Using Operations to Create Value
Chapter 1
Learning Objectives
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What is Operations & Supply Chain Management
Core & Support Processes
Operations & Corporate Strategy
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Competitive priorities & organizational capabilities
Latest Trends & Challenges
Process, OM, SCM – Defined
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A process is an activity that takes inputs and transforms them into outputs.
Organizations tend to cluster processes together into operations
that are linked to form a supply chain.
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Operations Management deals with the systematic design, improvement
and control of processes that create and deliver value to customers.
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Supply Chain Management is the synchronization of the organization's processes
with those of its suppliers to match the flow of materials, services, capital and
information with customer demand.
The Role of Operations in an Organization
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Operations is one of several functions within an organization.
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Accounting – Finance – Marketing – Operations – Engineering – Information Systems & HR
Process View
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Every process has inputs and outputs
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Inputs: Raw materials, HR (workers, managers), capital (equipment, money, facilities),
land, services, time, energy, etc.
Outputs: Physical products or intangible services & information.
Every process & person in an organization has
internal & external suppliers & customers
Supply Chain View
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Core Processes
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Support Processes
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SRM – R&D – Order Fulfillment – CRM
Provide inputs, resources, capabilities that allow core processes to function
Supply Chain Processes
Supply Chain View
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Core Processes
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Support Processes
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Supply Chain Processes
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Sourcing, Outsourcing,
Warehousing, Cross-docking,
Logistics, Customer Service, etc.
Corporate Strategy
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Provides direction to all functions and the framework to carry out of their processes
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Develops & prioritizes competitive capabilities
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Order Winners (differentiate)
 Cost – Quality – Time – Flexibility
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Order Qualifiers (min set of reqs)
Operations Strategy
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Links short-term & long-term decision making
with the corporate strategy
Closes the gap between strategic competitive priorities
and necessary operational competitive capabilities
Competitive Priorities
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Cost
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Low cost operations
Deliver within budget
Quality
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Design quality
Production quality
Consistent quality
Time
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Delivery speed
On-time delivery
Development speed
Flexibility
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Customization
Volume flexibility
Variety
Addressing Trends & Challenges in OM
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Productivity
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Major trend and basic measure of industrial, economic and process performance.
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Manufacturing vs. Service sector productivity gains
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Definition: Productivity =
Output
Input
Productivity – Example 1

Calculate the partial and multifactor productivity for the following data:
This Yr.
Last Yr.
Year Before Last
Factory unit sales ($)
2,762,103
2,475,738
2,175,447
Employment (hrs)
112,000
113,000
115,000
Sales of manufactured products ($)
$49,363
$40,831
—
Total manufacturing cost of sales ($)
$39,000
$33,000
—
Productivity – Example 1


Calculate the partial and multifactor productivity for the following data:
This Yr.
Last Yr.
Year Before Last
Factory unit sales ($)
2,762,103
2,475,738
2,175,447
Employment (hrs)
112,000
113,000
115,000
Sales of manufactured products ($)
$49,363
$40,831
—
Total manufacturing cost of sales ($)
$39,000
$33,000
—
Year-to-year labor (partial) productivity:
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2,762,103
= $24.66/ℎ𝑟
112,000
2,475,738
Last year:
= $21.91/ℎ𝑟
113,000
2,175,447
Year before last:
= $18.91/ℎ𝑟
115,000
This year:
Productivity – Example 1


Calculate the partial and multifactor productivity for the following data:
This Yr.
Last Yr.
Year Before Last
Factory unit sales ($)
2,762,103
2,475,738
2,175,447
Employment (hrs)
112,000
113,000
115,000
Sales of manufactured products ($)
$49,363
$40,831
—
Total manufacturing cost of sales ($)
$39,000
$33,000
—
Year-to-year total manufacturing cost
(multifactor) productivity:
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
49,363
= 1.27
39,000
40,831
Last year:
= 1.24
33,000
This year:
Productivity – Example 2

Calculate the partial and multifactor productivity for the following operations:
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Three employees process 600 insurance policies in a week.
They work 8 hours per day, 5 days a week.
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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.
Productivity – Example 2

Calculate the partial and multifactor productivity for the following operations:

Three employees process 600 insurance policies in a week.
They work 8 hours per day, 5 days a week.
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Partial productivity =
Policies processed
600
=
= 5 policies/hr
Employee hours
(3)(8)(5)
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.
Productivity – Example 2

Calculate the partial and multifactor productivity for the following operations:

Three employees process 600 insurance policies in a week.
They work 8 hours per day, 5 days a week.


Partial productivity =
Policies processed
600
=
= 5 policies/hr
Employee hours
(3)(8)(5)
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
400(10)
=
= 2.35
Labor cost+Material Cost+Overhead
400+1000+300
Productivity – Example 3
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Student tuition at a 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.
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What is the multifactor productivity ratio for this course process?
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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?
Productivity – Example 3
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Multifactor productivity is the ratio of output value to input value of resources.
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Output: 50 students/class (3 credits/student) ($150 tuition + $100 state support)/credit
Output = $37,500 per class
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Input: Labor + Material + Overhead = $4,000 + $20/student (50 students) + $25,000
Input = $30,000 per class
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Multifactor Productivity =
Output $37,500/class
=
= 1.25
Input
$30,000/class
Productivity – Example 3
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Labor productivity is the ratio of output value to labor value.
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Output: 50 students/class (3 credits/student) ($150 tuition + $100 state support)/credit
Output = $37,500 per class
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Input: Labor hours = 14 hrs/week (16 weeks) = 224 hrs/class
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Labor Productivity =
Output
$37,500/class
=
= 9.375
Labor Input
$4,000/class
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Labor Productivity =
Output
$37,500/class
=
= $167.41/hr
Labor Input 224 hrs/class
Productivity – Example 4
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Natalie 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 a Factory Outlet Store.
The remaining 80 garments are sold to retail distribution at $200 each.

What is the labor productivity of this manufacturing process?
Productivity – Example 4

Natalie 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 a Factory Outlet Store.
The remaining 80 garments are sold to retail distribution at $200 each.
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Output = 80 garments ($200) + 52 defective ($90) = $20,680
Labor Input = 360 hrs

Labor Productivity =
Output
$20,680
=
= $57.44/hr
Labor Input 360 hrs
Addressing Trends & Challenges in OM
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Globalization of supply chains
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Advantages:
 Market expansion, proximity to suppliers & customers, labor & material cost reduction, etc.
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Disadvantages:
 Geopolitical risks, intellectual property, production quality issues, lack of skilled workforce, etc.
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Workforce diversity & ethical dilemmas
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Dealing with conflicts of interest, bribery, discrimination, meeting or exceeding local standards,
minimum wage, work environment safety, data protection, customer privacy, etc.
Corporate social responsibility (CSR) & environmental sustainability
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Triple bottom line (TBL) reporting: Profit – People – Planet (3P)
Summary



What is Operations & Supply Chain Management
Core & Support Processes
Operations / Corporate Strategy


Competitive priorities & organizational capabilities
Latest Trends & Challenges