COMPETING WITH OPERATIONS 1 COMPETING WITH OPERATIONS Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

Operations Management The systematic design, direction, and control of processes that transform inputs into services and products for customers Processes can be linked together to form a supply chain – interrelated processes within a firms and across different firms that produce a service or product.

Across the Organization Finance Acquires financial resources and capital for inputs Marketing Generates sales of outputs Operations Translates materials and service into outputs Support Functions Accounting Information Systems Human Resources Engineering Material & Service Inputs Sales Revenue Product & Service Outputs

A Process View External environment Internal and external customers Processes and operations 1 2 3 4 5 Inputs Workers Managers Equipment Facilities Materials Land Energy Outputs Goods Services Information on performance

More like a manufacturing process More like a service process A Process View 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

The Supply Chain View Support Processes External suppliers External customers Supplier relationship process New service/ product development Order fulfillment process Customer relationship management

The Supply Chain View Core processes are sets of activities that deliver value to external customers Supplier relationship process New service/product development process Order fulfillment process Customer relationship process Support processes provide vital resources and inputs to the core processes

Support Processes TABLE 1.1 | EXAMPLES OF SUPPORT PROCESSES Capital acquisition The provision of financial resources for the organization to do its work and to execute its strategy Budgeting The process of deciding how funds will be allocated over a period of time Recruitment and hiring The acquisition of people to do the work of the organization Evaluation and compensation The assessment and payment of people for the work and value they provide to the company Human resource support and development The preparation of people for their current jobs and future skills and knowledge needs Regulatory compliance The processes that ensure that the company is meeting all laws and legal obligations Information systems The movement and processing of data and information to expedite business operations and decisions Enterprise and functional management The systems and activities that provide strategic direction and ensure effective execution of the work of the business

Competitive Priorities TABLE 1.2 | DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE PRIORITIES 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 Ferrari 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 TIME 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 science or a product Cross-functional integration and involvement of critical external suppliers Li & Fung

Competitive Priorities TABLE 1.2 | DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE PRIORITIES 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)

Order Winners and Qualifiers Sales ($) Achievement of competitive priority Low High Order Winner Sales ($) Achievement of competitive priority Low High Order Qualifier Threshold

Operations Strategy TABLE 1.3 | 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

Trends in Operations Management Productivity improvement Global competition Ethical, workforce, and environmental issues

Productivity Improvement EXAMPLE 1.1 Calculate the productivity for the following operations: Three employees process 600 insurance policies in a week. They work 8 hours per day, 5 days per week. SOLUTION Labor productivity = Policies processed Employee hours = = 5 policies/hour 600 policies (3 employees)(40 hours/employee)

Productivity Improvement EXAMPLE 1.1 Calculate the productivity for the following operations: 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. SOLUTION 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

Application 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

OM as a Set of Decisions Competing with Operations Project Management USING OPERATIONS TO COMPETE In practice, managers make strategic and tactical decisions Each part of the organization designs and operates processes Each function is connected through shared resources Process Strategy Process Analysis Quality and Performance Capacity Planning Lean Systems MANAGING PROCESSES Supply Chain Design Supply Chain Integration Location Inventory Management Forecasting Operations Planning and Scheduling Resource Planning MANAGING SUPLY CHAINS Figure 1.7

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?

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

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 $45,000, so Labor hours of input = 14 hours week 16 weeks class = 224 hours/class Labor productivity = = $45,000/class 224 hours/class Output Input = $200.89/hour

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?

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