COMPETING WITH OPERATIONS

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

11

Operations 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

12

Across the Organization

Finance
Acquires financial resources and capital for inputs

Material & Service Inputs

Sales Revenue

Support Functions
Accounting Information Systems Human Resources Engineering

Operations
Translates materials and service into outputs
Figure 1.1

Marketing
Generates sales of outputs

Product & Service Outputs

13

A Process View
External environment
Internal and external customers Inputs Workers Managers Equipment Facilities Materials Land Energy Outputs Goods Services 5 2 4

Processes and operations

Information on performance
Figure 1.2
14

A Process View

More like a manufacturing process

More like a service process

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

Figure 1.3
15

The Supply Chain View

Support Processes

External suppliers

New service/ product development

Customer relationship management

External customers

Supplier relationship process

Order fulfillment process

Figure 1.4
16

The 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

17

Support Processes
TABLE 1.1 | EXAMPLES OF SUPPORT PROCESSES The provision of financial resources for the organization to do its work and to execute its strategy The process of deciding how funds will be allocated over a period of time The acquisition of people to do the work of the organization The assessment and payment of people for the work and value they provide to the company The preparation of people for their current jobs and future skills and knowledge needs The processes that ensure that the company is meeting all laws and legal obligations Capital acquisition

Budgeting Recruitment and hiring Evaluation and compensation

Human resource support and development Regulatory compliance

Information systems

The movement and processing of data and information to expedite business operations and decisions
The systems and activities that provide strategic direction and ensure effective execution of the work of the business

Enterprise and functional management

18

Operations Strategy
Specifies the means by which operations implements corporate strategy and helps build a customer-driven firm. It links long term and short term operations decisions to corporate strategy and develops capabilities to be competitive.

19

Operations Strategy
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 Yes

No Performance Gap?

Operations Strategy Competitive Capabilities Current Needed Planned

1 10

Decisions Managing processes Managing supply chains

Figure 1.5

Corporate Strategy
Corporate strategy provides an overall direction that serves as the framework for carrying out all the organization's functions Environmental scanning Developing core competencies (unique resources and
strengths that management considers while formulating strategies) 1. Workforce 2. Facilities 3. Market and financial know-how 4. Systems and technologies

Developing core processes a firms core competencies

should drive its core processes

Global strategies strategic alliances or locating abroad

1 11

Market Analysis
A market analysis first divides the firms customers into market segments and then identifies the needs of each segment.

Market segmentation Needs assessment

Service

or product needs system needs needs

Delivery Volume Other

needs psychological, legal, etc.

1 12

Competitive Priorities
Competitive priorities are the critical operational dimensions a process or supply chain must possess to satisfy internal or external customers, both now and in the future. Competitive capabilities are the cost, quality, time and flexibility dimensions that a process or supply chain actually possesses and is able to deliver.

1 13

Competitive Priorities
TABLE 1.2 COST 1. Low-cost operations | DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE PRIORITIES Definition Delivering a service or a product at the lowest possible cost Process Considerations Processes must be designed and operated to make them efficient Example Big Bazaar

QUALITY
2. Top quality Delivering an outstanding service or product Producing services or products that meet design specifications on a consistent basis Quickly filling a customers order Meeting delivery-time promises Quickly introducing a new science or a product May require a high level of customer contact and may require superior product features Processes designed and monitored to reduce errors and prevent defects Ferrari

3. Consistent quality

McDonalds

TIME 4. Delivery speed 5. On-time delivery 6. Development speed Design processes to reduce lead time Planning processes to increase percent of customer orders shipped when promised Cross-functional integration and involvement of critical external suppliers Dell DHL

Li & Fung

1 14

Competitive Priorities
TABLE 1.2 FLEXIBILITY 7. Customization | DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE PRIORITIES Definition Satisfying the unique needs of each customer by changing service or products designs Handling a wide assortment of services or products efficiently Process Considerations Low volume, close customer contact, and easily reconfigured Example Ritz Carlton

8. Variety

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)

1 15

Order Winners and Qualifiers

Order winner is a criterion customers use to differentiate the services or products of one firm from those of another Order qualifier is a demonstrated level of performance of an order winner that is required for firm to do business in a particular market segment.

1 16

Order Winners and Qualifiers

Order Winner

Sales ($)

Order Qualifier

Low

High

Achievement of competitive priority

Sales ($) Low

Threshold

High

Achievement of competitive priority Figure 1.6

1 17

Using Competitive Priorities

At an airline
Customer relationship
Top

quality quality speed

Consistent Delivery Variety

New service development

Development

speed

Customization Top

quality
1 18

Using Competitive Priorities

At an airline
Order fulfillment
Low-cost

operations Top quality Consistent quality On-time delivery Variety

1 19

Using Competitive Priorities

At an airline
Supplier relationship
Low-cost

operations Consistent quality On-time delivery Variety Volume flexibility

1 20

Trends in Operations Management

Productivity improvement: value of outputs
produced divided by the values of input resources

Global competition
Ethical, workforce, and environmental issues

1 21

Productivity 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 Policies processed a. Labor productivity = Employee hours 600 policies = = 5 policies/hour (3 employees)(40 hours/employee)

1 22

Productivity 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 Value of output a. Multifactor productivity = Labor cost + Materials cost + Overhead cost = (400 units)($10/unit) $4,000 = = 2.35 $400 + $1,000 + $300 $1,700
1 23

Solved 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?

1 24

Solved 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 3 credit hours student $150 tuition + $100 state support credit hour

= $37,500/class Value of inputs = Labor + Materials + Overhead = $4,000 + ($20/student 50 students/class) + $25,000 = $30,000/class

Multifactor productivity =

Output Input

$37,500/class = 1.25 $30,000/class

1 25

Solved 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
14 hours week 16 weeks class

Labor hours of input =

= 224 hours/class Labor productivity = Output $45,000/class = Input 224 hours/class

= $200.89/hour

1 26

Solved 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 Attires 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?

1 27

Solved Problem 2
SOLUTION
Value of output = (52 defective 90/defective) + (80 garments 200/garment) = $20,680 Labor hours of input = 360 hours Output $20,680 Labor productivity = = Input 360 hours = $57.44 in sales per hour

1 28