Using Operations to Compete
Chapter 1
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01-01
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
manufacturing
process
• Physical, durable output
• Output can be inventoried
• Low customer contact
• Long response time
• Capital intensive
• Quality easily measured
More like
a service
process
• Intangible, perishable output
• Output cannot be inventoried
• High customer contact
• Short response time
• Labor intensive
• 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
• 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
No
Yes
Decisions
• Managing processes
• Managing supply chains
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Performance
Gap?
Competitive Capabilities
• Current
• Needed
• Planned
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Competitive Priorities and Capabilities
Competitive Priorities
Competitive 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.
The cost, quality, time, and
flexibility dimensions that a
process or supply chain
actually possesses and is able
to deliver.
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Order Winners and Qualifiers
Order Winners
Order Qualifiers
The criterion customers use
to differentiate the services
or products of one firm from
those of another.
The minimum level required
from a set of criteria for a firm
to do business in a particular
market segment.
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Examples
COST
Definition
Process Considerations
Example
1.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
2.Top quality
Delivering an
outstanding service
or product
May require a high level of
customer contact and may
require superior product
features
Rolex
3.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
QUALITY
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Examples
TIME
Definition
Process Considerations
Example
4.Delivery speed Quickly filling a
customer’s order
Design processes to reduce
lead time
Dell
5.On-time
delivery
Meeting deliverytime promises
Planning processes to
increase percent of
customer orders shipped
when promised
United Parcel
Service (UPS)
6.Development
speed
Quickly
introducing a new
service or a
product
Cross-functional integration Zara
and involvement of critical
external suppliers
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Examples
FLEXIBILITY
Definition
Process Considerations
Example
7.Customization
Satisfying the
unique needs of
each customer by
changing service or
products designs
Low volume, close
customer contact, and
easily reconfigured
Ritz Carlton
8.Variety
Handling a wide
assortment of
services or
products efficiently
Capable of larger
volumes than processes
supporting
customization
Amazon.com
9.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)
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Relationship of Order Qualifiers to
Competitive Priorities
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Relationship of Order Winners to
Competitive Priorities
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Operations Strategy
OPERATIONS STRATEGY ASSESSMENT OF THE BILLING AND PAYMENT PROCESS
Competitive
Priority
Measure
 Cost per
Low-cost
operations
Capability
 $0.0813
billing
statement
 Weekly
 $17,000
postage
Consistent quality
 Percent
Gap
Action
 Target is
 Eliminate microfilming
$0.06
and storage of billing
statements
 Target is
$14,000
 Develop Web-base
process for posting
bills
 0.90%
 Acceptable
 No action
 0.74%
 Acceptable
 No action
 Acceptable
 No action
 Too high to
 Acquire temporary
errors in bill
information
 Percent
errors in
posting
payments
 Lead time to  48 hours
Delivery speed
process
merchant
payments
Volume flexibility
 Utilization
 98%
support rapid
increase in
volumes
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employees
 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.
Labor productivity =
Policies processed
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 $1,700
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Application 1.1
This Year
Last Year
Year Before Last
Factory unit sales
2,762,103
2,475,738
2,175,447
Employment (hrs)
112,000
113,000
115,00
Sales of manufactured
products ($)
$49,363
$40,831
—
Total manufacturing
cost of sales ($)
$39,000
$33,000
—
 Calculate the year-to-date labor productivity:
This Year
factory unit sales
2,762,103
112,000
employment
Last Year
= 24.66/hr
2,475,738
113,000
Year Before Last
= 21.91/hr
2,175,447
115,000
= $18.91/hr
 Calculate the multifactor productivity:
This Year
sales of mfg products
$49,363
total mfg cost
$39,000
= 1.27
Last Year
$40,831
$33,000
= 1.24
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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.
Value of output =
50 student
class
3 credit hours
student
$150 tuition +
$100 state support
credit hour
= $37,500/class
Value of inputs = Labor + Materials + Overhead
= $4,000 + ($20/student  50 students/class) + $25,000
= $30,000/class
Multifactor productivity =
Output
$37,500/class
Input
$30,000/class
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= 1.25
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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
Labor hours of input =
14 hours
week
16 weeks
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
Labor productivity =
Output
$20,680
Input
360 hours
= $57.44 in sales per hour
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