Using Operations to Compete Chapter 1 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 01-01

What is Operations Management? The systematic design, direction, and control of processes that transform inputs into services and products for internal, as well as external, customers. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

What is 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. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

The Role of Operations in the Organization Integration between Different Functional Areas of a Business Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 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. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Service and Manufacturing Processes Differ Across Nature of Output and Degree of Customer Contact More like a manufacturing process More like a service process Physical, durable output Output can be inventoried Low customer contact Long response time Capital intensive Quality easily measured Intangible, perishable output Output cannot be inventoried High customer contact Short response time Labor intensive Quality not easily measured Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall The Supply Chain View Each activity in a process should add value to the preceding activities; waste and unnecessary cost should be eliminated. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 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. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall The Supply Chain View New service/product development – A process to design and develop new services or products from customer or market inputs. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall The Supply Chain View Order fulfillment process – A process to produce and deliver services or products to the external customer. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall The Supply Chain View Customer relationship process – A process that identifies, attracts and builds relationships with external customers and facilitates the placement of orders. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 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 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

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 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Operations Strategy Corporate Strategy Environmental scanning Core competencies Core processes Global strategies Market Analysis Market segmentation Needs assessment Competitive Priorities Cost Quality Time Flexibility New Service/ Product Development Design Analysis Development Full launch Operations Strategy Decisions Managing processes Managing supply chains Competitive Capabilities Current Needed Planned Performance Gap? No Yes Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Competitive Priorities and Capabilities The critical dimensions that a process or supply chain must possess to satisfy its internal or external customers, both now and in the future. Competitive capabilities The cost, quality, time, and flexibility dimensions that a process or supply chain actually possesses and is able to deliver. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Order Winners and Qualifiers The criterion customers use to differentiate the services or products of one firm from those of another. Order Qualifiers The minimum level required from a set of criteria for a firm to do business in a particular market segment. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Examples COST Definition Process Considerations Example Low-cost operations Delivering a service or a product at the lowest possible cost Processes must be designed and operated to make them efficient Costco QUALITY Top quality Delivering an outstanding service or product May require a high level of customer contact and may require superior product features Rolex Consistent quality Producing services or products that meet design specifications on a consistent basis Processes designed and monitored to reduce errors and prevent defects McDonald’s Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Examples TIME Definition Process Considerations Example Delivery speed Quickly filling a customer’s order Design processes to reduce lead time Dell On-time delivery Meeting delivery-time promises Planning processes to increase percent of customer orders shipped when promised United Parcel Service (UPS) Development speed Quickly introducing a new service or a product Cross-functional integration and involvement of critical external suppliers Zara Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Examples FLEXIBILITY Definition Process Considerations Example Customization Satisfying the unique needs of each customer by changing service or products designs Low volume, close customer contact, and easily reconfigured Ritz Carlton Variety Handling a wide assortment of services or products efficiently Capable of larger volumes than processes supporting customization Amazon.com Volume flexibility Accelerating or decelerating the rate of production of service or products quickly to handle large fluctuations in demand Processes must be designed for excess capacity The United States Postal Service (USPS) Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Relationship of Order Qualifiers to Competitive Priorities Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Relationship of Order Winners to Competitive Priorities Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

OPERATIONS STRATEGY ASSESSMENT OF THE BILLING AND PAYMENT PROCESS Competitive Priority Measure Capability Gap Action Low-cost operations Cost per billing statement $0.0813 Target is $0.06 Eliminate microfilming and storage of billing statements Weekly postage $17,000 Target is $14,000 Develop Web-base process for posting bills Consistent quality Percent errors in bill information 0.90% Acceptable No action Percent errors in posting payments 0.74% Delivery speed Lead time to process merchant payments 48 hours Volume flexibility Utilization 98% Too high to support rapid increase in volumes Acquire temporary employees Improve work methods Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

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 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

(3 employees)(40 hours/employee) 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. Labor productivity = Policies processed Employee hours = = 5 policies/hour 600 policies (3 employees)(40 hours/employee) Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Labor cost + Materials cost Example 1.1 Calculate the Multifactor Productivity: 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. Multifactor productivity = Value of output Labor cost + Materials cost + Overhead cost = = = 2.35 (400 units)($10/unit) $400 + $1,000 + $300 $4,000 $1,700 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Application 1.1 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 Employment (hrs) 112,000 113,000 115,00 Sales of manufactured products ($) $49,363 $40,831 — Total manufacturing cost of sales ($) $39,000 $33,000 Calculate the year-to-date labor productivity: factory unit sales employment This Year 2,762,103 = 24.66/hr 112,000 Last Year 2,475,738 = 21.91/hr 113,000 Year Before Last 2,175,447 = $18.91/hr 115,000 Calculate the multifactor productivity: sales of mfg products total mfg cost This Year $49,363 = 1.27 $39,000 Last Year $40,831 = 1.24 $33,000 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

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 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Trends in Operations Management Ethical, Workforce Diversity, and Environmental Issues Ethical decision-making in different countries Environmental concerns Sustainability initiatives Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

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Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 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. What is the multifactor productivity ratio for this course process? 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? Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Solved Problem 1 SOLUTION Multifactor productivity is the ratio of the value of output to the value of input resources. Value of output = 50 student class $150 tuition + $100 state support credit hour 3 credit hours student = $37,500/class Value of inputs = Labor + Materials + Overhead = $4,000 + ($20/student  50 students/class) + $25,000 = $30,000/class Multifactor productivity = = 1.25 $37,500/class $30,000/class Output Input Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Solved Problem 1 SOLUTION 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 Labor hours of input = 14 hours week 16 weeks class = 224 hours/class Labor productivity = $37,500/class 224 hours/class Output Input = $167.41/hour Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 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? Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Solved Problem 2 SOLUTION Value of output = (52 defective  90/defective) + (80 garments  200/garment) = $20,680 Labor hours of input = 360 hours Labor productivity = $20,680 360 hours Output Input = $57.44 in sales per hour Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

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