operations management chapter 1

Operations andSupply Chain Strategy

Chapter 1

1 | 2Copyright © Cengage Learning. All rights reserved.

Learning Objectives

1. Discuss the importance of operations/supplychain management.

2. Describe the history and development of threeexemplary organizations.

3. Explain how single organizations can followdifferent competitive strategies to besuccessful.

4. Illustrate the differences and similaritiesbetween manufacturing and service activities.

5. Characterize supply chain strategy within asingle organization and across multipleorganizations.


Source: © Image Source/Corbis

Discussion Starter

What is OperationsManagement?


Company Decisions

• Where and how to produce?• What it should include?• How it should be delivered?• How much is the customer willing to pay?• How much will it cost to make?• How much profit do we want to make?


Operations Management

• The process that effectively produce,transform, and deliver a product or service.

INPUTS

•Human labor•Materials and parts•Energy (gas, electricity, coal)•Machinery/equipment

TRANSFORMATION

•Manufacturing•Assembly•Location change•Exchange (retail)•Storage (distribution center)

OUTPUTS

•Finished product•Service interaction with customer•Increased knowledge orsatisfaction


Supply Chain Management

• The organization ofsupply chain activities

• Maximize customervalue.

• Maximize competitiveadvantage.

Source: © Image Source/Corbis


Difference Between Operations& Supply Chain Management

• Operations Management refers to processeswithin a SINGLE firm.

• Supply Chain Management refers to processesand exchanges across MULTIPLE firms.


Three Exemplary Organizations

• World Class Operations and Supply ChainManagement Companies:– Kellogg– Sony– American Express

• International, different products & services


Kellogg’s Company

• Maker of popular cereal, breakfast, and snackproducts, such as Kellogg’s Corn Flakes, RiceKrispies, Raisin Bran, Pop-Tarts, Eggo Waffles,and Nutri-grain bars

• Founded in 1906 in Battle Creek, Michigan, byW. K. Kellogg.

• Adhere to strong quality standards anddeveloping new technologies, such as Waxtitewrappers to keep cereal fresh for long periods oftime.


Figure 1.1: Kellogg’s 2006Sales Around the World (in $ billions)


Kellogg’s Supply Chain

• The supply chain consists of 27 manufacturingplants in the United States and 19 plants in 15countries around the world, including Australia,Mexico, India, Brazil, and Japan.

• Key supply chain decisions must be madethroughout Kellogg’s network of plants.


Sony – Electronics andEntertainment Provider to the World

• Electronic products & Entertainment (cameras,video cameras, computers, games and itsentertainment, including television programs,movies, and music).

• The company was founded as TokyoTelecommunications Research Institute, on May7, 1946 the end of World War II, by MasaruIbuku and Akio Morita (renamed Sony in 1958).

• Initial operations were under constant pressure.• The first revenues were generated by repairing

radios that had been damaged during the war.


Sony – Electronics andEntertainment Provider to the World

• Sony’s first successful products were a powermegaphone and a magnetic tape recorder.

• Sony produces around the world, with 50percent of total electronics production occurringin Japan and the remainder in China, the rest ofAsia, and the Americas/Europe.

• Sony also sells products around the world.Interestingly, the majority of the products madein Japan, China, and the rest of Asia are forexport.


Figure 1.2: Sony ElectronicsProduction by Geographic Region


Discussion Starter

What Supply ChainDecisions Would Sony Make?


American Express—FinancialServices Worldwide

• One of the world’s largest and most prestigiousfinancial and travel services companies.

• The company serves individual customers, smallbusinesses, and merchants by providing avariety of credit cards, banking and financialservices, and travel-related services.

• Its 2007 annual revenue was in excess of $24billion, and it employed over 65,000 employeesin several countries around the world.



• Founded in 1850 in New York and was amongthe first and most successful of the expressdelivery companies.

• American Express was not a financial servicescompany, but its largest clients were banks.

• Delivering the banks’ typically small parcels ofsuch things as stock certificates, notes,currency, and other financial instruments wasconsiderably more profitable than transportinglarger freight.



• The company soon scaled down its parcel andfreight delivery business and started selling itsown financial products.

• Launched money orders in 1882 and travelers’cheques in 1891.

• In 1915, American Express started providingtravel-related services.

• American Express issued its first charge card in1958.



• The year 1986 was very special for AMEX, as itsearnings exceeded $1 billion for the first time inhistory.

• During recent years, building relationships withmerchants has become the company’s toppriority, along with increasing acceptance of theAmerican Express Card across a wide range ofindustries and geographical markets.

• The company also began forming a number ofstrategic partnerships with selected airlines,banks, retailers, and other key businessesaround the world.


Operations Strategywithin a Single Organization

• Cost– Low-cost operations

• Quality– Consistent Quality– Superior Quality

• Time/Delivery– On-time Delivery– Delivery Speed– Product Development speed

• Flexibility– Range of products/customization– Variety– Volume Flexibility


Competitive Priorities vs. Capabilities

• Competitive priorities are the relative rankingsof what the company would LIKE to achieve.

• Competitive capabilities are the relativeeffectiveness that the company is ABLE toactually achieve.


Cost

• Cost is often the first thing that companies thinkof when they are developing an operationsstrategy.

• Lowering prices will lead to reduced profits oreven losses.

• Low-cost operations seek to provide a productor service that is less expensive than similarproducts or services offered by competitors:– Automation– Low wage countries


Quality

• Quality involves offering a product or service thatis superior to the alternatives in the eyes of thecustomer.

• Two Key Aspects of Quality:– Consistent quality involves meeting the product

specifications and the promises made to customerswith high reliability

– Superior quality is a term describing a product orservice that clearly is better than another in one ormore aspects.


Time/Delivery

• Time/delivery refers to the gap between when acustomer orders a product and when he or shereceives it.– On-time delivery involves delivering a product when

it is promised, but not necessarily quickly.– Delivery speed means that a corporation offers to

deliver a product or service faster than a competitor.– Product development speed refers to the time

between generations or major changes to a product.


Flexibility

• Differentiate their offerings from those ofcompanies that emphasize low cost.– Customization is the ability to make a product to

exactly fit customer needs.– Mass customization the process in which products

are produced in high volume at roughly the samecost as standard products, but are customized toindividual customer tastes.

– Postponement which involves keeping products in astandard format and then adding unique componentsfor the individual customer at the last possiblemoment.


Variety

• The ability to handle a wide range or assortmentof products without undue costs.

• Volume flexibility is the ability to adjustproduction volume either up or down to meetfluctuations in demand.


Table 1.2: Examples of Companieswith Different Operations Strategies


Operations’ Rolewithin Business Strategy

• Business Strategy• Mission Statement• Functional Strategies

– Core Goals of Each Department• Ex. Marketing - % Market Share, Sales Revenue etc.


Figure 1.4: Relationships BetweenBusiness Strategy and Functional Strategies


Operational Decision Areas

• Operational Decision Areas– Tactical Tools

• Infrastructural Decisions– Shorter Term, more frequent, less capital

• Structural Decisions– Long term, high capital, less frequent


Services

• Business processes can be categorized asprimarily manufacturing or primarily services.

• 80% of jobs and sales in developed countriesare services.

• Use service to differentiate products.• Examples of Services - consulting, medical care,

project management


Differences BetweenServices and Manufacturing

• The nature of their output—tangible vs.intangible.

• The degree of customer contact and co-production.

• Simultaneous production and consumption• Manufacturing processes convert raw materials

and inputs into finished products that have aphysical, tangible form.

• Services generally produce more intangible,perishable outputs (ex. restaurants).


Similarities BetweenServices and Manufacturing

• Carry Inventory– Services inventory supplies needed.– Manufacturing may carry finished goods.

• Process– Must be “top notch”

• Hotels• Toyota’s Service Parts


Supply Chain Strategy

• Linked set of multiple organizations• Structured fashion• Supply Chains have existed since trading routes

were developed.• Information Technology

– Quick & Inexpensive Communication• Globalization


Global Nature of Supply Chains

• Many companies have increased their offshoresourcing of parts, components, and finishedgoods.

• Manage multiple suppliers and shippers.• According to the World Trade Organization,

world merchandise exports have risen from$157 billion in 1963 to $8.907 trillion in 2004, anincrease of 57 times.


Global Nature of Supply Chains

• China’s trade with the United States has grownfrom $5.7 billion in 1981 to $286 billion in 2005.

• The Council of Supply Chain ManagementProfessionals (CSCMP) estimates that logisticscosts 9.5 percent of U.S. GDP.

• Numerous challenges in managing that globalsupply chain include differing laws andregulations, different languages, culturalbarriers, and political strife.

• Supply chain management plays a critical role inmanaging the manufacture and flow of goodsaround the world.


Supply Chain Withina Single Organization

• Many companies have elevated the importance of supplychain management over the past 10 years .

• Many large companies signal the importance of supplychain management by appointing a vice president ordirector of supply chain management.

• Two Major Supply Chain Areas for Companies– Sourcing/purchasing includes the processes associated with

identifying material and service needs, locating and selecting suppliers,negotiating contract and payment terms, and tracking to assesssupplier performance.

– Logistics plans, implements, and manages the efficient, effective flowand storage of goods and services from the point of origin to the pointof end consumption.


Figure 1.5: Organizational Structurewith Detail on Supply Chain Positions


Figure 1.6: Supply Chain View ofPersonal Computer Production and Sales


Supply ChainChallenges in Tracing Food

• Complex supply chain for food products in developedworld.

• Traceability in the food supply chain is becoming a majorissue.

• RFID– Indirect reading– Allow multiple items to be read– More information on code

• Contaminated Pet Food from China– 4,000 pets died

• Food Poisoning– 76 million illnesses– 5,000 deaths

operations management chapter 1

Documents

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kelloggs supply chain

learning objectives1

key supply chain decisions

single organizations

company decisions

kelloggs corn flakes

service activities