Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 1 Chapter 18 Prepared by Deborah Baker Texas Christian University Management 4th Edition Chuck Williams Managing Service and Manufacturing Operations

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 2 What Would You Do?  Hyundai has a long reputation of poor quality—and managers don’t care  Hoping to expand its U.S. presence, Hyundai is building a plant in Alabama  The company is losing money and has $6.6 billion debt Hyundai Headquarters, Seoul, South Korea. How can Hyundai improve quality--and change the mindset of managers, workers, and customers?

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 3 Operations Management Managing the daily production of goods and services.

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 4 Managing for Productivity and Quality After reading these sections, you should be able to: 1. discuss the kinds of productivity and their importance in managing operations. 2. explain the role that quality plays in managing operations.

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 5 Productivity Productivity = Outputs Inputs Productivity = Outputs Inputs Why Productivity Matters Different Kinds of Productivity 1 1

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 6 Why Productivity Matters Higher Productivity Higher Productivity Lower Costs Lower Costs Lower Prices Lower Prices Higher Market Share Higher Market Share Higher Profits Higher Profits Higher Standard of Living Higher Standard of Living 1.1

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 7 Why Productivity Matters 1.1  Increased wages and new jobs  More donations to charities  More affordable and better products

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 8 Kinds of Productivity Partial productivity = Outputs Single Kind of Input Multifactor productivity = Outputs Labor + Capital + Materials + Energy 1.2

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 9 Multifactor Productivity Growth 1.2

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 10 Quality Baldrige National Quality Award Baldrige National Quality Award Total Quality Management Total Quality Management ISO 9000 & Quality-Related Product Characteristics Quality-Related Service Characteristics 2 2

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 11 Meanings for Quality …A product or service free of deficiencies …The characteristics of a product or service that satisfy customer needs …The characteristics of a product or service that satisfy customer needs 2 2 Quality

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 12 Car Quality 2 2

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 13 Quality-Related Product Characteristics 2.1 Reliability Serviceability Durability Product

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 14 Serviceability Reva uses computer diagnostic system that can sync to the owner’s cell phone, indicating the type of service the vehicle needs.

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 15 Characteristics of Service Quality 2.1

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 16 ISO 9000 and ISO 9000 A series of five international standards (ISO 9000 to ISO 9004) for achieving consistency in quality management and quality assurance in companies throughout the world. ISO A series of international standards for managing, monitoring, and minimizing an organization’s harmful effects on the environment Web Link

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 17 Baldrige National Quality Award  Given to U.S. companies to recognize achievement in quality and business performance  Raises awareness about the importance of quality and performance excellence as a competitive edge 2.3

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 18 Criteria for the Baldrige National Quality Award 1. Leadership 2. Strategic Planning 3. Customer and Market Focus 4. Measurement, Analysis, & Knowledge Management 5. Human Resource Focus 6. Process Management 7. Business Results 2.3

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 19 Baldrige Application Process Link

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 20 Total Quality Management Principles of TQM Continuous improvement Teamwork 2.4 Customer focus and satisfaction

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 21 Total Quality Management Defects Per Million Parts (000) Sigma Quality Level 6 Sigma 5 Sigma 4 Sigma 3 Sigma 2 Sigma 1 Sigma 690, ,210 66, ,538 Adapted from Exhibit

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 22 Managing Operations After reading these sections, you should be able to: 3. explain the essentials of managing a service business. 4. describe the different kinds of manufacturing operations. 5. explain why and how companies should manage inventory levels.

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 23 Service Operations Services…  are performed  are intangible  are unstorable  57.2% of GDP Goods…  are made  are tangible  are storable  32.7% of GDP 3 3

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 24 Service Operations Service-Profit Chain Service Recovery and Empowerment Service Recovery and Empowerment 3 3

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 25 The Service-Profit Chain Exhibit

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 26 Components of Internal Service Quality Adapted From Figure 18.9 Both vertical and horizontal communication? Do service employees have tools needed? Are good performers rewarded/recognized? Does management aid or hinder employees? Is there teamwork among individuals and departments? Do they facilitate serving customers? Is job-specific training available? Are goals of senior management and frontline service employees aligned? Policies and Procedures Tools Effective Training Rewards and Recognition Communication Management Support Goal Alignment Teamwork 3.1

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 27 Service Recovery and Empowerment  Service recovery is restoring customer satisfaction to strongly dissatisfied customers  Fixing the mistakes that were made  Performing “heroic” service that delights customers  Empowering workers can help solve customer dissatisfaction  The goal is zero customer defections 3.2

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 28 Doing the Right Thing Protect Your Front-Line Staff: The Customer Isn’t Always Right  Fire customers who use foul language, make threats against employees or other customers, lie, demand unethical or illegal service, bully, or are belligerent  Otherwise, you are saying you care more about money than the safety of people in the business Protect Your Front-Line Staff: The Customer Isn’t Always Right  Fire customers who use foul language, make threats against employees or other customers, lie, demand unethical or illegal service, bully, or are belligerent  Otherwise, you are saying you care more about money than the safety of people in the business 3.2

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 29 Costs of Empowering Service Employees 1. Finding service workers capable of solving problems 2. Training service workers 3. Higher wages 4. Less emphasis on service reliability 5. Eagerness to provide “giveaways” 6. Unintentional unfair customer treatment Adapted from Exhibit

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 30 Benefits of Empowering Service Employees 3.2 Adapted from Exhibit Quicker response to customer complaints 2. Employees feel better 3. Enthusiastic employee interaction with customers 4. Employees offer ideas for improvement and prevention 5. Great word-of-mouth advertising and customer retention 6. Satisfied employees more likely to stay with company

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 31 Manufacturing Operations Amount of Processing Flexibility of Manufacturing 4 4

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 32 Amount of Processing in Manufacturing Operations  Make-to-order operations  manufacturing doesn’t begin until an order is placed  Assemble-to-order operations  used to create semi-customized products  Make-to-stock operations  manufacture standardized products 4.1

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 33 Amount of Processing in Manufacturing Operations More Processing Make-to-Order Assemble-to-Order Make-to-Stock Less Processing More Processing Make-to-Order Assemble-to-Order Make-to-Stock Less Processing Adapted from Exhibit

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 34 Flexibility of Manufacturing Operations LEAST FLEXIBLE Continuous-Flow Line-Flow Batch Job Shops Project Manufacturing MOST FLEXIBLE LEAST FLEXIBLE Continuous-Flow Line-Flow Batch Job Shops Project Manufacturing MOST FLEXIBLE Adapted from Exhibit

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 35 Flexibility of Manufacturing Operations Continuous-flow productionProduces products continuously, like oil drilling Line-flow productionUses predetermined, linear steps, like beverage bottling Batch productionProduces specific quantities of different items, like a bakery or commissary Job shopsHandle small, specialty batches Project manufacturingIs for large, expensive, specialized products like aircraft carriers 4.2

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 36 Flexibility at Just Born 4.2

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 37 Inventory Costs of Maintaining Inventory Systems for Managing Inventory Types of Inventory Measuring Inventory Levels 5 5

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 38 Types of Inventory Adapted from Exhibit Raw materials Component parts Work-in-process Finished goods Fabrication Initial Assembly Final Assembly Vendors Purchasing

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 39 Types of Inventory Finished Goods Inventories Field Warehouses Distribution Centers Wholesalers Retailers Customers 5.1 Adapted from Exhibit 18.13

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 40 Measuring Inventory 1. Average Aggregate Inventory  the average overall inventory for a certain time period 2. Weeks of Supply  the number of weeks to run out of inventory 3. Inventory Turnover  the number of times a year that a company sells its average inventory 5.2

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 41 Inventory Turn Rates Aerospace Automotive Chemicals Construction Consumer Packaged Goods/Nondurables Consumer Product Durables High Tech Industrial Equipment & Machinery Pharmaceuticals Printing and Publishing Average Average Inventory Turn Rate 75th Percentile Inventory Turn Rate Adapted from Exhibit

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 42 Costs of Maintaining an Inventory Ordering Cost Setup Cost Setup Cost Holding Cost Stockout Costs all costs associated with ordering inventory, correcting mistakes, determining when/how much to order all costs associated with ordering inventory, correcting mistakes, determining when/how much to order costs of downtime and lost efficiency when a machine is changed to produce different kinds of inventory cost of keeping inventory until it is used or sold costs when a company runs out of a product 5.3

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 43 Stockout Costs

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 44 Trade-off Between Setup Costs and Manufacturing Flexibility 5.3

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 45 Managing Inventory Economic Order Quantity Just-in-Time Inventory Materials Requirement Planning EOQ JIT MRP 5.3

Chapter 18 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 46 Managing Inventory 5.3 Kanban Kanban, which is Japanese for “sign,” is a simple ticket-based JIT system that indicates when to reorder inventory.