Operations Management Chapter 1 Operations and Productivity

Operations Management

Chapter 1

Operations and Productivity

OutlineOutline

Global Company Profile: Hard Rock Global Company Profile: Hard Rock CafeCafe

What Is Operations Management?What Is Operations Management?

Organizing To Produce Goods And Organizing To Produce Goods And Services Services

Why Study OM?Why Study OM?

What Operations Managers DoWhat Operations Managers Do

Outline - ContinuedOutline - Continued

The Heritage Of Operations The Heritage Of Operations ManagementManagement

Operations In The Service SectorOperations In The Service Sector Differences Between Goods And Differences Between Goods And

ServicesServices

Exciting New Trends In Operations Exciting New Trends In Operations

Ethics And Social Responsibility Ethics And Social Responsibility ManagementManagement

What Is Operations What Is Operations Management?Management?

ProductionProduction is the creation of is the creation of goods and servicesgoods and services

Operations management (OM)Operations management (OM) is the set of activities that is the set of activities that

creates value in the form of creates value in the form of goods and services by goods and services by

transforming inputs into transforming inputs into outputsoutputs

Organizing to Produce Organizing to Produce Goods and ServicesGoods and Services

Essential functions:Essential functions: Marketing – generates demandMarketing – generates demand

Production/operations – creates Production/operations – creates the productthe product

Finance/accounting – tracks how Finance/accounting – tracks how well the organization is doing, pays well the organization is doing, pays bills, collects the moneybills, collects the money

OperationsTeller SchedulingCheck ClearingCollectionTransaction processingFacilities design/layoutVault operationsMaintenanceSecurity

FinanceInvestmentsSecurityReal estate

Accounting

Auditing

MarketingLoans Commercial Industrial Financial Personal Mortgage

Trust Department

Commercial Bank

OperationsGround support equipmentMaintenanceGround Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications DispatchingManagement science

Finance/ accountingAccounting Payables Receivables General LedgerFinance Cash control International exchange

Airline

MarketingTraffic administration Reservations Schedules Tariffs (pricing)SalesAdvertising

MarketingSales promotionAdvertisingSalesMarket research

OperationsFacilities Construction; maintenance

Production and inventory control Scheduling; materials control

Quality assurance and controlSupply-chain managementManufacturing Tooling; fabrication; assembly

Design Product development and design Detailed product specifications

Industrial engineering Efficient use of machines, space, and personnel

Process analysis Development and installation of production tools and equipment

Finance/ accountingDisbursements/ credits Receivables Payables General ledgerFunds Management Money market International exchangeCapital requirements Stock issue Bond issue and recall

Manufacturing

Why Study OM?Why Study OM?

OM is one of three major functions OM is one of three major functions (marketing, finance, and operations) (marketing, finance, and operations) of any organizationof any organization

We want to know how goods and We want to know how goods and services are producedservices are produced

We want to understand what We want to understand what operations managers dooperations managers do

OM is such a costly part of an OM is such a costly part of an organizationorganization

Options for Increasing Options for Increasing ContributionContribution

SalesSales $100,000$100,000 $150,000$150,000 $100,000$100,000 $100,000$100,000

Cost of Goods Cost of Goods – 80,000– 80,000 – 120,000– 120,000 – 80,000– 80,000 – 64,000– 64,000

Gross MarginGross Margin 20,00020,000 30,00030,000 20,00020,000 36,00036,000

Finance CostsFinance Costs – 6,000– 6,000 – 6,000 – 6,000 – 3,000– 3,000 – 6,000– 6,000

SubtotalSubtotal 14,00014,000 24,00024,000 17,00017,000 30,00030,000

Taxes at 25%Taxes at 25% – 3,500– 3,500 – 6,000– 6,000 – 4,250– 4,250 – 7,500– 7,500

ContributionContribution $ 10,500$ 10,500 $ 18,000$ 18,000 $ 12,750$ 12,750 $ 22,500$ 22,500

Finance/Finance/MarketingMarketing AccountingAccounting OMOM

OptionOption OptionOption OptionOption

IncreaseIncrease ReduceReduce ReduceReduceSalesSales FinanceFinance ProductionProduction

CurrentCurrent Revenue 50%Revenue 50% Costs 50%Costs 50% Costs 20%Costs 20%

What Operations What Operations Managers DoManagers Do

PlanningPlanning

OrganizingOrganizing

StaffingStaffing

LeadingLeading

ControllingControlling

Basic Management FunctionsBasic Management Functions

Ten Critical DecisionsTen Critical DecisionsTen Decision AreasTen Decision Areas Chapter(s)Chapter(s)

Service and product designService and product design 55 Quality managementQuality management 66

6 Supplement6 Supplement Process and capacity Process and capacity 77

design design 7 Supplement7 Supplement LocationLocation 88 Layout designLayout design 99 Human resources, Human resources, 1010

job design job design 10 Supplement10 Supplement Supply-chain Supply-chain 1111

management management 11 Supplement11 Supplement Inventory managementInventory management 12, 14, 1612, 14, 16 SchedulingScheduling 13, 1513, 15 MaintenanceMaintenance 1717

Where are the OM Jobs?Where are the OM Jobs?

Where are the OM Jobs?Where are the OM Jobs?

Technology/methodsTechnology/methods Facilities/space utilizationFacilities/space utilization Strategic issuesStrategic issues Response timeResponse time People/team developmentPeople/team development Customer serviceCustomer service QualityQuality Cost reductionCost reduction Inventory reductionInventory reduction Productivity improvementProductivity improvement

Significant Events in OMSignificant Events in OM

Characteristics of GoodsCharacteristics of Goods

Tangible productTangible product

Consistent product Consistent product definitiondefinition

Production usually Production usually separate from separate from consumptionconsumption

Can be inventoriedCan be inventoried

Low customer Low customer interactioninteraction

Characteristics of ServiceCharacteristics of Service Intangible productIntangible product

Produced and Produced and consumed at same timeconsumed at same time

Often uniqueOften unique

High customer High customer interactioninteraction

Inconsistent product Inconsistent product definitiondefinition

Often knowledge-basedOften knowledge-based

Frequently dispersedFrequently dispersed

Goods and ServicesGoods and ServicesAutomobile

Computer

Installed carpeting

Fast-food meal

Restaurant meal/auto repair

Hospital care

Advertising agency/investment management

Consulting service/teaching

Counseling

Percent of Product that is a GoodPercent of Product that is a Good Percent of Product that is a ServicePercent of Product that is a Service

100%100% 7575 5050 2525 00 2525 5050 7575 100%100%|| || || || || || || || ||

New Trends in OMNew Trends in OM

Local or Local or national national focusfocus

Low-cost, reliable Low-cost, reliable worldwide communication worldwide communication and transportation and transportation networksnetworks

Global focusGlobal focus

Batch (large) Batch (large) shipmentsshipments

Short product life cycles Short product life cycles and cost of capital put and cost of capital put pressure on reducing pressure on reducing inventoryinventory

Just-in-time Just-in-time shipmentsshipments

Low-bid Low-bid purchasingpurchasing

Quality emphasis requires Quality emphasis requires that suppliers be engaged that suppliers be engaged in product improvementin product improvement

Supply-Supply-chain chain partners, partners, Enterprise Enterprise Resource Resource Planning, Planning, e-commercee-commerce

PastPast CausesCauses FutureFuture


Lengthy Lengthy product product developmentdevelopment

Shorter life cycles, Shorter life cycles, Internet, rapid international Internet, rapid international communication, computer-communication, computer-aided design, and aided design, and international collaborationinternational collaboration

Rapid product Rapid product development, development, alliances, alliances, collaborative collaborative designsdesigns

Standardized Standardized productsproducts

Affluence and worldwide Affluence and worldwide markets; increasingly markets; increasingly flexible production flexible production processesprocesses

Mass Mass customization customization with added with added emphasis on emphasis on qualityquality

Job Job specializationspecialization

Changing socioculture Changing socioculture milieu; increasingly a milieu; increasingly a knowledge and information knowledge and information societysociety

Empowered Empowered employees, employees, teams, and teams, and lean lean productionproduction



Low-cost Low-cost focusfocus

Environmental issues, ISO Environmental issues, ISO 14000, increasing disposal 14000, increasing disposal costscosts

Environmentally Environmentally sensitive sensitive production, production, green green manufacturing, manufacturing, recycled recycled materials, materials, remanufacturingremanufacturing


Ethics and Social ResponsibilityEthics and Social Responsibility

Challenges facing Challenges facing operations managers:operations managers:

Developing safe quality productsDeveloping safe quality products

Maintaining a clean environmentMaintaining a clean environment

Providing a safe workplaceProviding a safe workplace

Honouring community commitmentsHonouring community commitments

Operations Management

Chapter 1 –

Operations and Productivity11

Chapter 2

Operations Strategy in a Global Environment

OutlineOutline

Global Company Profile: BoeingGlobal Company Profile: Boeing

A Global View of OperationsA Global View of OperationsCultural and Ethical IssuesCultural and Ethical Issues

Developing Missions And Developing Missions And StrategiesStrategiesMissionMission

StrategyStrategy

Outline Outline –– Continued Continued

Achieving Competitive Advantage Achieving Competitive Advantage Through OperationsThrough OperationsCompeting On DifferentiationCompeting On Differentiation

Competing On CostCompeting On Cost

Competing On ResponseCompeting On Response

Ten Strategic OM Decisions Ten Strategic OM Decisions Global Operations Strategy OptionsGlobal Operations Strategy Options

Global StrategiesGlobal Strategies

Boeing – sales and production are Boeing – sales and production are worldwideworldwide

Benetton – moves inventory to stores Benetton – moves inventory to stores around the world faster than its around the world faster than its competition by building flexibility into competition by building flexibility into design, production, and distributiondesign, production, and distribution

Sony – purchases components from Sony – purchases components from suppliers in Thailand, Malaysia, and suppliers in Thailand, Malaysia, and around the worldaround the world

Global StrategiesGlobal Strategies

Volvo – considered a Swedish company Volvo – considered a Swedish company but it is controlled by an American but it is controlled by an American company, Ford. The current Volvo S40 is company, Ford. The current Volvo S40 is built in Belgium and shares its platform built in Belgium and shares its platform with the Mazda 3 built in Japan and the with the Mazda 3 built in Japan and the Ford Focus built in Europe.Ford Focus built in Europe.

Haier – A Chinese company, produces Haier – A Chinese company, produces compact refrigerators (it has one-third of compact refrigerators (it has one-third of the US market) and wine cabinets (it has the US market) and wine cabinets (it has half of the US market) in South Carolinahalf of the US market) in South Carolina

Reasons to GlobalizeReasons to Globalize

Reasons to GlobalizeReasons to Globalize

Reduce costs (labor, taxes, tariffs, etc.)Reduce costs (labor, taxes, tariffs, etc.) Improve supply chainImprove supply chain Provide better goods and servicesProvide better goods and services Understand marketsUnderstand markets Learn to improve operationsLearn to improve operations Attract and retain global talentAttract and retain global talent

Tangible Tangible ReasonsReasons

Intangible Intangible ReasonsReasons

Reduce CostsReduce Costs

Foreign locations with lower wage Foreign locations with lower wage rates can lower direct and indirect rates can lower direct and indirect costscostsWorld Trade Organization (WTC)World Trade Organization (WTC)

North American Free Trade North American Free Trade Agreement (NAFTA)Agreement (NAFTA)

APEC, SEATO, MERCOSUR APEC, SEATO, MERCOSUR

European Union (EU)European Union (EU)

Improve the Supply ChainImprove the Supply Chain

Locating facilities closer to Locating facilities closer to unique resourcesunique resourcesAuto design to CaliforniaAuto design to California

Athletic shoe production to ChinaAthletic shoe production to China

Perfume manufacturing in FrancePerfume manufacturing in France

Provide Better Goods Provide Better Goods and Servicesand Services

Objective and subjective Objective and subjective characteristics of goods and characteristics of goods and servicesservicesOn-time deliveriesOn-time deliveries

Cultural variablesCultural variables

Improved customer serviceImproved customer service

Understand MarketsUnderstand Markets

Interacting with foreign customer Interacting with foreign customer and suppliers can lead to new and suppliers can lead to new opportunitiesopportunities

Learn to Improve OperationsLearn to Improve Operations

Remain open to the free flow of Remain open to the free flow of ideasideasGeneral Motors partnered with a General Motors partnered with a

Japanese auto manufacturer to Japanese auto manufacturer to learnlearn

Attract and Retain Global Attract and Retain Global TalentTalent

Offer better employment Offer better employment opportunitiesopportunitiesBetter growth opportunities and Better growth opportunities and

insulation against unemploymentinsulation against unemployment

Relocate unneeded personnel to Relocate unneeded personnel to more prosperous locationsmore prosperous locations

Incentives for people who like to Incentives for people who like to travel travel

Developing Missions and Developing Missions and StrategiesStrategies

MissionMission statements tell an statements tell an organization where it is goingorganization where it is going

The The Strategy Strategy tells the tells the organization how to get thereorganization how to get there

MissionMission

Mission - where are Mission - where are you going?you going?Organization’s Organization’s

purpose for beingpurpose for being

Answers ‘What do Answers ‘What do we provide society?’we provide society?’

Provides boundaries Provides boundaries and focusand focus

Hard Rock CaféHard Rock Café

Our Mission: To spread the spirit of Rock ‘n’ Our Mission: To spread the spirit of Rock ‘n’ Roll by delivering an exceptional Roll by delivering an exceptional

entertainment and dining experience. We entertainment and dining experience. We are committed to being an important, are committed to being an important,

contributing member of our community and contributing member of our community and offering the Hard Rock family a fun, healthy, offering the Hard Rock family a fun, healthy,

and nurturing work environment while and nurturing work environment while ensuring our long-term success.ensuring our long-term success.

Benefit to Society

Mission

Factors Affecting MissionFactors Affecting Mission

Philosophy and Values

Profitability and GrowthEnvironment

Customers Public Image

Strategic ProcessStrategic Process

Marketing Operations Finance/ Accounting

Functional Area Missions

Organization’s Mission

StrategyStrategy

Action plan to Action plan to achieve missionachieve mission

Functional areas Functional areas have strategieshave strategies

Strategies exploit Strategies exploit opportunities and opportunities and strengths, neutralize strengths, neutralize threats, and avoid threats, and avoid weaknessesweaknesses

Strategies for Competitive Strategies for Competitive AdvantageAdvantage

Differentiation – better, or at least Differentiation – better, or at least differentdifferent

Cost leadership Cost leadership –– cheaper cheaper

Quick response – more Quick response – more responsiveresponsive

Competing on Competing on DifferentiationDifferentiation

Uniqueness can go beyond both the Uniqueness can go beyond both the physical characteristics and service physical characteristics and service attributes to encompass everything attributes to encompass everything

that impacts customer’s perception of that impacts customer’s perception of valuevalue

Safeskin gloves – leading edge productsSafeskin gloves – leading edge products

Walt Disney Magic Kingdom – Walt Disney Magic Kingdom – experience differentiationexperience differentiation

Hard Rock Cafe – theme experienceHard Rock Cafe – theme experience

Competing on CostCompeting on Cost

Provide the maximum value as Provide the maximum value as perceived by customer. Does not perceived by customer. Does not

imply low quality.imply low quality.

Southwest Airlines – secondary Southwest Airlines – secondary airports, no frills service, efficient airports, no frills service, efficient utilization of equipmentutilization of equipment

Wal-Mart – small overheads, shrinkage, Wal-Mart – small overheads, shrinkage, distribution costsdistribution costs

Franz Colruyt – no bags, low light, no Franz Colruyt – no bags, low light, no music, doors on freezersmusic, doors on freezers

Competing on ResponseCompeting on Response

Flexibility is matching market changes in Flexibility is matching market changes in design innovation and volumesdesign innovation and volumes Institutionalization at Hewlett-PackardInstitutionalization at Hewlett-Packard

Reliability is meeting schedulesReliability is meeting schedules German machine industryGerman machine industry

Timeliness is quickness in design, Timeliness is quickness in design, production, and deliveryproduction, and delivery Johnson Electric, Bennigan’s, MotorolaJohnson Electric, Bennigan’s, Motorola

OM’s Contribution to StrategyOM’s Contribution to Strategy

Product

Quality

Process

Location

Layout

Human resource

Supply-chain

Inventory

Scheduling

Maintenance

FLEXIBILITYSony’s constant innovation of new products………………………………....Design HP’s ability to follow the printer market………………………………Volume

Southwest Airlines No-frills service……..…..LOW COST

DELIVERY Pizza Hut’s five-minute guarantee at lunchtime…………………..…..……..Speed Federal Express’s “absolutely, positively on time”………………………..….Dependability

QUALITY Motorola’s automotive products ignition systems…………………………......Conformance Motorola’s pagers………………………..….Performance

IBM’s after-sale service on mainframe computers……....AFTER-SALE SERVICE

Fidelity Security’s broad line of mutual funds………….BROAD PRODUCT LINE

OperationsOperations SpecificSpecific CompetitiveCompetitiveDecisionsDecisions ExamplesExamples Strategy UsedStrategy Used AdvantageAdvantage

Response(Faster)

Cost leadership(Cheaper)

Differentiation(Better)

Strategy Development ProcessStrategy Development Process

Determine Corporate MissionState the reason for the firm’s existence and identify the

value it wishes to create.

Form a StrategyBuild a competitive advantage, such as low price, design, or

volume flexibility, quality, quick delivery, dependability, after-sale service, broad product lines.

Environmental AnalysisIdentify the strengths, weaknesses, opportunities, and threats.

Understand the environment, customers, industry, and competitors.

Four International Four International Operations StrategiesOperations Strategies

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Local Responsiveness ConsiderationsLocal Responsiveness Considerations(Quick Response and/or Differentiation)(Quick Response and/or Differentiation)

Import/export or license existing product

ExamplesU.S. SteelHarley Davidson

International Strategy


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International StrategyInternational Strategy




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Standardized product

Economies of scale Cross-cultural

learning

ExamplesTexas InstrumentsCaterpillarOtis Elevator

Global Strategy


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Standardized product Economies of scale Cross-cultural learning


Global Strategy






Global StrategyGlobal Strategy





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Use existing domestic model globally

Franchise, joint ventures, subsidiaries

ExamplesHeinzMcDonald’sThe Body ShopHard Rock Cafe

Multidomestic Strategy


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Global Strategy




Multidomestic Strategy Use existing

domestic model globally Franchise, joint ventures,

subsidiaries

ExamplesHeinz The Body ShopMcDonald’s Hard Rock Cafe






subsidiaries




Global StrategyGlobal Strategy


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Move material, people, ideas across national boundaries

Economies of scale Cross-cultural

learning

ExamplesCoca-ColaNestlé

Transnational Strategy


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Global Strategy Transnational Strategy

Move material, people, ideas across national boundaries

Economies of scale Cross-cultural learning

ExamplesCoca-ColaNestlé






subsidiaries


Documents

Operations Management Chapter 1 Operations and Productivity