Chapter 1
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The Nature of Operations
Chapter 1: The Nature of Operations
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Introduction
Chapter 1: The Nature of Operations
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McDonald’s Corp
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Facing increased competition
Smarter and more demanding
customers
Less brand loyal
Switched to hamburger bun that does
not require toasting.
Customers prefer taste of new bun
Saves time and money
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Olympic Flame
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10,000 runners
15,000 miles through 42 states in 84
days
Two years of planning
Must plan for no-show runners and
rush hour traffic
Cost of this operation in the
neighborhood of $20 million
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Kmart Versus Wal-Mart
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Both chains started in 1962
In 1987, Kmart had 2,223 stores to
Wal-Mart’s 1,198.
Kmart’s sales were $25.63 billion to
Wal-Mart’s $15.96 billion
By 1991, Wal-Mart’s sales exceeded
Kmarts
Kmart still had more stores
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Kmart Versus Wal-Mart continued
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In year ending January 1996, WalMart’s sales were $93.6 billion to
Kmart’s $34.6 billion.
During this time Kmart emphasized
marketing and merchandising (such as
national TV ad campaigns).
Wal-Mart was investing millions in its
operations to lower cost.
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Kmart Versus Wal-Mart
continued
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Wal-Mart developed sophisticated
distribution system that integrated its
computer system with its distribution
system.
Kmart’s employees lacked skills needed to
plan and control inventory.
Period from 1987 to 1995 Kmart's market
share declined from 34.5 percent to 22.7
percent.
Wal-Mart's increased from 20.1 percent to
41.6 percent
Chapter 1: The Nature of Operations
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Kmart Versus Wal-Mart continued
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Fast forward to 2004
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Kmart appears to have adopted a new
strategy
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Merge with Sears, Roebuck & Co.
Potential synergies between Kmart’s
convenient locations and Sears’ strong
brands
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Diversity and Importance of
Operations
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Improvements in operations can
simultaneously lower costs and
improve customer satisfaction.
Improving operations often dependent
on advances in technology.
Can obtain competitive advantage by
improving operations.
Diversity of operations
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Operations
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Heart of every organization
Operations are the tasks that create
value
Chapter 1: The Nature of Operations
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The Production System
Chapter 1: The Nature of Operations
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Systems Perspective
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Inputs
Transformation System
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Alter
Transport
Store
Inspect
Outputs
Environment
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Inputs
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Inputs include facilities, labor, capital,
equipment, raw materials, and
supplies.
A less obvious input is knowledge of
how to transform the inputs into
outputs.
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Transformation System
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The part of the system that adds value
to the inputs.
Four major ways
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Alter – physical change
Transport - relocate
Store - protect
Inspect – better understanding
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Outputs
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Two types of outputs commonly result
from a production system
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Services (abstract or nonphysical)
Products (physical goods)
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Chapter 1: The Nature of
Operations
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Facilitating Good Concept
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Often confusion in trying to classify
organization as manufacturer or service
Facilitating good concept avoids this
ambiguity
All organizations defined as service
The tangible part of the service is
defined as facilitating good
Pure services
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The Range From Services to Products
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Classification and Evolution of Economic
Offerings
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Comparison of Alternative
Economic Offerings
Economic
Offering
Commodities
Goods
Services
Experiences
Value added
by
Extracting
Producing
Delivering
Staging
Form of output
Fungible
Tangible
Intangible
Memorable
Key
characteristics
Natural
Standardized
Customized
Personalized
Buyer
Market
User
Client
Guest
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Chapter 1: The Nature of
Operations
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Operations Activities
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Strategy
Output Planning
Capacity Planning
Facility Location
Facility Layout
Aggregate
Planning
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Inventory
Management
Materials
Requirements
Planning
Scheduling
Quality Control
Chapter 1: The Nature of Operations
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Functional View of Organizations
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Three Core Functions
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Operations
Marketing
Finance/Accounting
Other Important Functional Activities
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Human Resource Management
Information Systems
Engineering
Chapter 1: The Nature of Operations
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Chapter in Perspective
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Two alternative ways for organizing
work activities
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Functional approach, companies
organize activities on the basis of the
type of work performed
Organizing activities on the basis of
specific value-creating processes.
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Process View of
Organizations
An Evolution
Chapter 1: The Nature of Operations
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Traditional Functional Organization
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Value Chain Approach
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