OPERATIONS

MANAGEMENT
USING OPERATIONS TO
CREATE VALUE
CHAPTER 1

1-1
WHAT PRODUCT/SERVICE FEATURES MAKE
THESE COMPANIES SUCCESSFUL?

 Southwest Airline, Wal-Mart, Amazon

 Chipotle, Baja Fresh
 Custom Bikeshop, Mayo Clinic, Apple

1-2
PROGRESSIVE INSURANCE
Grew from $1.3 billion to over $17 billion in 15 yrs
How: better service and low prices through
“operational innovation” in car insurance sector.
 Improved representative response (24 hours a day)
 Claims processing reduced from 7-10 days to 9 hours
 Claims adjustor drives mobile claims unit to the accident site,
writes a check on the spot
 Dedicated agents-only web site to improve service
Profitable growth and
differentiation in a
low-growth industry

1-3
OPERATIONS
MANAGEMENT IS…
The systematic design, direction and control of processes
that transform inputs into services and products for internal,
as well as external, customers

Transformation
Inputs • Procedures
• Labor • Equipment Outputs
• Capital • Facilities
• Materials • Technology • Goods
• Time • Knowledge • Services
• Information
• Energy

Processes can be linked together to form a supply chain –

integrated processes within a firm and across different firms that
produce a service or product to the satisfaction of the customers
PROCESS AND
OPERATIONS
Process
 Any activity or group of activities that takes one or
more inputs, transforms them, and provides one or more
outputs for its customers

Operation
 A group of resources performing all or part of one or
more processes

1-5
 Across the Organization
Finance
Acquires financial resources and
capital for inputs

Material & Service Sales

Inputs Revenue

Support Functions
Operations • Accounting
Translates
• Information Systems Marketing
• Human Resources
materials and • Engineering Generates sales of
service into outputs
outputs

Product & Service

Outputs
 CROSS- General manager

FUNCTIONAL Marketing Operations Finance/

Accounting

LINKAGES Manufacturing Production

Control
Quality
Control Purchasing

 Engineering: what products and processes are needed

 Marketing: can we make what we wish to sell / what products
cost the most to make / customer expectations
 Accounting: inventory management / JIT / work standards / cost
verses price
 Finance: make verses buy / quantifying quality / cash flow and
capital requirements / cost verses price
 Human resources: what skills do our employees need / who to
hire / type of compensation to match strategy
 Information Systems: what information is needed and by whom /
flow of goods / linkages to rest of supply chain
1-7
HOTEL MANAGEMENT
DECIDES TO BUY
A KIOSK FOR SELF-CHECK IN
Operations
- Labor cost / efficiency
Finance
- Use of capital
Marketing
- Service provided to customers
Human Resources
- Employee training

1-8
 And FEMA …Operations gone bad …

1-9
Processes and Operations
Internal and
external customers

Inputs
•Workers Processes and
•Managers operations
•Equipment 1 3 Outputs
•Facilities •Services
5
•Materials •Goods
•Services 2 4
•Land
•Energy
Information on
performance

1-10
 Process View of an Ad Agency

Accounting process

Advertisement Output interface

Inputs

Outputs
design and process
planning process • Communicate with
• Create the ad to the client, get needs, and
needs of the client coordinate progress
and prepare a plan
for media exposure

Production process
• Prepare ad for publication
and deliver to media
outlets

1-11
 Accounting process Nested
Advertisement Output Processes
Inputs

Outputs
design and interface
planning process
process

Production
process

Advertisement Design and Planning Process

Creative design process Media planning process
• Receive work request • Receive work request
• Assemble team • Prepare several media
• Prepare several designs plans
• Receive inputs from • Receive inputs from
Account Executive Account Executive
• Prepare final concept • Prepare final plan
• Revise concept per client’s • Revise plan per client’s
inputs inputs
1-12
 EXTERNAL VS. INTERNAL
CUSTOMERS
External Customers are those who purchase the goods
and services.
Internal Customers are those who receive the output of
others within the firm. They are part of the
transformation process.

Outputs to
Inputs from
Transformation Processes Internal or
other
(Adding value) to External
processes
customers

1-13
MANUFACTURING AND
SERVICE PROCESSES
Goods Production Service Production
Tangible  Intangible
Can be inventoried  Can’t be inventoried
Low customer contact  High customer contact
Capital Intensive  Labor Intensive
 Quality hard to measure
Quality easily measured

Most firms provide both goods and services

1-14
SUPPLY CHAINS
Interrelated series of processes that produce a
service or product to the satisfaction of customers

Support processes

Four “core” processes

External customers
External suppliers

New service/
product Customer
development relationship
process process

Supplier Order
relationship fulfillment
process process

1-15
 Mission: The organization’s purpose for being

Managing Processes: Chapters 3-8

Managing Supply Chains: Chapters 9-15
 MISSION
The organization’s purpose for being;
provides boundaries and focus
 Merck – The mission of Merck is to provide society with superior products and
services - innovations and solutions that improve the quality of life and satisfy customer
needs - to provide employees with meaningful work and advancement opportunities and
investors with a superior rate of return
 Hard Rock Café – To spread the spirit of Rock ‘n’ Roll by delivering an
exceptional entertainment and dining experience. We are committed to being an
important, contributing member of our community and offering the Hard Rock family a
fun, healthy, and nurturing work environment while ensuring our long-term success.
 Starbucks – Establish Starbucks as the premier purveyor of the finest coffee in the
world while maintaining our uncompromising principles while we grow.

 Amazon – It's our goal to be Earth's most customer-centric company, where

customers can find and discover anything at Amazon.com.
2-17
Developing Competitive Priorities
Corporate Strategy
• environmental scanning
• core competencies
• core processes
• global strategies

Market analysis
• segmentation
• needs analysis

Competitive priorities
• cost
• quality
• time
• flexibility
 Core Competencies
The unique resources and strengths
•
Corporate Strategy
environmental
that an organization’s management
•
•
scanning
core competencies
core processes
considers when formulating strategy
• global strategies

Market analysis
• segmentation
• needs analysis

Competitive priorities
• cost
• Workforce – well trained and flexible
• quality
• time
• flexibility
• Facilities – well located and flexible
• Market and financial know-how
• Systems and technology expertise

Developed over time, difficult for competitors to copy 2-19

 Needs Assessment
Identify the needs of each segment and
assess how well competitors are
•
Corporate Strategy
environmental
scanning
addressing those needs
• core competencies
• core processes

• Service or product needs

• global strategies

•
Market analysis
segmentation price, quality, customization
• needs analysis

Competitive priorities
• cost
• Delivery system needs
•
•
quality
time availability, convenience, courtesy, safety,
• flexibility
accuracy, reliability, speed, dependability

• Volume needs
high, low, variability, predictability

• Other needs
reputation, technical support, geography
2-20
 •
Corporate Strategy
environmental
Competitive Priorities
scanning
• core competencies
• core processes
• global strategies

Market analysis
• segmentation
• needs analysis

Competitive Priorities
Cost 1. Low-cost operations
Quality 2. Top quality
3. Consistent quality
Time 4. Delivery speed
5. On-time delivery
6. Development speed
Flexibility 7. Customization
8. Variety
9. Volume flexibility
2-21
 Competitive Priorities
Cost
COST Definition Process Considerations Example
1. Low-cost Delivering a service or a Processes must be designed and Costco
operations product at the lowest operated to make them efficient
possible cost

Quality
QUALITY
2. Top quality Delivering an outstanding May require a high level of Ferrari, Rolex
service or product customer contact and may require
superior product features
3. Consistent Producing services or Processes designed and McDonald’s
quality products that meet design monitored to reduce errors and
specifications on a prevent defects
consistent basis

2-22
 Competitive Priorities
Time
TIME
4. Delivery speed Quickly filling a Design processes to reduce lead Dell, Netflix
customer’s order time
5. On-time Meeting delivery-time Planning processes to increase United Parcel
delivery promises percent of customer orders Service (UPS)
shipped when promised
6. Development Quickly introducing a new Cross-functional integration and Zara, Li & Fung
speed science or a product involvement of critical external
suppliers

Flexibility
FLEXIBILITY Definition Process Considerations Example
7. Customization Satisfying the unique Low volume, close customer Ritz Carlton
needs of each customer contact, and easily reconfigured
by changing service or
products designs
8. Variety Handling a wide Capable of larger volumes than Amazon.com
assortment of services or processes supporting
products efficiently customization
9. Volume Accelerating or Processes must be designed for The United States
flexibility decelerating the rate of excess capacity Postal Service
production of service or (USPS)
products quickly to
handle large fluctuations
in demand
2-23
 ORDER QUALIFIERS VS.
ORDER WINNERS
Order Qualifiers – performance dimensions on which
customers expect a minimum level of performance
WANTS: “We want the fast(er) delivery, low(er) cost, and…”
Order Winners – performance dimensions that
differentiate a company’s products and services from its
competitors
MUSTS: “Purity must be at least 99.5%”

Item Supplier A Supplier B

MUST Conformance
quality
99.9% pure - Meets 98% pure – Does not meet
Delivery 3 days 2 days
WANTS $20 / liter
Cost $30 / liter
Flexibility 100 liter minimum order 50 liter minimum order

2-24
 Corporate Strategy
Development Strategies
• environmental
scanning
• core competencies

•
• core processes
global strategies  Product Variety
Offering a wide assortment (Amazon.com,
•
Market analysis
segmentation Wal-Mart)
• needs analysis

Competitive priorities
 Design
•
• cost
quality
Aesthetic appeal, features (Apple,
•
• time
flexibility
Nordstroms)
New Service/
 Innovation
Product Development
Translate new technology into new products
(Intel, Callaway)
 Service
Complementing products with services
(tech support, consulting)

 Market position
Leader, middle of the road, laggard
2-25
 •
Corporate Strategy
environmental
Operations Strategy
scanning
• core competencies
• core processes
• global strategies

Market analysis

Operations strategy
• segmentation
• needs analysis

Competitive priorities

•
• cost
quality Generic Operations Strategies Differentiation
• time (Better)

• flexibility
Production and Inventory Strategies Cost leadership
Response
(Faster)
(Cheaper)
New Service/ MTO, ATO, MTS Chapter 2
Product Development
Job
Process Structure process
Small batch
process

Operations Strategy
Large batch
Chapter 2 process
Line
process
Continuous
process

• Process decisions
• Quality decisions
• Capacity, location, and layout decisions
• Operating decisions

2-26 1-26
GENERIC OPERATIONS
STRATEGIES (GOALS)

Differentiation – better / unique

• Top quality • Customization
• Consistent quality • Variety

Cost leadership – cheaper / value

Quick response – faster Differentiation

(Better)
• Delivery speed
• On-time delivery
Response
• Development speed Cost leadership
(Faster)
(Cheaper)
 PRODUCTION AND
INVENTORY STRATEGY
Service Strategies Manufacturing Strategies

Customized Services Make to Order (MTO)

Individualized services Receive order before producing goods
e.g. Health clinic e.g. Machine shop

Assemble to Order (ATO) Assemble to Order (ATO)

Assemble standardized offerings for Stock standardized components/assemblies
a specific customer’s needs assemble finished product to customer order
e.g. Cellular phone service e.g. Dell Computer

Standardized Services Make to Stock (MTS)

High volume with little variety Satisfy customer orders from inventory
e.g. U.S. Postal Service e.g. Paper

Chapter 2, p.2-28
57
 OPERATIONS STRATEGIES -
EXAMPLES
Dole Microsystems WolfByte Computers
Assemble, sell, and support PC’s Assemble, sell, and support PC’s
Business targeted at price-sensitive buyers targeted at buyers who are willing
strategy who require adequate, but not to pay for excellent performance,
exceptional performance, delivery, delivery, and customer service
and support

• Buy components from the • Buy components from state-of-

lowest-cost suppliers who the-art suppliers. Price is
Operations & meet minimum quality and important, but not the critical
supply chain delivery capabilities factor
strategy • Keep minimum levels of • Keep enough inventory in
inventory in factories to factories to meet rush orders
hold down inventory costs and shorten delivery times
• Hire and train support staff • Hire and train support staff to
to provide acceptable provide superior customer
customer service level service
• Use 3-day ground shipment • Use overnight air freight to
to keep costs low minimize lead time to customer
2-29
STRATEGY LINKAGES /
ALIGNMENT
All functional strategies must be aligned to support the
business strategy…

Business strategy for low cost:

Financial strategy to minimize capital investment
Operations strategy to increase investment for higher productivity

Business strategy for superior customer support:

Marketing strategy for differentiation / customization
Operations strategy to build to stock for improved delivery

2-30
STRATEGY AND ISSUES DURING A
PRODUCT’S LIFE

2-31
Corporate
Strategy

Matching Capabilities to
Market analysis

Competitive
priorities

Priorities
• cost
• quality
• time
• flexibility

New Service/
Product
Development

no

Performance
yes Gap?

Competitive
Operations Strategy Capabilities

2-32
 WHY STUDY OPERATIONS
MANAGEMENT?
 This is where the good or service comes into being
– if you do not understand this part of the
company, you are not being the best accountant,
marketer, or whatever, that you could be.
 Strategies in all functional areas must be
linked/aligned to support the business strategy.
 This is where companies focus a great deal of
energy – because this is where most companies
incur the majority of their costs. Thus, this is an
area where you can have a major impact on a
firm’s competitiveness.

1-33
OPTIONS FOR INCREASING
CONTRIBUTION
Marketing Finance/Acct OM Option
Option Option
Current Sales Finance Production
+ 50% Costs – 50% Costs – 15%

Sales $100,000 $150,000 $100,000 $100,000

Cost of Goods -80,000 -120,000 -80,000 -68,000

Gross Margin 20,000 30,000 20,000 32,000

Finance Costs -6,000 -6,000 -3,000 -6,000

Net Margin 14,000 24,000 17,000 26,000

Taxes @ 25% -3,500 -6,000 -4,250 -6,500

Contribution 10,500 18,000 12,750 19,500

1-34
SUMMARY
Strategy is how we accomplish our mission
Functional strategies must be aligned to support the
business/corporate strategy
OM goals are to be faster, better and/or cheaper
Operations strategy:
 Where the product or service is in its life cycle
 Determines our mix of faster, better, and cheaper to satisfy our
customers (trade-offs where necessary)
 Specifies process choice, work flow, order processing, inventory,
capacity, etc.

2-35
 Productivity
Productivity = output / input (bigger is better)

Single-factor productivity
output / labor hours
output / labor $
sales / sales rep
sales / retail outlet, etc

Multi-factor productivity
output / (labor + material + overhead)

1-36
 Single Factor Productivity
Three employees process 600 insurance policies
in a week. They work 8 hours per day, 5 days/week.
Calculate the productivity in policies per hour.

Policies Processed
Labor productivity =
Employee Hours

= 600 Policies
For each employee (3 people) x (40 hours/person)
Output 200 policies/week
Input 8 hours per day
5 days per week

(Labor) productivity 200 policies/week

= 5 policies/hour
8 hrs/day * 5 days/week
5 policies/hour
1-37
 Multi Factor Productivity
A team of workers makes 400 units of a product, valued by its
standard cost of $10 each (before markups for other expenses
and profit). The accounting department reports that the actual
costs are $400 for labor, $1,000 for materials, and $300 for
overhead. Calculate the multi-factor productivity.

MFP = Quantity at standard cost (or value of output)

Labor cost + Materials Cost + Overhead cost

= (400 units) ($10/unit)

$400 + $1000 + $300

$4,000 = 2.35 Unitless!

=
$1,700
1-38
 Stix Furniture Company
Yesterday, the employees at Stix produced 46 chairs. Of the 46
chairs produced, 12 were damaged due to a problem with a
new sanding machine. The damaged chairs can be discounted
and sold for $25 each. The undamaged chairs are sold to a
retail chain for $70 each. Labor costs were $720, material
costs were $460, and overhead costs were $500. What was
the multi-factor productivity?

1-39
 Stix Furniture Company
Yesterday, the employees at Stix produced 46 chairs. Of the 46
chairs produced, 12 were damaged due to a problem with a
new sanding machine. The damaged chairs can be discounted
and sold for $25 each. The undamaged chairs are sold to a
retail chain for $70 each. Labor costs were $720, material
costs were $460, and overhead costs were $500. What was
the multi-factor productivity?

Output = 12 chairs x $25/chair + 34 chairs x $70/chair = $2680

Input = $720 + $460 + $500 = $1680

MFP = $2680 / $1680 = 1.60

1-40
 PROB. #1 FROM HW #1
(P.27)
Coach Bjourn Toulouse led the Big Red Herrings to several disappointing
football seasons. Only better recruiting will return the BRH to winning form.
Because of the current state of the program, Boehring Univ. fans are unlikely
to support increases in the $192 season ticket price. Improved recruitment
will increase overhead costs to $30,000 per class section from the current
$25,000 per class section. The univ.’s budget plan is to cover recruitment
costs by increasing the avg. class size to 75 students. Labor costs will
increase to $6,500 per 3-credit course. Material costs will be about $25 per
student for each 3-credit course. Tuition will be $200 per semester credit,
which is supplemented by state support of $100 per semester credit.

a. What is the multi-factor productivity ratio?

b. If instructors work an average of 20 hours per week for 16 weeks for
each 3-credit class of 75 students, what is the labor productivity ratio?

1-41
  Coach Bjourn Toulouse led the Big Red Herrings to several disappointing football seasons. Only better
recruiting will return the BRH to winning form. Because of the current state of the program, Boehring Univ.
fans are unlikely to support increases in the $192 season ticket price. Improved recruitment will increase
overhead costs to $30,000 per class section from the current $25,000 per class section. The univ.’s budget
plan is to cover recruitment costs by increasing the avg. class size to 75 students. Labor costs will increase
to $6,500 per 3-credit course. Material costs will be about $25 per student for each 3-credit course. Tuition
will be $200 per semester credit, which is supplemented by state support of $100 per semester credit.

a. What is the multifactor productivity ratio?

b. If instructors work an average of 20 hours per week for 16 weeks for each 3-credit class of 75 students,
what is the labor productivity ratio?

Productivity = output value / input value

Value of output = (75 students/class)*(3 credits/student)*(($200 + $100)/credit)

= $67,500 / class
Value of inputs = Labor + Material + Overhead
= $6,500/class + ($25/student/class*75 students/class) + $30,000/class

= $38,375 / class

Multi-factor Productivity (MFP) = $67,500 (per class) / $38,375 (per class) = 1.76
1-42
 Coach Bjourn Toulouse led the Big Red Herrings to several disappointing football seasons. Only better
recruiting will return the BRH to winning form. Because of the current state of the program, Boehring Univ.
fans are unlikely to support increases in the $192 season ticket price. Improved recruitment will increase
overhead costs to $30,000 per class section from the current $25,000 per class section. The univ.’s budget
plan is to cover recruitment costs by increasing the avg. class size to 75 students. Labor costs will increase
to $6,500 per 3-credit course. Material costs will be about $25 per student for each 3-credit course. Tuition
will be $200 per semester credit, which is supplemented by state support of $100 per semester credit.

a. What is the multifactor productivity ratio?

b. If instructors work an average of 20 hours per week for 16 weeks for each 3-credit class of 75 students,
what is the labor productivity ratio?

Productivity = output value / input value

Value of output = (75 students/class)*(3 credits/student)*(($200 + $100)/credit)

= $67,500 / class
Value of labor input = (20 hours/class/week) * (16 weeks) = 320 hours / class

Labor Prod. = $67,500 (per class) / 320 hours (per class) = $210.94/hour

1-43