation process (e.g. HOW the car cleaning service transforms a dirty car into a clean car). Service characteristics: 1. Intangibility: Many services cannot be touched, tasted, smelled, or seen (e.g. an attorney’s services, or an exam preparation course). 2. Customization: Many services are customized to meet individual consumer needs (e.g. a haircut, or a restaurant meal). 3. Unstorability: Many services cannot be produced ahead of time and stored (e.g. an airplane flight, or computer repair).

Copyright ©2003 Prentice Hall, Inc Service operations focus on: Customer service link: As actual participants in the service process, customers have a unique ability to affect the process (e.g. since students must participate in receiving an education, schools must ensure that the student experience is positive). E-commerce has introduced the “virtual presence” of the customer in the service process, encouraging firms to respond via tools such as detailed customer profiles and customized . Service quality considerations: Successful service companies deliver excellence in each step of the process (e.g. delicious pizzas, always delivered on time by a friendly driver).

Copyright ©2003 Prentice Hall, Inc Layout  Process  Product  Cellular Methods Quality Location Capacity Operations Planning

Copyright ©2003 Prentice Hall, Inc Operations Planning Operations planning plays an important role in managing each area of both goods and services production: Capacity: The amount of a product that a company can produce under normal working conditions. 1. Goods: Effective capacity planning means ensuring that a firm’s capacity slightly exceeds normal demand. Under- capacity (limited production capacity) leads to lower profits, and alienated\separated customers and salespeople. 2. Services: For low-contact processes, maintaining inventory, capacity should be set at the level of average demand, e.g., catalogue sales warehouse. while for high-contact processes, it should be set at the level of peak demand, e.g., supermarket.

Copyright ©2003 Prentice Hall, Inc Operations Planning Location: The right location is critical because it affects both costs and flexibility. Location planning for goods and services: 1. Goods: Location decisions must consider proximity to raw materials and markets, availability of labor, energy and transportation costs, local and state regulations and taxes, and community living conditions. 2. Services: Low-contact services have some flexibility in terms of location. They may choose to locate near resources, supplies, labor, transportation outlets, or customers. High-contact services must locate near their customers.

Copyright ©2003 Prentice Hall, Inc Operations Planning Layout: Layout planning means arranging machinery, equipment, and supplies for the most efficient operations. 1- layout for producing Goods: it is planned for three different types of space: - Productive facilities, e.g., workstations and equipment. - Nonproductive facilities, e.g., storage and maintenance areas. - Support facilities, e.g., parking lots, offices, restrooms. Process layout: Equipment and people are grouped according to function (e.g. mixing, baking, and decorating may be the functions in a baked goods factory). Product layout: Equipment and people are grouped to move resources through a smooth, fixed sequence of steps to product one type of product (e.g. an assembly line). Cellular layout: Equipment and people are grouped to move families of products through similar flow paths. E.g., a clothing manufacturer may designate area to make a pockets for shirts, designate area for buttons fixing. 2- Services: Low-contact service firms use some of the same layout patterns as goods producers. High-contact services should use layouts that meet customer needs and expectations.

Copyright ©2003 Prentice Hall, Inc Operations Planning Quality: All operations planning—for both goods and services— should consider a firm’s quality goals. Quality is enhanced through continuous improvement of manufacturing methods, the careful control of every step in the operations process, and a quality improvement program that empowers employees. Methods: Operations managers can reduce waste, inefficiency, and poor performance by examining each of the production steps and the specific methods for performing them. 1. Goods: Methods improvement for goods production involves documenting the current processes, identifying inefficiencies, and implementing improvements. 2. Services: Methods improvement for low-contact service operations involves the same process, with particular emphasis on eliminating unnecessary steps. For high-contact services, methods planning must clearly outline how employees interact with customers.

Copyright ©2003 Prentice Hall, Inc Operations Scheduling Scheduling Goods Operations Scheduling Service Operations

Copyright ©2003 Prentice Hall, Inc Operations Scheduling Operations scheduling entails developing timetables for when resources will be used for production. 1. Scheduling goods operations occurs at every level of the production facility. It shows which products will be produced, when production will occur, and what resources will be used during specified time periods. 2. Scheduling service operations often involves both work and workers. In low- contact services, scheduling may be based on either desired completion dates or the time of order arrival (e.g. a car repair service). In high-contact services, firms must accommodate customer needs in the scheduling process (e.g. a hospital emergency room).

Copyright ©2003 Prentice Hall, Inc Operations control Operations control: The process of monitoring production performance by comparing results with plans. Materials management: Planning, organizing and controlling the flow of materials from design through distribution of finished goods. Materials management is most efficient when product components are standardized, or uniform. The five key areas of materials management: 1. Transportation: The means of transporting resources to the company and finished goods to buyers. 2. Warehousing: The storage of incoming materials for production and finished goods for physical distribution to customers. 3. Purchasing: The acquisition of raw materials and services that a firm needs to produce its products. 4. Supplier selection: Finding and selecting suppliers from whom to buy. 5. Inventory control: Receiving, storing, handling, and counting of all raw materials, partly finished goods, and finished goods.

Copyright ©2003 Prentice Hall, Inc Tools for Operations Process Control Worker Training Just-in-time Production Systems (JIT) Material Requirements Planning Quality Control

Copyright ©2003 Prentice Hall, Inc Tools for Operations Process Control Worker training: Continual employee training leads to higher quality products and more satisfied customers. This is especially important for high-contact services and rapidly changing fields (e.g. doctors, dentists, and pharmacists are required to attend a yearly professional development to maintain their licenses). Just in time production systems (JIT): This process brings together all materials and parts needed at each production stage at the precise moment they are required, greatly reducing inventory costs. Material requirements planning: The key tool is a bill of materials that specifies the necessary ingredients of a product, the order in which they should be combined, and how many of each is needed to make one batch. Quality control: Management of the production process to ensure that goods and services meet specific quality standards.

Copyright ©2003 Prentice Hall, Inc Total Quality Management Always Delivering High Quality Planning for quality Organizing for quality Directing for quality Controlling for quality

Copyright ©2003 Prentice Hall, Inc Total Quality Management Total quality management (TQM): The sum of all the activities involved in consistently delivering high quality products into the marketplace. TQM has begun to permeate each area of operations management in most U.S. companies: 1. Planning for quality entails setting goals for performance quality—the performance features offered by a product—and for quality reliability—the consistency of quality from unit to unit. 2. Organizing for quality means ensuring that people in all areas of the organization are responsible for quality, and where appropriate, also designating responsibility for specific aspects of TQM to specific departments and jobs. 3. Directing for quality involves taking the initiative in making quality happen by motivating employees throughout the organization to achieve quality goals. 4. Controlling for quality means establishing specific quality standards and measurements in order to detect shortfalls and implement corrections. 5. Stop

Copyright ©2003 Prentice Hall, Inc Tools for Total Quality Management Statistical Process Control Quality/Cost Studies Getting Close to the Customer Process Reengineering

Copyright ©2003 Prentice Hall, Inc Tools for Total Quality Management 1. Statistical process control includes various methods to gather data regarding variations in production activity. Control charts plot sampling results on a diagram to determine when a process is beginning to depart from normal operating conditions. 2. Quality/cost studies identify a firm’s current costs and areas with the greatest cost-saving potential. Internal costs are incurred during production and before bad products leave a production facility (e.g. identifying under-filled boxes of cereal and plucking them from the production process), while external costs are incurred after defective products have left a production facility (e.g. issuing refunds to irate customers who received under-filled boxes). 3. Getting closer to the customer helps firms provide meaningful product and service quality features to help meet changing customer needs. 4. Process reengineering improves quality through re-thinking and re- designing an organization’s approach to productivity and quality.

Copyright ©2003 Prentice Hall, Inc Adding Value Through Supply Chains ForesterFarmerCo-op Grain Storage Flour Miller Pulp Maker Paper Factory ConsumersDistributor GrainGrainFlourBakery Baking Company Rolls, bread Packager Packaged Baked Goods WoodPulpPaper Grocery Stores

Copyright ©2003 Prentice Hall, Inc The Supply Chain Strategy Supply Chain Management Working with the supply chain as a whole to improve overall flow Supply Chain Reengineering Improving the process for better results

Copyright ©2003 Prentice Hall, Inc The Supply Chain Strategy Supply chain management is the principle of working with the supply chain as a whole to improve the overall flow through the system. Supply chain reengineering is dramatic rethinking of the supply chain process to achieve better results.

Copyright ©2003 Prentice Hall, Inc Chapter Review What are the four different kinds of production- based utility? 1. Time utility: making products available when customers want them. 2. Place utility: making products available where they are convenient for customers. 3. Possession or ownership utility: giving customers the ability to benefit from possessing and using a product. 4. Form utility: creating the product in the first place.

Copyright ©2003 Prentice Hall, Inc Chapter Review What are the five major categories of operations planning? 1. Capacity planning 2. Location planning 3. Layout planning 4. Quality planning 5. Methods planning

Copyright ©2003 Prentice Hall, Inc Chapter Review What activities are involved in total quality management? 1. Statistical process control 2. Quality/cost studies 3. Getting closer to the customer 4. Business process reengineering What is supply chain management? Supply chain management is managing the supply chain as a whole to more closely coordinate activities. The result is often better service at lower prices, leading to a competitive advantage for all the players in the chain.

Copyright ©2003 Prentice Hall, Inc Chapter Review Why do you suppose lower inventory levels can cause productivity to increase? Inventory carrying costs and record keeping costs are high, tying up capital that could be used more productively. Reducing inventory levels reduces these costs, causing productivity to rise.

Copyright ©2003 Prentice Hall, Inc Chapter Review Explain how product redesign and product simplification can improve productivity. How might they improve quality at Dell? Products that are redesigned for easier or more efficient assembly, or that can use fewer, simplified, and less costly parts and materials, can improve productivity by making production quicker, cheaper, and more efficient and by improving standardization and quality. These results would also apply to Dell.