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CCOMPETINGOMPETING WITHWITH OOPERATIONSPERATIONS1

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Across the OrganizationAcross the Organization

Material & Service Inputs

Sales Revenue

Product & Service Outputs

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

Figure 1.1

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Operations ManagementOperations Management

The systematic design, direction, and control of processes that transform inputs into services and products for internals, as well as external, 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 to the satisfaction of the customers

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A Process ViewA Process View

External environment

Information on performance

Internal and external customers

Processes and operations

1

2

3

4

5

Inputs• Workers• Managers• Equipment• Facilities• Materials• Land• Energy

Outputs• Goods• Services

Figure 1.2

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5

Process view vs departmental viewProcess view vs departmental view

A process is any activity or group of activities that takes one or more inputs, transforms and adds value to them, and provides one or more outputs for its customers.

Why? Departments typically have their own set of

objectives, set of resources with capabilities to achieve those objectives, and managers and employees responsible for their performance.

The concept of a process, however, can be much more expansive. A process can have its own set of objectives, involve a work flow that cuts across departmental boundaries, and require resources from several departments.

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ProcessesProcesses

Processes should add value.

Processes can be broken down into sub-processes, which in turn can be broken down further.

Any process that is part of a larger process is considered a “nested process.”

Each process and each nested process has inputs and outputs.

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7

Process View of an Ad AgencyProcess View of an Ad AgencyProcess View of an Ad AgencyProcess View of an Ad Agency

Accounting process

Production process• Prepare ad for publication

and deliver to media outlets

Advertisement designand planning process• Create the ad to the

needs of the client and prepare a plan for media exposure

Client interface process• Communicate with client,

get needs, and coordinate progress

Inp

uts

Clien

ts

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8

Nested ProcessesNested ProcessesNested ProcessesNested Processes

Advertisement Design and Planning Process

Creative design process• Receive work request• Create team• Prepare several designs• Receive inputs from

Account Executive• Prepare final concept• Revise concept per

client’s inputs

Media planning process• Receive work request• Prepare several media

plans• Receive inputs from

Account Executive• Prepare final plan• Revise plan per client’s

inputs

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The Supply Chain ViewThe Supply Chain View

Support Processes

Ext

ern

al s

up

pli

ers

Exte

rnal cu

stom

ers

Supplier relationship process

New service/ product development

Order fulfillment process

Customer relationship management

Figure 1.4

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10

Customer-Supplier RelationshipCustomer-Supplier Relationship

External customers – end customers or users buying the firm’s products and services

Internal customers – employees or processes inside the firms that rely on inputs from other employees or processes

External suppliers – employees or businesses who provide resources for the firms

Internal suppliers – employees or processes that supply inputs to the other employees or processes inside the firm

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The Supply Chain ViewThe Supply Chain View

Core processes are sets of activities that deliver value to external customers

1. Supplier relationship process

2. New service/product development process

3. Order fulfillment process

4. Customer relationship process

Support processes provide vital resources and inputs to the core processes

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Core ProcessesCore Processes

1) Customer relationship process

Identifies, attracts, builds relationships with external customers, and facilitates the placement of orders by customers.

2) New service/product development process

Designs and develops new services or products from inputs received from external customer specifications or from the market in general through the customer relationship process.

3) Order fulfillment process

Includes the activities required to produce and deliver the service or product to the external customer

4) Supplier relationship process

Selects the suppliers of services, materials, and information and facilitates the timely and efficient flow of these items into the firm.

Core process – A chain of activities that delivers value to external customersCore process – A chain of activities that delivers value to external customers

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Support ProcessesSupport 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

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A Process ViewA Process View

• 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

More like a manufacturing

process

More like a service process

Figure 1.3

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Service Processes and Service Processes and Manufacturing ProcessesManufacturing Processes

Manufacturing processes change materials in one or more of the following dimensions: Physical properties Shape Fixed dimensions Surface finish Joining parts and materials

If a process isn’t doing at least one of these, then it is a service (non-manufacturing) process.

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Manufacturing and ServiceManufacturing and Service

Goods ProductionTangible

Can be inventoried

Low customer contact

Capital Intensive

Quality easily measured

Service Production Intangible

Can’t be inventoried

High customer contact

Labor Intensive

Quality hard to measure

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Service vs ManufacturingService vs Manufacturing

Differences The nature of output

– Service – intangible, perishable outputs– Manufacturing – physical, durable outputs

Products can be produced, stored, and transported in anticipation of future demands

The degree of customer contact– Service – a higher degree of customer contact– Manufacturing – less customer contact, leaving the primary contacts

with customer to retailers or distributors.

Similarities Some service and manufacturing provide both products and

services. (80 percent of the jobs in business are in services). Services related to products now represent 10 to 30 times the annual dollar volume of sales).

Both must be concerned with issues of process design, quality, productivity, capacity, staffing levels, forecasting, location, and layout.

Some services do need inventory such as hotel and hospital.

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Services VS ManufacturingServices VS Manufacturing

Today the service sector accounts for 80 percent of U.S. economic output, and the goods producing sector accounts for the remaining 20 percent.

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Operations StrategyOperations 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 StrategyOperations Strategy

Figure 1.5

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

Decisions• Managing processes• Managing supply chains

Competitive Capabilities• Current• Needed• Planned

Performance Gap?

No

Yes

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Corporate StrategyCorporate Strategy

Environmental scanning

Developing core competencies1. Workforce

2. Facilities

3. Market and financial know-how

4. Systems and technologies

Developing core processes

Global strategies

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Market AnalysisMarket Analysis

Market segmentation

Needs assessment Service or product needs Delivery system needs Volume needs Other needs

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Competitive PrioritiesCompetitive Priorities

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

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

QUALITY

2. Top quality Delivering an outstanding service or product

May require a high level of customer contact and may require superior product features

Ferrari

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

TIME

4. Delivery speed Quickly filling a customer’s order

Design processes to reduce lead time

Dell

5. On-time delivery

Meeting delivery-time promises

Planning processes to increase percent of customer orders shipped when promised

United Parcel Service (UPS)

6. Development speed

Quickly introducing a new science or a product

Cross-functional integration and involvement of critical external suppliers

Li & Fung

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Competitive PrioritiesCompetitive Priorities

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

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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Order Winners and QualifiersOrder Winners and QualifiersS

ales

($)

Achievement of competitive priority

Low High

Order Winner

Figure 1.6

Sal

es (

$)

Achievement of competitive priority

Low High

Order Qualifier

Threshold

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Trends in Operations ManagementTrends in Operations Management

Productivity improvement

Global competition

Ethical, workforce, and environmental issues

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Productivity ImprovementProductivity Improvement

EXAMPLE 1.1

Calculate the productivity for the following operations:

a. Three employees process 600 insurance policies in a week. They work 8 hours per day, 5 days per week.

SOLUTION

a. Labor productivity = Policies processed

Employee hours

= = 5 policies/hour600 policies

(3 employees)(40 hours/employee)

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Productivity ImprovementProductivity Improvement

EXAMPLE 1.1

Calculate the productivity for the following operations:

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.

SOLUTION

a. 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

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ApplicationApplication

Calculate the year-to-date labor productivity:

Calculate the multifactor 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 —

factory unit sales

employment

This Year

2,762,103= 24.66/hr

112,000

Last Year

2,475,738 =

21.91/hr113,000

Year Before Last

2,175,447= $18.91/hr

115,000

sales of mfg products

total mfg cost

This Year

$49,363= 1.27

$39,000

Last Year

$40,831= 1.24

$33,000

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Solved Problem 1Solved 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 1Solved 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

$150 tuition +$100 state support

credit hour3 credit hours

student

Value of inputs = Labor + Materials + Overhead

Multifactor productivity = = = 1.25$37,500/class

$30,000/class

Output

Input

= $37,500/class

= $4,000 + ($20/student 50 students/class) + $25,000

= $30,000/class

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Solved Problem 1Solved 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 $45,000, so

Labor hours of input =14 hours

week16 weeks

class

Labor productivity = = $45,000/class

224 hours/class

Output

Input

= 224 hours/class

= $200.89/hour

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Solved Problem 2Solved 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 2Solved Problem 2

SOLUTION

Labor productivity = = $20,680

360 hours

Output

Input

Labor hours of input = 360 hours

Value of output = (52 defective 90/defective) + (80 garments 200/garment)

= $20,680

= $57.44 in sales per hour

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Exercises 1.1: Exercises 1.1:

Student tuition at Boehring University is $100 per semester credit hour. The state supplements school revenue by matching student tuition dollar for dollar. Average class size for a typical three-credit course is 50 students. Labor costs are $4,000 per class, materials 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 three-credit class of 50 students, what is the labor productivity ratio?

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Exercise 1.2Exercise 1.2

Under Coach Bjourn Toulouse, several football seasons for the Big Red Herrings have been disappointing. Only better recruiting will return the Big Red Herrings to winning form. Because of the current state of the program, Boehring University fans are unlikely to support increases in the $192 season ticket price. Improved recruitment will increase overhead costs to $30,000 per class tuition from the current $25,000 per class section. The university’s budget plan is to cover recruitment costs by increasing the average class size to 75 students. Labor costs will increase to $6,500 per three-credit course. Material costs are about $25 per student for each three-credit course. Tuition will be $200 per semester credit, which is matched by state support of $100 per semester credit.

a) What is the productivity ratio? Compared to the previous exercise 1.2, did productivity increase or decrease for the course process? 

b) If instructors work an average of 20 hours per week for 16 weeks for each three-credit class of 75 students, what is the labor productivity radio?

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Exercise 1.3Exercise 1.3

CD Players are produced on an automated assembly line process. The standard cost of CD players is 150 per unit (labor: 30, materials: 70, and overhead: 50). The sales price is 300 per unit.

a) To achieve a 10% multifactor productivity improvement by reducing materials costs only, by what percentage must these costs be reduced?

b) To achieve a 10% multifactor productivity improvement by reducing labor costs only, by what percentage must these costs be reduced?

c) To achieve a 10% multifactor productivity improvement by reducing overhead costs only, by what percentage must these costs be reduced?