Chapter 1
Introduction to
Operations and
Competitiveness
Copyright 2006 John Wiley & Sons, Inc.
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Welcome to ISQS 5343
Instructor: Dr. Burns
Summer II 2013 SEMESTER
Telephone: 834-1547
Email: jburns@ba.ttu.edu
Off hrs: 9:30-10:00 Tues., Th.
And by appointment
Website: burns.ba.ttu.edu
Copyright 2010 John Wiley & Sons, Inc.
My web site
http://burns.ba.ttu.edu
Copyright 2011 John Wiley & Sons, Inc.
1-3
Prerequisites
 STATISTICS

ISQS 5345: Basic Statistical Concepts
 COMPUTER LITERACY


MS Excel
MS Word
Copyright 2011 John Wiley & Sons, Inc.
1-4
Seating
 The seat you sit in on the second
session of class will be your seat for the
duration of the class
 A seating chart will be ‘made-up’ then
Copyright 2006 John Wiley & Sons, Inc.
1-5
Survey
 I will hand it out…
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Requirements/Pedagogy
 4 homework sets


Collected the day before we do our review
TO GET US READY TO TAKE THE EXAMS
 3 EXAMS and a FINAL
 Term Project
Copyright 2006 John Wiley & Sons, Inc.
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Term Project--Consists of six parts
 Part 1 is due 7-15-2013
 Part 2 is due 7-17-2013
 Part 3 is due 7-19-2013
 Part 4 is due 7-30-2013
 Part 5 is due 8-5-2013
 Part 6 is due 8-9-2013
 PROJECT IN TOTAL IS due 8-9-2013
1-9
Term Project





Part 1—design the firm & its products/ services
Part 2—design of the quality system
Part 3—design of the internal processes
Part 4—design of the external processes
Part 5—design of the inventory system/design
for leanness
 Part 6—design of the startup project
 TEAM SIZES: 3-4
Copyright 2006 John Wiley & Sons, Inc.
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Grading
 The homework is worth a total of 16%
 Each EXAM is worth 13%

{There are three EXAMS}
 The FINAL is worth 15%
 The PROJECT is worth 30%


Each project part (there are six) is worth 4%
The final project report is worth 6%
Copyright 2006 John Wiley & Sons, Inc.
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Grades
 90-100---A
 80-89.999---B
 70-79.999---C
 97.5-on up---A+
 92.5-97.4999---A
 90-92.4999—ACopyright 20011 John Wiley & Sons, Inc.
1-12
Class Pedagogy
 Won’t show any movies
 Video clips are OK, however
 PowerPoint
 Simulations, where possible
 Lectures--more informal
 Interactive Discussions
Copyright 2006 John Wiley & Sons, Inc.
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How Long does it take you to
do stuff?
 Do you know?
 Suppose your employer assigns a task to
you and asks you how long it will take
you to do it? Could you tell him/her?
 For your benefit, I want you to estimate
how long its going to take you to do each
project step and then record how long it
actually took you
Copyright 2006 John Wiley & Sons, Inc.
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Five ‘hot’ jobs right now—
according to Yahoo.
 http://hotjobs.yahoo.com/career-articlesfive_hot_business_careers_no_mba_needed276
 Event Planning--$20--$40/hr
 Public Relations--$43,830/yr (median)
 Advertising--$40,300/yr (median)
 Web Designer--$60,000/yr (median)
 Search Engine Optimization--$40,000 (med.)
 Project manager--$50,000 to $80,000 to start
Copyright 2006 John Wiley & Sons, Inc.
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Questions
 How big is the U.S. economy in terms of
GDP? What is the world-wide GDP?
 How big is the U.S. population in relation
to the rest of the world?
 What percentage of worldwide
nonrenewable resources are consumed
just in the U.S. alone?
Copyright 2006 John Wiley & Sons, Inc.
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More questions
 Is the U.S. leadership in terms of
material standard of living sustainable?

What does it take to make it sustainable?
 What is causing the devaluation of the
dollar? Will that devaluation continue?
 Is there anything good that comes from
devaluation of the dollar?
 What’s bad about the $ devaluation?
Copyright 2006 John Wiley & Sons, Inc.
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What are some of the biggest
problems our country (U.S.A.)
faces?







The war on terror
Mexican border out of control
The national debt; the budget and trade deficits
Contributions to global warming
High energy costs
Health care is too expensive
Major employers like banks tanking
Copyright 2006 John Wiley & Sons, Inc.
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What solutions do you foresee to
America’s problems?
 Massive Jobs growth (particularly high-value jobs) and
Immigration of tax-paying, foreign professionals
 Strong productivity growth
 Sell Resources owned by the Federal Gov.





Oil on Federally-owned lands
Gas on Federally-owned lands
Coal on Federally-owned lands
Uranium on Federally-owned lands
Electricity (solar and wind farms on federally-owned land)
 BUY AMERICAN
Copyright 2006 John Wiley & Sons, Inc.
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The National Debt
 Officially, $ 16,455,325,678,402.07 as of today
accumulating at the rate of $3.5 billion per day-$139,250 per taxpayer
 According to Kotlikoff, the fiscal gap is a stunning
$65.9 trillion—that is more than twice the total net
worth of the entire country
 Social Security and Medicare liabilities are
estimated at $40 trillion
 No plans for accommodation of the retirements in
77 million baby boomers beginning now, but
becoming substantial after 2014
Copyright 2006 John Wiley & Sons, Inc.
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Can we increase tax rates, really?
<Other Federal
Revenues>
Gov expenditures
Tax Revenues
GDP
Deficit
SS & Medicare
Tax base
National
Debt
Tax Rate
debt service
Interest rate
Copyright 2006 John Wiley & Sons, Inc.
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The Federal Government must
become an entrepreneur
Other Federal
Revenues
Sale of oil and gas off
of Federal lands
Sale of uranium off of
Federal lands
Sale of solar and wind
power off of federal lands
Copyright 2006 John Wiley & Sons, Inc.
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Solutions--Kotlikoff
Copyright 2006 John Wiley & Sons, Inc.
1-23
Competitiveness
 The opportunities are huge
 There will be massive change
 You can exploit that change to create
wealth
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1-24
Standard of Living
Jobs
Competitiveness
Cycle Time
Productivity
Cost
Quality
Operations
Creativity
Innovation
Copyright 2006 John Wiley & Sons, Inc.
Improvement
Design
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What are some OM entry-level
titles?










PROJECT MANAGER
BUSINESS PROCESS ANALYST
INVENTORY ANALYST
PROJECT COORDINATOR
UNIT SUPERVISOR
SUPPLY CHAIN ANALYST
MATERIALS MANAGER
QUALITY ASSURANCE SPECIALIST
PRODUCTION SCHEDULER
LOGISTICS PLANNER
Copyright 2006 John Wiley & Sons, Inc.
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Competitiveness, Productivity,
Leanness, Agility and Maturity
 That’s what this course is about
 Creating wealth through production of
goods and services
Copyright 2006 John Wiley & Sons, Inc.
1-27
Potential Project Topics
 Products/services that help us conserve
energy/water


Residential
Commercial
 Products that help the retiring baby boom
generation—77 million of them in the U.S.
alone
 Products/processes that reduce the cost of
health care?
 Products/services that help us become
GREEN AND
Copyright 2006 John Wiley & Sons, Inc.
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Copyright 2006 John Wiley & Sons, Inc.
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Copyright 2006 John Wiley & Sons, Inc.
1-30
Lecture Outline
 What Operations and Supply Chain
Managers Do
 Operations Function
 Evolution of Operations and Supply Chain
Management
 Globalization and Competitiveness
 Operations
 Learning Objectives for This Course
Copyright 2006 John Wiley & Sons, Inc.
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What Operations and
Supply Chain Managers Do
 What is Operations Management?

design, operation, and improvement of productive
systems
 What is Operations?

a function or system that transforms inputs into outputs of
greater value
 What is a Transformation Process?


a series of activities along a value chain extending from
supplier to customer
activities that do not add value are superfluous and
should be eliminated
Copyright 2006 John Wiley & Sons, Inc.
1-33
Transformation Process
 Physical: as in manufacturing operations
 Locational: as in transportation or
warehouse operations
 Exchange: as in retail operations
 Physiological: as in health care
 Psychological: as in entertainment
 Informational: as in communication
Copyright 2006 John Wiley & Sons, Inc.
1-34
Operations as a
Transformation Process
INPUT
•Material
•Machines
•Labor
•Management
•Capital
TRANSFORMATION
PROCESS
OUTPUT
•Goods
•Services
Feedback & Requirements
Copyright 2006 John Wiley & Sons, Inc.
1-35
From Paradigms to Products
 Paradigms

Principles

Practices
 Processes

Products and Services
Copyright 2006 John Wiley & Sons, Inc.
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Operations Function
 Operations
 Marketing
 Finance and
Accounting
 Human
Resources
 Outside
Suppliers
Copyright 2006 John Wiley & Sons, Inc.
1-37
How is Operations Relevant to my
Major?
 Accounting
 Information
Technology
 Management
 “As an auditor you must
understand the fundamentals of
operations management.”
 “IT is a tool, and there’s no better
place to apply it than in
operations.”
 “We use so many things you
learn in an operations class—
scheduling, lean production,
theory of constraints, and tons of
quality tools.”
Copyright 2006 John Wiley & Sons, Inc.
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How is Operations Relevant to my
Major? (cont.)
 Economics
 Marketing
 Finance
 “It’s all about processes. I live
by flowcharts and Pareto
analysis.”
 “How can you do a good job
marketing a product if you’re
unsure of its quality or delivery
status?”
 “Most of our capital budgeting
requests are from operations,
and most of our cost savings,
too.”
Copyright 2006 John Wiley & Sons, Inc.
1-39
Evolution of Operations and
Supply Chain Management
 Craft production

process of handcrafting products or services for
individual customers in the craftsman’s shop
 The Industrial Revolution brought:

Division of labor -- Adam Smith


Interchangeable parts – Eli Whitney


dividing a job into a series of small tasks each performed
by a different worker
standardization of parts initially as replacement parts;
enabled mass production
Steam Engine – James Watt
Copyright 2006 John Wiley & Sons, Inc.
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Evolution of Operations and
Supply Chain Management (cont.)

Scientific management

systematic analysis of work methods

Mass production


high-volume production of a standardized product
for a mass market
Lean production

adaptation of mass production that prizes quality,
flexibility and low costs
Copyright 2006 John Wiley & Sons, Inc.
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Historical Events in
Operations Management
Era
Industrial
Revolution
Events/Concepts
Dates
Originator
Steam engine
Division of labor
Interchangeable parts
Principles of scientific
management
1769
1776
1790
James Watt
1911
Frederick W. Taylor
Time and motion studies
Scientific
Management Activity scheduling chart
Moving assembly line
Copyright 2006 John Wiley & Sons, Inc.
1911
1912
1913
Adam Smith
Eli Whitney
Frank and Lillian
Gilbreth
Henry Gantt
Henry Ford
1-42
Historical Events in
Operations Management (cont.)
Era
Human
Relations
Operations
Research
Events/Concepts
Dates
Originator
Hawthorne studies
1930
1940s
1950s
1960s
1947
1951
Elton Mayo
Abraham Maslow
Frederick Herzberg
Douglas McGregor
George Dantzig
Remington Rand
1950s
Operations research
groups
1960s,
1970s
Joseph Orlicky, IBM
and others
Motivation theories
Linear programming
Digital computer
Simulation, waiting
line theory, decision
theory, PERT/CPM
MRP, EDI, EFT, CIM
Copyright 2006 John Wiley & Sons, Inc.
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Historical Events in
Operations Management (cont.)
Era
Events/Concepts Dates Originator
JIT (just-in-time)
TQM (total quality
management)
Strategy and
Quality
Revolution operations
Business process
reengineering
Six Sigma
Copyright 2006 John Wiley & Sons, Inc.
1970s
1980s
1980s
1990s
1990s
Taiichi Ohno (Toyota)
W. Edwards Deming,
Joseph Juran
Wickham Skinner,
Robert Hayes
Michael Hammer,
James Champy
GE, Motorola
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Historical Events in
Operations Management (cont.)
Era
Events/Concepts
Internet
Revolution
Internet, WWW, ERP,
1990s
supply chain management
E-commerce
Dates Originator
2000s
Globalization WTO, European Union,
1990s
and other trade
2000s
agreements, global supply
chains, outsourcing, BPO,
Services Science
Copyright 2006 John Wiley & Sons, Inc.
ARPANET, Tim
Berners-Lee SAP,
i2 Technologies,
ORACLE
Amazon, Yahoo,
eBay, Google, and
others
Numerous countries
and companies
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Evolution of Operations and
Supply Chain Management (cont.)
 Supply chain management

management of the flow of information, products, and services across
a network of customers, enterprises, and supply chain partners
Copyright 2006 John Wiley & Sons, Inc.
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Globalization and
Competitiveness
 Why “go global”?





favorable cost
access to international markets
response to changes in demand
reliable sources of supply
latest trends and technologies
 Increased globalization

results from the Internet and falling trade
barriers
Copyright 2006 John Wiley & Sons, Inc.
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Globalization and
Competitiveness (cont.)
Hourly Compensation Costs for Production Workers
Source: U.S. Bureau of Labor Statistics, 2005.
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1-48
Globalization and
Competitiveness (cont.)
World Population Distribution
Source: U.S. Census Bureau, 2006.
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Globalization and
Competitiveness (cont.)
Trade in Goods as % of GDP
(sum of merchandise exports and imports divided by GDP, valued in U.S. dollars)
Copyright 2006 John Wiley & Sons, Inc.
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Productivity and
Competitiveness
 Competitiveness

degree to which a nation can produce goods and services that
meet the test of international markets
 Productivity – THE MEASURE OF
COMPETITIVENESS

ratio of output to input
 Output

sales made, products produced, customers served, meals
delivered, or calls answered
 Input

labor hours, investment in equipment, material usage, or
square footage
Copyright 2006 John Wiley & Sons, Inc.
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Productivity and
Competitiveness (cont.)
Measures of Productivity
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Productivity and
Competitiveness (cont.)
Average Annual Growth Rates in Productivity, 1995-2005.
Source: Bureau of Labor Statistics. A Chartbook of
International Labor Comparisons. January 2007, p. 28.
Copyright 2006 John Wiley & Sons, Inc.
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Productivity and
Competitiveness (cont.)
Average Annual Growth Rates in Output and Input, 1995-2005
Source: Bureau of Labor Statistics. A Chartbook of International
Labor Comparisons, January 2007, p. 26.
Copyright 2006 John Wiley & Sons, Inc.
Dramatic Increase in
Output w/ Decrease in
Labor Hours
1-54
Productivity and
Competitiveness (cont.)
 Retrenching

productivity is increasing, but both output and input
decrease with input decreasing at a faster rate
 Assumption that more input would cause
output to increase at the same rate


certain limits to the amount of output may not be
considered
output produced is emphasized, not output sold;
increased inventories
Copyright 2006 John Wiley & Sons, Inc.
1-55
Strategy and Operations
 Strategy

Provides direction for achieving a mission
 Five Steps for Strategy Formulation

Defining a primary task


Assessing core competencies



What qualifies an item to be considered for purchase?
What wins the order?
Positioning the firm


What does the firm do better than anyone else?
Determining order winners and order qualifiers


What is the firm in the business of doing?
How will the firm compete?
Deploying the strategy
Copyright 2006 John Wiley & Sons, Inc.
1-56
Strategic Planning
Mission
and Vision
Corporate
Strategy
Marketing
Strategy
Copyright 2006 John Wiley & Sons, Inc.
Operations
Strategy
Financial
Strategy
1-57
Order Winners
and Order Qualifiers
Source: Adapted from Nigel Slack, Stuart Chambers, Robert Johnston, and Alan
Betts, Operations and Process Management, Prentice Hall, 2006, p. 47
Copyright 2006 John Wiley & Sons, Inc.
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Positioning the Firm




Cost
Speed
Quality
Flexibility
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Positioning the Firm:
Cost
 Waste elimination

relentlessly pursuing the removal of all waste
 Examination of cost structure

looking at the entire cost structure for
reduction potential
 Lean production

providing low costs through disciplined
operations
Copyright 2006 John Wiley & Sons, Inc.
1-60
Positioning the Firm:
Speed
 fast moves, fast adaptations, tight linkages
 Internet

conditioned customers to expect immediate responses
 Service organizations

always competed on speed (McDonald’s, LensCrafters, and
Federal Express)
 Manufacturers

time-based competition: build-to-order production and
efficient supply chains
 Fashion industry

two-week design-to-rack lead time of Spanish retailer, Zara
Copyright 2006 John Wiley & Sons, Inc.
1-61
Positioning the Firm:
Quality
 Minimizing defect rates or conforming to
design specifications; please the customer
 Ritz-Carlton - one customer at a time




Service system is designed to “move heaven
and earth” to satisfy customer
Every employee is empowered to satisfy a
guest’s wish
Teams at all levels set objectives and devise
quality action plans
Each hotel has a quality leader
Copyright 2006 John Wiley & Sons, Inc.
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Positioning the Firm:
Flexibility
 ability to adjust to changes in product mix,
production volume, or design
 National Bicycle Industrial Company



offers 11,231,862 variations
delivers within two weeks at costs only 10%
above standard models
mass customization: the mass production of
customized parts
Copyright 2006 John Wiley & Sons, Inc.
1-63
Policy Deployment
 Policy deployment

translates corporate strategy into measurable
objectives
 Hoshins

action plans (small projects) generated from the
policy deployment process
Copyright 2006 John Wiley & Sons, Inc.
1-64
Policy Deployment
Derivation of an Action Plan Using Policy Deployment
Copyright 2006 John Wiley & Sons, Inc.
1-65
Balanced Scorecard
 Balanced scorecard

measuring more than financial performance




finances
customers
processes
learning and growing
 Key performance indicators

a set of measures that help managers evaluate
performance in critical areas
Copyright 2006 John Wiley & Sons, Inc.
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Balanced Scorecard
Balanced Scorecard Worksheet
Copyright 2006 John Wiley & Sons, Inc.
1-67
Balanced Scorecard
Radar Chart
Copyright 2006 John Wiley & Sons, Inc.
Dashboard
1-68
Operations Strategy
Services
Products
Capacity
Facilities
Copyright 2006 John Wiley & Sons, Inc.
Human
Resources
Sourcing
Process
and
Technology
Quality
Operating
Systems
1-69
Organization of This Text:
Part I – Operations Management
 Intro. to Operations and
Supply Chain Management:
 Quality Management:
 Statistical Quality Control:
 Product Design:
 Service Design:
 Processes and Technology:
 Facilities:
 Human Resources:
 Project Management:
Copyright 2006 John Wiley & Sons, Inc.
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
1-70
Organization of This Text:
Part II – Supply Chain Management
 Supply Chain
Strategy and Design:
 Global Supply Chain
Procurement and Distribution:
 Forecasting:
 Inventory Management:
 Sales and
Operations Planning:
 Resource Planning:
 Lean Systems:
 Scheduling:
Copyright 2006 John Wiley & Sons, Inc.
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
1-71
Learning Objectives of
this Course
 Gain an appreciation of strategic importance
of operations and supply chain management
in a global business environment
 Understand how operations relates to other
business functions
 Develop a working knowledge of concepts
and methods related to designing and
managing operations and supply chains
 Develop a skill set for quality and process
improvement
Copyright 2006 John Wiley & Sons, Inc.
1-72
Copyright 2009 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that
permitted in section 117 of the 1976 United States Copyright Act without
express permission of the copyright owner is unlawful. Request for further
information should be addressed to the Permission Department, John Wiley &
Sons, Inc. The purchaser may make back-up copies for his/her own use only and
not for distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages caused by the use of these programs or from the
use of the information herein.
Copyright 2006 John Wiley & Sons, Inc.
1-73
THIS IS AS FAR AS YOU NEED
TO GO!!
Copyright 2006 John Wiley & Sons, Inc.
1-74
Lecture Outline






What Do Operations Managers Do?
Operations Function
Evolution of Operations Management
Operations Management and E–Business
Globalization and Competitiveness
Primary Topics in Operations
Management
 Learning Objectives for this Course
Copyright 2006 John Wiley & Sons, Inc.
1-75
What Do Operations
Managers Do?
 What are Operations?

a function, process or system that transforms inputs into
outputs of greater value
 What is a Transformation Process?


a series of activities along a value chain extending from
supplier to customer
activities that do not add value are superfluous and
should be eliminated
 What is Operations Management?

design, operation, and improvement of productive
systems
Copyright 2006 John Wiley & Sons, Inc.
1-76
Transformation Process






Physical: as in manufacturing operations
Locational: as in transportation operations
Exchange: as in retail operations
Physiological: as in health care
Psychological: as in entertainment
Informational: as in communication
Copyright 2006 John Wiley & Sons, Inc.
1-77
Operations as a
Transformation Process
INPUT
•Material
•Machines
•Labor
•Management
•Capital
TRANSFORMATION
PROCESS
OUTPUT
•Goods
•Services
Feedback
Copyright 2006 John Wiley & Sons, Inc.
1-78
Operations Function
 Operations
 Marketing
 Finance and
Accounting
 Human
Resources
 Outside
Suppliers
Copyright 2006 John Wiley & Sons, Inc.
1-79
How is Operations Relevant to my
Major?
 Accounting
 Information
Technology
 Management
 “As an auditor you must
understand the fundamentals of
operations management.”
 “IT is a tool, and there’s no better
place to apply it than in
operations.”
 “We use so many things you
learn in an operations class—
scheduling, lean production,
theory of constraints, and tons of
quality tools.”
Copyright 2006 John Wiley & Sons, Inc.
1-80
How is Operations Relevant to my
Major?
 Economics
 Marketing
 Finance
 “It’s all about processes. I live
by flowcharts and Pareto
analysis.”
 “How can you do a good job
marketing a product if you’re
unsure of its quality or delivery
status?”
 “Most of our capital budgeting
requests are from operations,
and most of our cost savings,
too.”
Copyright 2006 John Wiley & Sons, Inc.
1-81
Typical entry-level Positions for
Operations Management Majors
 Business process
analyst
 Inventory analyst
 Project coordinator
 Project Manager
 Unit supervisor
 Supply chain analyst
Copyright 2006 John Wiley & Sons, Inc.
 Materials Manager
 Quality assurance
specialist
 Production scheduler
 Logistics planner
1-82
Evolution of Operations
Management
 Craft production

process of handcrafting products or
services for individual customers
 Division of labor

dividing a job into a series of small tasks
each performed by a different worker
 Interchangeable parts

standardization of parts initially as
replacement parts; enabled mass
production
Copyright 2006 John Wiley & Sons, Inc.
1-83
Evolution of Operations
Management (cont.)
 Scientific management

systematic analysis of work methods
 Mass production

high-volume production of a standardized
product for a mass market
 Lean production

adaptation of mass production that prizes
quality and flexibility
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1-84
Historical Events in
Operations Management
Era
Industrial
Revolution
Events/Concepts
Dates
Originator
Steam engine
Division of labor
Interchangeable parts
Principles of scientific
management
1769
1776
1790
James Watt
1911
Frederick W. Taylor
Time and motion studies
Scientific
Management Activity scheduling chart
Moving assembly line
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1911
1912
1913
Adam Smith
Eli Whitney
Frank and Lillian
Gilbreth
Henry Gantt
Henry Ford
1-85
Historical Events in
Operations Management (cont.)
Era
Human
Relations
Operations
Research
Events/Concepts
Dates
Originator
Hawthorne studies
1930
1940s
1950s
1960s
1947
1951
Elton Mayo
Abraham Maslow
Frederick Herzberg
Douglas McGregor
George Dantzig
Remington Rand
1950s
Operations research
groups
1960s,
1970s
Joseph Orlicky, IBM
and others
Motivation theories
Linear programming
Digital computer
Simulation, waiting
line theory, decision
theory, PERT/CPM
MRP, EDI, EFT, CIM
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1-86
Historical Events in
Operations Management (cont.)
Era
Events/Concepts Dates Originator
JIT (just-in-time)
TQM (total quality
management)
Quality
Strategy and
Revolution
operations
Business process
reengineering
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1970s
1980s
1990s
1990s
Taiichi Ohno (Toyota)
W. Edwards Deming,
Joseph Juran
Wickham Skinner,
Robert Hayes
Michael Hammer,
James Champy
1-87
Historical Events in
Operations Management (cont.)
Era
Events/Concepts
Dates Originator
Globalization
WTO, European Union,
and other trade
agreements
Internet, WWW, ERP,
supply chain
management
1990s
2000s
Numerous countries
and companies
1990s
E-commerce
2000s
ARPANET, Tim
Berners-Lee SAP,
i2 Technologies,
ORACLE,
PeopleSoft
Amazon, Yahoo,
eBay, and others
Internet
Revolution
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1-88
Continuum from Goods
to Services
Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff,
Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.
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1-89
Business
Consumer
Business
B2B
Commerceone.com
B2C
Amazon.com
Consumer
Operations Management
and E-Business
C2B
Priceline.com
C2C
eBay.com
Categories of E-Commerce
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1-90
An Integrated Value Chain
 Value chain: set of processes that create and
deliver products to customer
Customer
Manufacturer
Supplier
Flow of information (customer order)
Flow of product (order fulfillment)
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Impact of E-Business on
Operations Management
Benefits of E-Business
 Comparison shopping
by customers
 Direct contact with
customers
 Business processes
conducted online
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Impact on Operations
 Customer expectations escalate;
quality must be maintained and
costs lowered
 No more guessing about demand
is necessary; inventory costs go
down; product and service design
improves; build to-order products
and services is made possible
 Transaction costs are lower;
customer support costs decrease;
e-procurement saves big bucks
1-92
Impact of E-Business on
Operations Management (cont.)
Benefits of E-Business
Impact on Operations
 Access to customers  Demand increases; order fulfillment
and logistics become major issues;
worldwide
production moves overseas
 Middlemen are
eliminated
 Access to suppliers
worldwide
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 Logistics change from delivering to a
store or distribution center to
delivering to individual homes;
consumer demand is more erratic and
unpredictable than business demand
 Outsourcing increases; more alliances
and partnerships among firms are
formed; supply is less certain; global
supply chain issues arise
1-93
Impact of E-Business on
Operations Management (cont.)
Benefits of E-Business
Impact on Operations
 Online auctions and emarketplaces
 Better and faster
decision making
 Competitive bidding lowers cost
of materials; supply needs can be
found in one location
 More timely information is
available with immediate access
by all stakeholders in decisionmaking process; customer orders
and product designs can be
clarified electronically; electronic
meetings can be held;
collaborative planning is
facilitated
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1-94
Impact of E-Business on
Operations Management (cont.)
Benefits of E-Business
 IT synergy
 Expanded supply
chains
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Impact on Operations
 Productivity increases as
information can be shared more
efficiently internally and
between trading partners
 Order fulfillment, logistics,
warehousing, transportation and
delivery become focus of
operations management; risk is
spread out; trade barriers fall
1-95
Globalization and
Competitiveness
 Favorable cost
 Access to international
markets
 Response to changes in
demand
 Reliable sources of
supply
 14 major trade
agreements in 1990s
 Peak: 26% in 2000
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World Trade Compared to World GDP
Source: “Real GDP and Trade Growth of OECD Countries, 2001–03,”
International Trade Statistics 2003, World Trade Organization,
www.wto.org
1-96
Globalization and
Competitiveness (cont.)
Germany: $26.18
USA: $21.33
Taiwan: $5.41
Mexico: $2.38
Hourly Wage Rates for Selected Countries
Source: “International Comparisons of Hourly Compensation Costs for Production Workers in
Manufacturing,” Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003.
Copyright 2006 John Wiley & Sons, Inc.
China: $0.50
1-97
Globalization and
Competitiveness (cont.)
Trade with China: Percent of each country‘s trade
Source: “Share of China in Exports and Imports of Major Traders, 2000 and 2002,”
International Trade Statistics 2003, World Trade Organization, www.wto.org
Copyright 2006 John Wiley & Sons, Inc.
1-98
Risks of Globalization
 Cultural differences
 Supply chain logistics
 Safety, security, and
stability
 Quality problems
 Corporate image
 Loss of capabilities
Copyright 2006 John Wiley & Sons, Inc.
1-99
Competitiveness and
Productivity
 Competitiveness

degree to which a nation can produce goods and
services that meet the test of international
markets
 Productivity

ratio of output to input
 Output

sales made, products produced, customers
served, meals delivered, or calls answered
 Input

labor hours, investment in equipment, material
usage, or square footage
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1-100
Competitiveness and
Productivity (cont.)
Measures of Productivity
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1-101
Changes in Productivity
for Select Countries
Internet-enabled
productivity
- Dot com bust
- 9/11 terrorist attacks
Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor
Statistics, U.S. Department of Labor, September 2003. U.S. figures for 2002–2003 from “Major Sector Productivity and
Costs Index,” Bureau of Labor Statistics, U.S. Department of Labor, March 2004
Copyright 2006 John Wiley & Sons, Inc.
1-102
Productivity Increase
 Become efficient

output increases with little or no increase in input
 Expand

both output and input grow with output growing
more rapidly
 Achieve breakthroughs

output increases while input decreases
 Downsize

output remains the same and input is reduced
 Retrench

both output and input decrease, with input
decreasing at a faster rate
Copyright 2006 John Wiley & Sons, Inc.
1-103
Competitiveness and
Productivity
Breakthrough
Performance
More Efficient
Retrench
Productivity as a Function of Inputs and Outputs, 2001–2002
Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor
Statistics, U.S. Department of Labor, September 2003
Copyright 2006 John Wiley & Sons, Inc.
1-104
Global Competitiveness
Ranking
1. Finland
2. United States
3. Sweden
4. Denmark
5. Taiwan
6. Singapore
7. Switzerland
8. Iceland
9. Norway
10. Australia
Copyright 2006 John Wiley & Sons, Inc.
Source: Global Competitiveness Report
2003–2004, World Economic Forum,
January 2004, www.weforum.org
1-105
Operations–Oriented
Barriers to Entry
 Economies of Scale
 Capital Investment
 Access to Supply and Distribution
Channels
 Learning Curve
Copyright 2006 John Wiley & Sons, Inc.
1-106
Primary Topics in
Operations Management
Copyright 2006 John Wiley & Sons, Inc.
1-107
Primary Topics in Operations
Management (cont.)
Copyright 2006 John Wiley & Sons, Inc.
1-108
Learning Objectives of
this Course
 Gain an appreciation of strategic importance
of operations in a global business
environment
 Understand how operations relates to other
business functions
 Develop a working knowledge of concepts
and methods related to designing and
managing operations
 Develop a skill set for quality and process
improvement
Copyright 2006 John Wiley & Sons, Inc.
1-109
Copyright 2006 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that
permitted in section 117 of the 1976 United States Copyright Act without
express permission of the copyright owner is unlawful. Request for further
information should be addressed to the Permission Department, John Wiley &
Sons, Inc. The purchaser may make back-up copies for his/her own use only and
not for distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages caused by the use of these programs or from the
use of the information herein.
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1-110
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Copyright 2006 John Wiley & Sons, Inc.
1-113
Introduction: The Growing
Federal Deficit—is it a real
Problem?
 Current deficit stands at 8.25 trillion dollars
 This does not take into account the amount the
government owes to Social Security and
Medicare
 Taking this into account the real federal debt is
nearly $30 trillion or $100,000 for every man
woman and child in the country.
 If you are head of a household of four, you
owe the government $400,000
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An Assessment using a methodology
that Assimilates Three World Views
 Statistics/Forecasting
 Dynamic modeling/simulation
 Systems Thinking
Copyright 2006 John Wiley & Sons, Inc.
1-115
A System Dynamics Model:
Purpose
 To address the question “Is our debt
serviceable over the long haul?”
 To discern that, we constructed a model
that was able to forecast debt service
and annual revenues to come up with a
ratio of debt service to revenues
Copyright 2006 John Wiley & Sons, Inc.
1-116
Assumptions and Starting Points
 U.S. Population projections (‘mid-series’) by
Census Bureau Department of Commerce (2000)
are basis for population numbers.
 Only about 70% of population participates in
workforce (RAND, 2004)
 Federal revenues are stabilizing at 19% of GDP
over the past 50 years (Jones, 2003)
 If present policies are continued federal deficit
would rise from current 3% to 20% of GDP by the
year 2075(Jones, 2003)
 Current avg interest rate on National Debt is 4.8%
p.a. (Bureau of Public Debt, 2006)
 Avg GDP growth rate has been 3% for the period
1994-2003 (IMF, 2004)
 AAAS predicts a decline in the federal Deficit by
theWiley
year
2015
Copyright 2006 John
& Sons,
Inc. (AAAS, 2005)
1-117
Basic Simplified Structure
turn around switch
GDP look up
budget deficit
lookup2
<Time>
GDP growth norm
deficit as a fraction
of GDP
annual federal
deficit
budget deficit
lookup
<Time>
GDP growth rate
GDP Gr switch
National
Federal
Debt
GDP
normalizing factor
annual debt service
federal revenues
ratio of debt
to revenues
Copyright 2006 John Wiley & service
Sons, Inc.
Assumed aggregate
annual interest rate
Fract of GDP that is
federal revenue
1-118
About the Structure Above
 Obviously, persistent Federal deficits are
accumulated within the National Debt
 The model starts on January 1, 2005
with an assumed national debt of 7.596
trillions (Bureau of Public Debt, 2006)
Copyright 2006 John Wiley & Sons, Inc.
1-119
ratio of debt service to revenues
Debt Service
to Federal Revenues
0.8
2
2
2
0.6
2
2
2
1
2
1
2
0.4
1
2
1
2
2
1
0
2005
1
2
2
2
1
2010
1
2
1
1
2
2
2
1
2015
ratio of debt service to revenues : Debt1
ratio of debt service to revenues : Debt2
2
2020
1
2025
1
2
1
2
1
2
2030
Time (Year)
1
2
Copyright 2006 John Wiley & Sons, Inc.
1
2
1
2
1
2
2035
1
2
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
1
1
2
0.2
1
2
2
1
2
1
1
2
2040
1
2
1
2
2045
1
2
1
2
1
2
2050
1
2
1
2
1
2
2055
1
2
1
2
1-120
Dmnl
Dmnl
What the Above Curves Don’t
Show
 The additional burdens to be brought to
bear upon the Federal government
 Retiring baby-boomers living longer, will
require more than the SSA can pay out
after the year 2025
 Other entitlement programs coming into
full play—the military and civil service
pension programs, specifically
Copyright 2006 John Wiley & Sons, Inc.
1-121
More concerns leading to lower
federal revenues
 The Bush tax cuts
 Offshoring of jobs
 Devaluation of the dollar leading to
higher inflation, higher interest rates, and
a slowing economy
 Higher energy prices

Instability of foreign sources of oil
Copyright 2006 John Wiley & Sons, Inc.
1-122
Basic Demographic Sector
Total
Population
pop tab
IMMIGRATION NORMAL
ratio of retirees to
Total Population
BR NORMAL
Immigration 1
birth rate transit fraction1
Pop: 0-15 yr tr1
transit fraction2
Pop: 16-19 yr tr2
dr1
fractional mortality 1
Immigration 2
transit fraction3
Pop: 20-39 yr tr3
dr2
fractional mortality 2
Immigration 3
fractional mortality 3
Copyright 2006 John Wiley & Sons, Inc.
transit fraction4
Pop: 40-49 yr tr4
dr3
fractional mortality 4
Immigration5
Immigration 4
transit fraction5
Pop: 50-64 yr tr5
dr4
fractional mortality 5
Pop: 65- and
above
dr5
dr6
fractional mortality 6
1-123
Population Cohorts
Populations
200 M
150 M
100 M
3
3
3
50 M
5
4
2
0
2005
4
6
2
2010
5
5
6
4
5
6
2
2015
2
2
2020
5
6
2025
6
5
6
2
5
2
2030
Time (Year)
5
2
2035
2
4
2040
2
2
2045
6
6
6
5
6
4
4
4
4
4
4
4
2
5
5
6
6
6
1
1
1
1
1
1
1
1
1
1
1
1
1
1
3
3
3
3
3
3
3
3
3
3
3
5
5
4
4
2
2
2050
2055
1
1
1
1
1
1
1
1
1
1
1
"Pop: 0-15 yr" : Debt1
2
2
2
2
2
2
2
2
2
2
2
"Pop: 16-19 yr" : Debt1
3
3
3
3
3
3
3
3
3
3
3
"Pop: 20-39 yr" : Debt1
4
4
4
4
4
4
4
4
4
4
4
"Pop: 40-49 yr" : Debt1
5
5
5
5
5
5
5
5
5
5
5
"Pop: 50-64 yr" : Debt1
6
6
6
6
6
6
6
6
6
6
6
"Pop: 65- and above" : Debt1
Copyright 2006 John Wiley & Sons, Inc.
4
People
People
People
People
People
People
1-124
Ratio of Retirees to Total
Population
ratio of retirees to Total Population
0.2
0.175
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0.15
1
1
1
0.125
1
1
0.1
2005
2010
2015
ratio of retirees to Total Population : Debt1
2020
2025
1
1
1
Copyright 2006 John Wiley
&1 Sons,
Inc.
1
2030
Time (Year)
1
1
1
2035
1
1
2040
1
1
1
2045
1
1
1
2050
1
1
2055
1
1 Dmnl
1-125
Workforce Structure
beginner
participation rate
early earner
participation rate
early savers
participation rate
peak savers
participation rate
<Pop: Beginner
Earners 16-19 yr>
<Pop: Early earners
20-39 yr>
<Pop: Early Savers
40-49 yr>
<Pop: Peak Savers
50-64 yr>
early saver
workforce
peak savers
workforce
beginner
workforce
early earner
workforce
total civilian
workforce
<Pop: Dissavers 65and above>
Copyright 2006 John Wiley & Sons, Inc.
workforce to
retirees ratio
dissavers
participation rate
<Pop: Dissavers 65and above>
dissavers
workforce
<Pop: Youthful
Dependent 0-15 yr>
population
participation rate
<TOTAL
POPULATION>
1-126
Basic Demographics
 What happens when we increase the
average lifespan from 83 years to 90
years?

This puts an even greater drain on Social
Security and Medicare
Copyright 2006 John Wiley & Sons, Inc.
1-127
Workforce to Retirees Ratio, assuming
retirement ages of 65 and 70
workforce to retirees ratio
8
6
2
2
2
2
2
4
1
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
1
1
2
2
1
2
2
1
1
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
0
2005
2010
2015
workforce to retirees ratio : Debt1
workforce to retirees ratio : Debt3
2020
1
1
2
2025
1
2
1
2
1
2
2030
Time (Year)
1
2
Copyright 2006 John Wiley & Sons, Inc.
1
2
1
2
2035
1
2
1
2
1
2
2040
1
2
1
2
2045
1
2
1
2
1
2
2050
1
2
1
2
1
2
2055
1
2
1
2
Dmnl
Dmnl
1-128
Workforce to Retirees Ratio, assuming
average lifetime of 90
workforce to retirees ratio
6
5
4
12
34
5 6
1
3
23
45 6
1
23 45
6
23 456
1
2
2005
2010
workforce to
workforce to
workforce to
workforce to
workforce to
workforce to
retirees
retirees
retirees
retirees
retirees
retirees
2015
ratio
ratio
ratio
ratio
ratio
ratio
:
:
:
:
:
:
INTR9
basecase
INTR8
FDTRND
GDPDNG
Debt2
2020
23456
1
23456
1
2025 2030 2035
Time (Year)
1
1
2
5
6 Sons, Inc.
Copyright 2006 John Wiley &
5
6
2055
2
3
4
4
5
6
2050
1
3
5
6
2045
2
4
234 5
1
1
3
4
5
2040
2
3
4
1
1
2
3
2345 6
5
6
Dmnl
Dmnl
Dmnl
Dmnl
Dmnl
Dmnl
61-129
Workforce to Retirees Ratio, assuming
avg lifetime of 90
workforce to retirees ratio
6
5
4
1 2
3 4
5 6
1
3
2 3
4 5 6
1
2 3 4 5
6
2 3 4 5 6
1
2
2005
workforce
workforce
workforce
workforce
workforce
workforce
2010
to
to
to
to
to
to
retirees
retirees
retirees
retirees
retirees
retirees
2015
ratio
ratio
ratio
ratio
ratio
ratio
:
:
:
:
:
:
INT R9
basecase
INT R8
FDT RND
GDPDNG
Debt2
2020
1
5
6
2050
2
3
4
4
5
6
2055
1
3
5
6
2045
2
4
2 3 4 5
1
1
3
4
5
2040
2
3
4
1
1
2
3
2 3 4 5 6
1
1
2
6
2 3 4 5 6
2025
2030
2035
Time (Year)
1
5
2 3 4 5 6
5
6
 Now the steady-state ratio of workers to
retirees
isJohn2.2,
opposed to 2.7
Copyright 2006
Wiley & as
Sons, Inc.
6
Dmnl
Dmnl
Dmnl
Dmnl
Dmnl
Dmnl
1-130
Cumulative Ratios
<ratio of debt service
to revenues>
<National Federal
Debt>
ar
<Total
Population>
<workforce to
retirees ratio>
ar2
<normalizing
factor>
cumulative
AVG Debt per
capita
avg Debt per
capita
Copyright 2006 John Wiley & Sons, Inc.
ar3
<normalizing
factor>
cumulative Debt
Service to
revenue ratio
cumulative
Workforce to
retirres ratio
avg Debt Service to
revenue ratio
avg Workforce to
retirees ratio
<Time>
1-131
Table 1: Some Scenarios
Settings
Dataset
Base case
GDPDNG
Key metrics
Average
workforce
Participation
Rate
Debt
Service
To
Revenues
ratio in
2055
GDP
Growth
rate
Federal
Deficit %
assumed
4.80
at 3.1%
Increasing
65
0.7
0.3045
$94,320.00
2.993
4.80
3.1% to
1%
by 2025
increasing
65
0.7
0.3841
$73,139.00
2.993
65
0.7
0.1239
$31,053.00
2.993
65
.7
0.5076
Interest
FDTRND
4.80
at 3.1%
turned
around
HI INTR
8.00
at 3.1%
increasing
Retirement
age
National
debt
per capita
Workforce
To retirees
ratio
2.993
GDPDNG= GDP does not continue to grow
FDTRND=Fed deficit turned around
Copyright 2006 John Wiley & Sons, Inc.
1-132
Avg. Debt Service-to-Revenue Ratios
Avg Debt Service to revenue ratio
0.4
2
2
2
2
0.3
3
2
3
2
2
2
2
0.2
2 3 1 2 3
1 2 3 1
2 3
2 3
1
2
1
1
3
3
3
1
1
1
3
3
3
3
1
3
1
1
1
1
1
0.1
1
0
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
Time (Year)
avg Debt Service to revenue ratio : FDTRND
1
avg Debt Service to revenue ratio : GDPDNG
avg Debt Service to revenue ratio : basecase
Copyright 2006 John Wiley & Sons, Inc.
1
2
3
1
2
3
1
2
3
1
2
3
2
3
Dmnl
1
2
3
Dmnl
Dmnl
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Avg Debt Per-capita
Avg Debt per capita
100,000
3
3
75,000
3
3
3
50,000
3
25,000
2
1 2 3 1
2
3 1 2 3 1
3
2 3
1
2
2 3
1
1
2
3
3
2
2
2
2
1
1
1
2
2
1
1
1
1
1
0
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
Time (Year)
avg Debt per capita per year : FDTRND
1
avg Debt per capita per year : GDPDNG
avg Debt per capita per year : basecase
Copyright 2006 John Wiley & Sons, Inc.
1
2
3
1
2
3
1
2
3
2
3
Dollars/People
1
2
3
Dollars/People
Dollars/People
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THE PROBLEM Revisited
 Reduce the outflow (federal
expenditures) to a minimum
 Increase the inflow (federal revenues) to
a maximum, without raising taxes
 As some optimists predict (AAAS,2005)
federal deficits must register a turn
around in the trend and start to decline
from the current 3+% of GDP down to a
healthy 1%
Copyright 2006 John Wiley & Sons, Inc.
1-135
Possible Solutions to the Growing
Deficit and National Debt
 Open up federal lands in Colorado,
Wyoming, Utah, Nevada and Alaska to
oil exploration and production
 Open up the outer continental shelf to
aggressive oil exploration
 Export our hugely abundant uranium
resources for energy usage
Copyright 2006 John Wiley & Sons, Inc.
1-136
Action items
 Write your Congressperson and Senator
 Inform your friends that reducing the
deficit and the national debt should be
our country’s highest priority
Copyright 2006 John Wiley & Sons, Inc.
1-137
Summary
 Debt service is growing; revenues aren’t
 Our highest priority as a country should
be the reduction and pay-down of the
national debt
 To pay down the national debt, we must
stay focused on that national priority
 The citizenry of a country are NOT
FREE if that country is deeply in debt
Copyright 2006 John Wiley & Sons, Inc.
1-138
Ignore slides below this point
Copyright 2006 John Wiley & Sons, Inc.
1-139
Copyright 2006 John Wiley & Sons, Inc.
1-140
SOURCES
CONSUMPTION SECTORS
biofuels
Coal
Transportation
U.S. Natural Gas
Foreign Natural Gas
U.S. Oil
Electric Utilities
Residential/commercial
Foreign Oil
Uranium
Solar, including Wind
Copyright 2006 John Wiley & Sons, Inc.
Industrial
1-141