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OPERATIONS
MANAGEMENT
3RD EDITION

ALEX HILL & TERRY HILL

The decision 160
Reviewing the service and product mix 160
Service/product life cycles 161
Service/product portfolio analysis 162

Designing services and products to meet the needs of different market segments 166
Developing a specification 166
The inherent nature of services and products 166
Developing a specification to reflect the service/product mix 166
The implications of the non-repeat or repeat nature of a service or product 169

Techniques for improving design 171

Standardization 171
Modular design 171
Mass customization 171
Taguchi methods 173
Quality function deployment and the house of quality 173
Value engineering and value analysis 175
Simultaneous engineering 179
Variety reduction 181

Designing services and products in practice 184

Driving business performance 184
Critical reflections 185
Study activities 188
Exploring further 189

5 Delivering services 195

Executive overview 198
Introduction 199
Factors affecting service delivery system design 199
Characteristics of service operations 200
Service/product mix 200
Intangible nature of services 201
Simultaneous provision and consumption of services 201
Time-dependent capacity 201
Customers as participants in the service delivery system 202
Customer management 202
People skills 202
Effective services are reproducible 202
Site selection: proximity to the customer and multi-site management 204
Lack of patents on services 204

Factors involved in delivering services 204

The roles of technology and people in service provision 204
The nature of the services to be delivered 204
Categorizing services 206
Complexity of the service 206
Volumes 206
Order-winners and qualifiers 207

Service delivery system – overall design 207

Service delivery system – detailed design 207
Phase 1: the point of customer interface: back office or front office? 209
Phase 2: the delivery system 211
Operations Management Contents vii
 Single-step or multi-step process 217
IT-based service delivery system designs 221
E-commerce 224
Further aspects of service delivery 227
Customer participation in service delivery 230
Maximizing the use of skilled staff 231
Determining the level of server discretion within the delivery system 231

Service profiling 235

Procedure 235

Delivering services in practice 239

Driving business performance 239
Critical reflections 240
Study activities 241
Exploring further 242

6 Making products 251

Executive overview 254
Introduction 255
Factors affecting the design of the manufacturing process 255
Categories of product 255
Product complexity 256
Volumes 256

Types of manufacturing process 256

Project process 257
Jobbing process 257
Batch 258
Line process 259
Continuous processing 261

Designing the manufacturing process 261

Implications of process design 269
Hybrid processes 273
Cells 273
Linked batch 279
Nagare production system 279
Transfer lines 279
Product profiling 280

Procedure 281
The story behind Figure 6.18 282

Making products in practice 284

Driving business performance 285
Critical reflections 286
Study activities 287
Exploring further 288

7 Location and layout 301

Executive overview 304

viii
Introduction 306
Choosing a location 306
Levels of decision 307
Choosing the continent or region 307
Choosing the country 308
Choosing the area or city 308
Choosing the site 308

Background factors influencing location decisions 308

Factors affecting the choice of continent/region, country and area/city 309
Factors affecting the choice of site 311
Impact of site location on potential demand 313

Site location techniques 315

Weighted factor method 316
Centre of gravity method 316

Choosing a layout 320

Factors influencing layout 320
The nature of the core task 320
Available space 320
Making space for future expansion and layout changes 320
Health and safety 321
Aesthetics 321

Basic types of layout 321

Fixed position layout 323
Process or functional layout 324
Service or product layout 329

Hybrid delivery system layouts 330

Cellular layout 330
Nagare cellular layout 332
Transfer line layout 332

Other layout formats 332

Flexing process layouts to reflect varying levels of demand 333
Flexible office layouts 333

Impact of IT on delivery systems and layouts 334

Detailed layout design 335
The features of good layouts 335
Designing fixed position layouts 337
Designing process or functional layouts 337
Load, movement or trip frequency charts 338
Relationship charts 339
Designing service or product layouts 340
Hybrid layouts 341
Queuing and waiting line analysis 342

Location and layout in practice 343

Driving business performance 344
Critical reflections 345
Study activities 346
Exploring further 348

Operations Management Contents ix

 Part three – Managing operations 353
8 Managing capacity 353
Executive overview 356
Introduction 357
An overview of managing capacity 357
Defining and measuring capacity 358
Defining capacity 358
Measuring capacity 359
Overall measurement 360
Using output to measure capacity 361
Measuring capacity in practice 361

Using utilization and efficiency data to manage capacity 369

Utilization 369
Efficiency 369

Factors affecting capacity management 370

Make-or-buy decisions 370

How do service delivery systems and manufacturing process designs affect capacity? 371
Customers as a source of capacity 371
The perishable nature of service capacity 371
Back office vs. front office 372
Ensuring adequate capacity at each stage of a delivery system 372
Flexibility 372

Skills and mix 372

The impact of different delivery systems 372
Service delivery systems 375
Manufacturing processes 375

Determining the level of capacity 378

Demand-related issues 378
Capacity-related issues 379

Planning and managing capacity 380

Resource planning 381

General issues 382

Competition 382
Developing countries 383
Technology 383

Amount of capacity 383

Forecasting demand for services and products 383
Operations issues in forecasting 384
The choice of forecasting method 384
Make vs. buy 384
Size of operations units 384

Timing of capacity 385

Proactive strategy 385
Reactive strategy 385
Combination strategy 387
Strategic positioning 387

Location 387

x
Medium-term capacity planning 387
Steps in medium-term capacity planning 388
Achieving the medium-term capacity plan 388

Types of capacity plan 390

Level capacity plans 390
Chase demand capacity plans 391
Mixed capacity plans 392

Managing demand and capacity 392

Managing demand 392
Managing capacity 394

Managing capacity in practice 398

Driving business performance 399
Critical reflections 400
Study activities 402
Exploring further 403

9 Scheduling and executing operations 407

Executive overview 410
Introduction 411
What is operations scheduling? 411
The role of scheduling in managing operations 412
Operations scheduling systems 413
Bar charts 416
Scheduling systems for complex services or products 420
Network analysis 420
Scheduling systems for repeat services or products 425

Material requirements planning 425

The master schedule 426
Service/product structure records 428
Inventory status records 429

Manufacturing resource planning 432

Enterprise resource planning 432
Software characteristics 433

Just-in-time control system 436

Physical changes 440
Staff involvement 442
Control system changes 442

Lean – a philosophy of operations management 444

Asset emphasis: inventory versus process 444
Improvement through exposing problems 445
Incorporating indirect activities into the remit of direct staff 445
Eliminating waste 446
Set-up reduction 446

Optimized production technology 446

Theory of constraints 447

Scheduling and executing operations in practice 448

Driving business performance 449

Operations Management Contents xi

 Critical reflections 450
Study activities 452
Exploring further 453

10 Managing inventory 457

Executive overview 460
Introduction 461
What is inventory? 461
The role of inventory 462
Types of inventory 463
Functions of inventory 463
Corporate inventory 466
Operations inventory in manufacturing processes 467
Operations inventory in service delivery systems 470

Managing and controlling inventory – general issues 471

Inventory and its impact on profit levels 472
Inventory cost structures 472
Corporate issues 473

Models and approaches to managing inventory 473

The independent/dependent demand principle 473
Pareto analysis 476
Economic order quantity and economic batch quantity/economic lot size 478
Determining the reorder level 479

Key inventory decisions – what to stock and when to order 480

Deciding which items to hold in stock 480
Deciding how much inventory to hold, and how much and when to order materials 481
Approaches to managing inventory 483

Inventory control systems and analysis 487

Inventory control systems 487
Corporate inventory control 487
Operations inventory control 487
Inventory analysis 489
Causal analysis 491

Managing inventory in practice 493

Driving business performance 494
Critical reflections 495
Study activities 497
Exploring further 499

11 Managing quality 507

Executive overview 510
Introduction 512
What is quality and why is it important? 512
Quality philosophies: the work of Deming, Juran and Crosby 513
W. Edwards Deming 517
Joseph M. Juran 518
Philip B. Crosby 520

xii
The steps to effectively managing quality 521
Tools and techniques 525
Checklists 528
Sampling 529
Process mapping 532
Pareto analysis 533
Scatter diagrams 534
Cause and effect diagrams 535
Gap analysis 536
Breakthrough projects 537
Control charts 538
Statistical process control 539
Six-sigma quality 539

Tools and techniques in practice 540

Managing the supply chain 540
Proactively managing bought-out service and product quality 541
Reactively managing bought-out service and product quality 541
Delivering services and products 542

Approaches to managing quality 543

Total quality management philosophy 543
Quality management frameworks: ISO 9000, Baldrige Award and EFQM Excellence Award 546

Managing quality in practice 549

Driving business performance 550
Critical reflections 551
Study activities 554
Exploring further 557

12 Managing the supply chain 567

Executive overview 569
Introduction 571
What is a supply chain? 571
Designing the supply chain 572
Deciding whether to make or buy 573
Deciding how much to make or buy 576
Advantages and disadvantages of make or buy 578
Reasons for making inappropriate make-or-buy decisions 588

Managing supply chains 591

Types of supplier relationship 593
Corporate social responsibility 595
Digital supply 595

Developing supply chains 598

Stages of development 598
Tools and techniques for developing supply chains 602
The benefits of improving supply chains 617

Managing supply chains in practice 621

Driving business performance 622
Critical reflections 623

Operations Management Contents xiii

 Study activities 628
Exploring further 628

Part four – Improving operations 637

13 Analyzing operations 637
Executive overview 639
Introduction 641
Why analyze operations? 641
How to analyze operations 641
Understanding the business context 643
Stakeholder requirements 644
Corporate objectives 644
Business health check 645

Analyzing markets 651

Identify current and future markets 651
Identify executive opinion of current and future order-winners and qualifiers 654
Test executive opinion with data 655

Analyzing market support 660

Analyzing cash holdings 664
Review current assets 665
Review fixed assets 666

Analyzing operating costs 666

Analyzing operations in practice 668
Driving business performance 669
Critical reflections 671
Exploring further 675

14 Improving operations 677

Executive overview 679
Introduction 681
Why improve operations? 681
Releasing cash 681
Improving market support 682
Reducing costs 687

Process of improving operations 687

1. Plan 687
2. Do 691
3. Check 691
4. Review 691

Approach to improving operations 691

Passive incremental 695
Proactive incremental 697
Passive breakthrough 697
Proactive breakthrough 697

xiv
Improvement tools and techniques 700
Benchmarking 700
Mapping the customer journey 702
Mapping processes 703
Identifying causes of problems 705
Generating improvement ideas 705
Reengineering business processes 707

Making improvements 709

Involving employees 712
Involving suppliers 714
Involving customers 714

Improving operations in practice 720

Driving business performance 721
Critical reflections 722
Study activities 724
Exploring further 725

15 Corporate social responsibility 733

Executive overview 735
Introduction 737
What is CSR? 737
Meeting the needs of stakeholders 739
The ethical consumer 739
Employee expectations 746
Suppliers 746

Developing social and environmental initiatives 746

Designing services and products 746
Delivering services and products 750
Managing capacity 750
Managing inventory 750
Managing quality 750
Managing the supply chain 750

Implementing social and environmental initiatives 750

The benefits of social and environmental initiatives 753
Criticisms of social and environmental initiatives 754
Corporate social responsibility in practice 757
Driving business performance 758
Critical reflections 759
Study activities 761
Exploring further 762

Index 769

Operations Management Contents xv

 Case studies
Service Product Location
1.1 Operations management tasks at Portioli sandwich and coffee bar UK 6
1.2 A cup of coffee – product or service? – 18
1.3 Operations – a key role in the retail chain UK 23
End of chapter case: Southwest Airlines USA 33
2.1 Comparing success at Kmart and Walmart USA 48
2.2 Price leadership strategies at Aldi and Ikea Europe 63
2.3 Operations developments at Benetton Global 64
2.4 Restructuring within the healthcare industry USA 66
2.5 Customer segmentation in the electricity industry UK 71
End of chapter case: Apple Global 86
3.1 Introducing work teams at San Diego Zoo USA 104
3.2 Opportunities for involvement at Unipart UK 120
End of chapter case: Lloyds Banking Group Global 134

4.1 Product design at Asahi Breweries Asia 147

4.2 R&D expenditure at Microsoft Global 149
4.3 Product R&D at Microsoft Global 150
4.4 Design and development at GlaxoSmithKline (GSK) Global 154
4.5 Product design for different market segments at Handels Bank NW Switzerland 167
4.6 Market segmentation in the hotel industry Global 168
4.7 Operations techniques – 172
4.8 Capitalizing through volume at Assa Abloy Global 183
4.9 Small changes with dramatic effects – 186
End of chapter case: Dyson Global 193
5.1 Tipping as a measure of customer service – 203
5.2 Influencing customer perceptions at the Royal Bank of Canada Canada 214
5.3 Changing the point of customer interface – 215
5.4 Service delivery at the Moscow Scientific Institute for eye microsurgery Russia 220
5.5 Service delivery at a local high-street bank branch UK 222
5.6 Telephone service delivery at Thomas Cook Group UK 225
5.7 Telephone banking at HSBC’s First Direct Global 226
5.8 Providing personal service online at Garden Escape Global 228
5.9 Self-scanning in supermarkets Global 232
5.10 Service delivery at Direct Line UK 233
End of chapter case: British Airways Club World Global 244
6.1 Old and new car plants USA 270
6.2 Manufacturing processes at Meindorf GMBH Germany 271
6.3 Manufacturing in small quantities at Toshiba Asia 276
End of chapter case: McDonald’s Global 290
7.1 Growth at Plastic Omnium Global 312
7.2 HSBC relocates call centre operations Global 314
7.3 Creating space on passenger jets – 322
7.4 Functions at a telecommunications company call centre – 331
7.5 Building communal learning spaces at various North American universities USA 336
End of chapter case: McDonald’s and McCafé New Zealand 350

8.1 Increasing restaurant capacity – 373

8.2 Dell’s customer support USA 374
8.3 Walmart uses scale to compete in the US food market USA 386
8.4 Flexible working at BMW Europe 395
8.5 A job to suit the business and your lifestyle UK 396
End of chapter case: Minkies Deli UK 404
9.1 IT systems changes at Dell UK 437
9.2 JIT system developments at Nissan Global 439
End of chapter case: Ash Electrics UK 455

xvi
 Service Product Location
10.1 Some examples of inventory decisions – 482
10.2 Using causal analysis to reduce inventory levels – 492
End of chapter case: Dell Global 500
11.1 The importance of managing quality UK 514
11.2 Changing the quality offering Global 515
11.3 Regaining consumer confidence at Coca-Cola and Perrier Global 526
11.4 On-time passenger flights: improving quality USA 527
11.5 Nashua: need to have the right tools to do the job USA 530
11.6 3M: Committing to quality improvement Global 545
End of chapter case: The Ipswich Hospital NHS Trust UK 559
12.1 Capital One and Delta: strategic outsourcing decisions USA 575
12.2 Fender International: creating a positive retail experience Global 580
12.3 Land Rover: single sourcing policy UK 582
12.4 Rawlins Industries: the dominance of the cost argument USA 590
12.5 Chiquita: relocates from Cincinnati to Costa Rica Central America 592
12.6 Fedex and Kinko join forces to increase delivery speed Global 594
12.7 Apple’s iTunes: digital supply chain Global 597
12.8 Reinhold Messner: the direct alpine approach to mountain climbing Italy 603
12.9 Japanese companies: approach to suppliers Asia 605
12.10 IT developments at Caterpillar and Gap USA 611
12.11 Dell: supply chain integration Global 614
12.12 Strategic partnership developments at Volkswagen, Mercedes-Benz and Skoda Global 616
12.13 Calyx and Corolla: synchronising the supply chain USA 618
End of chapter case: Zara Global 631

14.1 Improving processes: Ritz-Carlton, Steinway & Sons and Massachusetts Global 683
General Hospital
14.2 Breakthrough vs incremental improvement: Sheffield Council, gold mining, Global 696
Metro and McDonald’s
14.3 Continuously improving operations: Porsche Germany 698
14.4 Continuously driving improvement: Microsoft, Volvo and Ricoh Global 699
14.5 Ford Motors: benchmarking its ‘accounts payable’ department against Mazda Global 701
14.6 IDEO: rules for brainstorming improvement ideas USA 708
14.7 Reengineering business processes: Mutual Benefit, Taco Bell, Global 710
JetBlue and Western Provident Association
14.8 Closed vs open innovation: Apple vs Google Global 713
14.9 Unipart UK 715
14.10 Apple’s iPod: using suppliers to reduce lead-times Global 717
14.11 Using suppliers to develop new products and services: TED and Apple’s App Store Global 718
14.12 Using customers to improve operations: Wikipedia, Threadless and Starbucks Global 719
End of chapter case: Harley-Davidson Global 727
15.1 Herman Miller: changing production processes and working with USA 748
suppliers to become sustainable
15.2 Apple estimates the complete environmental footprint of its products Global 749
15.3 Veja: building a social and environmental supply chain France 751
15.4 Social initiatives: Pfizer and Ernst & Young Global 752
15.5 Reduced inefficiencies from environmental initiatives: Walmart and UPS Global 755
15.6 Unilever: increased market access through social initiatives Global 756
End of chapter case: IBM Corporate Service Corps Global 765

Operations Management Case studies xvii

 About the authors

ALEX HILL is a Principal Lecturer at the University of Kingston

(UK), an Associate Fellow at the University of Oxford (UK), a
Visiting Professor at the University of Pretoria (South Africa)
and a Visiting Professor at the University of Bordeaux (France).
Prior to moving into university education, he worked extensively
in industry and now researches and consults in a wide range of
service and manufacturing organizations.

TERRY HILL is an Emeritus Fellow at the University of Oxford,

(UK), an Affiliate Professor at the Milan Polytechnic (Italy) and at
the Ohio State University (USA), and a Visiting Professor at the
University of Pretoria (South Africa). He is a leading international
figure in the field of operations management and operations
strategy. Terry spent several years in operations management
and continues to work as a consultant. He has held previous
professorial appointments at London Business School (UK),
and the University of Bath (UK).

xviii
Preface
The competitive nature of markets over the last 20 years has re-emphasized the key role
of operations in bringing about the growth and profitability of organizations. Providing
services and products fast, on-time, right first time and at a price that matches or betters
competitors’ are increasingly important factors in most markets. How well operations
is managed to bring these about is a key corporate issue. However, not only does
operations contribute much that enables a company to compete effectively, but it is also
responsible for 60–70 per cent of costs, assets and people. The task of controlling costs
and assets and the continuing need to reduce costs and release cash are equally critical
and essential contributions to the welfare of an organization. Furthermore, the need to
effectively manage and develop people adds yet more substance to the role of managing
the operations function. From a historical bias towards techniques and systems, the
emphasis of what is key in operations has swung to one that stresses and highlights the
effective management of this large business function. This book is designed to contribute
to this on-going focus. It is orientated towards a managerial perspective of operations and
is set within the context of the function’s significant contribution to the overall success of
an organization. Operations has now rightly and appropriately returned to the top of the
corporate agenda and this text has been designed to serve the needs of those who intend
to take on the operations management role and also those whose roles will relate to this
function in a range of businesses. In particular it can be used by:

• Postgraduate, MBA or Executive students, with explanations and further application

through class discussion and the use of appropriate case studies.

• Managers who can apply the knowledge, concepts and ideas to their own business
to increase their understanding of how to improve operations’ contribution to an
organization’s overall performance.

Why choose this book?

This 3rd edition is a comprehensive and accessible guide to operations management.
Here are just a few reasons why you should choose this book:

• It has been researched and written by a highly respected author team. Alex and Terry Hill
both worked in operations management for a decade or more before switching careers
and this experience and their continued research and consultancy within the field is the
basis for the book’s orientation towards the task of managing the operations function
and the source of the numerous case studies that provide illustrations and teaching
material throughout.

• The content is supported by a comprehensive pedagogy, and a modern and dynamic

page design to draw in the reader.

• It reflects the mix of the service and manufacturing sectors that typify more developed
economies.

• It contains excellent coverage of operations strategy – a key area that students find
difficult to grasp.

• It is fully up-to-date both in terms of its content, data illustrations and case study material.

• It has an excellent supporting companion website which includes bonus chapters and
cases for students and a comprehensive manual for lecturers which contains teaching
notes for all the cases in the book, PowerPoint slides and much more. Visit www.
palgrave.com/business/hillom3e

Alex Hill and Terry Hill

Operations Management Preface xix
 How to use each chapter
Learning objectives
• Show what you should have learned by the time you reach the end of the chapter
• Are linked to a central topic or issue in operations management

Chapter outline
• Highlights the key topics discussed in the chapter

Executive overview
Explains:
• How the ideas and concepts discussed in the chapter impact a business
• Why it is important to understand these ideas and concepts
• How these ideas can be used to improve business performance
• The key issues to consider when applying these ideas in practice

Introduction Key terms used

within the chapter are
Sets the scene for the chapter and explains the key topics that will be covered. explained in speech
bubbles placed in the
page margin.
Text within the chapter
Explains the key ideas and concepts discussed within the chapter.

> EXECUTIVE INSIGHT

Highlights the key ideas and concepts being discussed and the issues to consider when
applying them in practice.

Figures
Show data or concepts in a tabular or graphic format to provide a deeper illustration
of the issues being discussed.

CASES
Illustrate current business practices and
show how the ideas and concepts dis-
cussed in the chapter can be applied in
practice. Questions at the end of each case
encourage critical reflection and web links
are provided for further investigation.

Example answers to these questions can

be found at www.palgrave.com/business/
hillom3e

xx
In practice
• Highlights the key issues to consider when applying the ideas and concepts
to an organization

Driving business performance

Looks at how the ideas and concepts discussed within the chapter can be used to improve
business performance by:

• Releasing cash
• Improving market support, and/or
• Reducing costs

Critical reflections
Discuss the issues addressed in the chapter and encourage critical evaluation and
reflection on the key topics that have been discussed.

Summary
• Summarises the key points from the chapter as bullet points

Exploring further
Provides TED talks, journal articles, books, films and websites that allow you to
explore further the ideas and concepts discussed within the chapter.

Study activities
Outlines discussion questions, assignments and groups exercises that can be used to
debate and apply the chapter content.

END OF CHAPTER CASES

As well as the smaller cases within the
chapter, there is also a longer case at the
end of each chapter. This can be used for
a tutorial, study group or class discussion
based on the aspects covered within the
chapter.

Extensive teaching notes for each

of these cases can be obtained from
www.palgrave.com/business/hillom3e

Operations Management How to use each chapter xxi

 Publisher’s acknowledgements
The authors and publishers are grateful to the following for permission to reproduce copyright
material:

The American Marketing Association for Figure 11.17, ‘The gap model for understanding the
difference between customer expectations and perceptions’, adapted from Parasuraman, A. et
al (1985) ‘A conceptual model of service quality and implications for future research’, Journal
of Marketing, 49 (Fall 1985), pp. 41–50.

The Baldrige National Quality Programme for permission to reproduce Figure 11.24.

Barclays Bank PLC for permission to reproduce the image used in Case 5.5.

The Benetton Group for permission to reproduce the image of the Regent Street Benetton
Store (Oxford Circus) in Case 2.3.

Canon (UK) Ltd. for permission to reproduce the image of a Canon camera used in Case 12.9.

The Central Intelligence Agency for Figure 1.6, ‘Percentage of GDP by sector for selected
countries, 2001 and 2008’.

The Co-operative Financial Services for Figure 15.2, ‘Percent of UK adults who undertake
the following ethical behaviours at least once a year’; Figure 15.3, ‘Ethical spending by the
average UK household in 2009 compared with 1999’; and Figure 15.4, ‘UK ethical consumerism
(1999–2009)’ from the Co-operative Ethical Consumerism Report 2009.

The EFQM for Figure 11.25, ‘EFQM Excellence Model criteria and weights’ © EFQM 2009.

Elsevier for permission to reprint Figures 12.4, 12.5 and 12.6 from R.H. Lowson, ‘Offshore
sourcing: and optimal operational strategy?’, Business Horizons (Nov–-Dec 2001), pp. 61–6.

Honda Manufacturing for permission to use the images in Figure 6.8.

Lloyds TSB for permission to use the image in Figure 5.12, from 2000.

Pearson Education Limited for Figure 11.17, ‘The gap model for understanding the difference
between customer expectations and perceptions’, from Slack, N., Chambers, S. and Johnston,
R. (2010) Operations Management, 6th edn), Essex. [Adapted from Parasuraman, A. et al. (1985)
‘A conceptual model of service quality and implications for future research’. Reproduced by
permission of the American Marketing Association.]

Upper Crust for permission to use the image in Figure 5.13.

The authors and publishers are also very grateful to the following for permission to use
photographs in the book: Aldi, Asahi Breweries Inc., BMW Group, British Airways Plc., Dyson
Ltd., Ernst & Young, Fotolia, Google, Herman Miller, HSBC and First Direct, Inditex, iStockphoto,
Nissan Motor Ltd., Pret A Manger Ltd., Porsche Cars Ltd., Sainsbury’s Supermarkets Ltd., TED
Conferences, Threadless, Toyota, Veja, and Volvo Group. Special thanks are due to Jonathan
Harris for permitting us to use a selection of his photographs in the short and long cases
throughout the book.

Every effort has been made to trace all copyright holders, but if any have been inadvertently
overlooked, the publishers would be pleased to make the necessary arrangements at the first
opportunity.

The authors and publishers are particularly grateful to Judith Wilding at Delicious Industries
for creating the page design for this textbook and typesetting the figures.

xxii
Managing Operations
1
 Learning objectives

After completing this chapter, you should be able to:

• Explain the role of operations management in an organization and

appreciate the dimensions that make up the operations task

• Be aware of the features that distinguish operations management in

the service and manufacturing sectors

• Identify where the operations function fits into an organization

• Illustrate the crucial role of operations management in an

organization’s success

Chapter outline
Executive overview
Introduction
Managing operations: an overview of the role
Origins of the name ‘operations management’
The nature of organizations
The operations manager’s task
The operations manager within an organization
The mix of sectors in different economies
The purchase – a mix of services and products
Size of the operations task

The role of the operations manager

Managing a large cost centre
Managing the short and long term
Managing the strategic contribution
Managing technology
Coordinating the whole
Using the common denominators of time and money
Managing the process through people
Linking the thinking and doing ends of a business
Managing complexity

Services versus manufacturing

Nature of the service/product
Organizational arrangements
Competitive environment

Managing operations in practice

Driving business performance
Critical reflections
Summary

2
-Executive overview

Why is managing operations important?

• Organizations, whether commercial, public sector or non-profit making in nature,
deliver services or make products that are purchased or provided for their users or
customers. Operations completes these tasks

• Operations is central to an organization’s activities in that it takes the inputs (such as

people, data, materials and energy) and transforms them into the required outputs
(such as services, products and information)

• Operations constitutes the essence of why an organization exists. How well this
provisioning task is completed will directly impact customers’ perceptions of
an organization in terms of its reputation (and hence customers’ willingness to
recommend it to others) and repeat sales

How does operations impact on a business?

• The characteristic size of operations in terms of the assets used, cost budgets involved
and people managed typically accounts for 60–70 per cent of the total

• Get it wrong and the economic wealth and welfare of the enterprise suffers

What are the key issues to consider in operations management?

• The strategic role of operations both in securing new and retaining existing customers
is central to sustaining and growing the success of an organization

• Traditionally, operations executives have failed to appreciate this essential contri-

bution and, as a consequence, have neither fully recognized nor fully fulfilled this key
strategic role

• Given the size of its spend both in terms of cost budgets and asset investments, how
well operations manages the conversion process of inputs into services or products,
while meeting the increasingly competitive demands of today’s markets, underpins
the financial success of an organization

• The provision and delivery of services and products is made possible through the
efforts and skills of the people within operations

• Harnessing and developing these key resources is a prerequisite for the continued
and growing success of any organization

How does operations impact business performance?

• Retaining and growing market share owes much to the effective arrangement of the
operations function

• Failings to meet customers’ needs will, in the long-term, result in a loss of business

• The size of operations’ budgets and investments underpins the day-to-day cost
structures that have such a large and inherent impact on an organization’s financial
prosperity

Operations Management Managing Operations 3

 Introduction
Let’s first of all summarize what the operations management
task comprises as this will give you an overall view of what is
Operations
involved and what is covered by this book: management –
the activities,
1. Companies sell services and goods to customers. To do this they purchase the inputs responsibilities and
they need such as materials, services and energy. They then process these inputs decisions that make
through the skills of their people, the equipment/processes and systems/procedures up the task of
managing of the
into the required outputs (services and products) to be sold in their markets. How
process of
complicated the ‘processing’ phase is will vary. For example: transforming inputs
• A retailer purchases products, unpacks and displays them and processes their such as materials,
subsequent resale people, energy and
information into
• A hospital processes patients (its customers): the healthcare provided can range services and
from relatively simple checks and procedures to complicated surgery necessitating products.
lengthy aftercare
Services – intangible
• A restaurant buys in food and prepares this into a range of menus but buys in soft items (i.e. you cannot
drinks, bottled water and wine, stores them and then serves them with relatively little touch them) that are
additional processing consumed at the time
of provision.
• A garment manufacturer buys in a range of materials in terms of material types and
colours, cotton threads, trims, buttons, zips and other accessories. The materials Inputs – the
are then cut to meet different styles and sizes and sewn together, with relevant trim, materials, staff,
buttons, zips and other accessories added during the operations process. After energy and other
‘ingredients’
pressing and final inspection the finished garments are packed and despatched to necessary to provide
different retail outlets. a service or make a
product.
2. The operations function concerns managing the inputs into the system (often referred
to as the ‘external phase of the supply chain’) and also the systems and processes Outputs – the
services or products
used for converting these into the outputs (services and products) sold to customers. produced by a
delivery system
3. Operations is responsible for efficiently managing these tasks and seeking ways to make or manufacturing
improvements throughout, in order to better meet the objectives and targets set by the process.
business itself and the needs of its customers.
Products (also
4. Underpinning these activities is the key task of managing the people within the known as goods) –
operations function in such a way that meets agreed schedules, productivity levels and tangible items
(i.e. you can touch
other business targets, while helping develop them in terms of broadening their skills them) purchased
base and facilitating personal development opportunities. by individuals or
organizations for
subsequent use.
This book addresses the various aspects of these tasks and discusses and reviews the
range of topics involved and the alternative approaches that may be followed under each Operations function –
heading. the function in an
organization that is
responsible for
the resources
Managing operations: an overview of the role necessary to deliver
services and/or make
The contribution and value-adding role of operations management is at the heart of most products.
organizations. Whether it is a pair of jeans, midday snack, live concert, haircut, a loaf of
bread or hospital check-up, operations is central to its provision. To successfully manage
operations within a business concerns two distinct but complementary aspects which, in Capacity – comprises
turn, comprise a further two dimensions: the staff, equipment
and/processes that
make up the value-
1. Content – what an operations manager does in terms of the tasks and responsibilities
adding activities to
involved: meet a certain level
• The internal day-to-day or operational role that involves managing the set of tasks of demand in a given
and responsibilities within operations necessary to provide the services or products period of time.

to be sold, for example, managing capacity and controlling costs

4
 • The external or strategic role that concerns meeting the order-winners and
qualifiers within a company’s markets for which operations is responsible, for
Order-winners – example, providing a service right first time and delivering a service on time.
features of a service
or product that
2. Style – how an operations manager handles the people management task:
contribute directly to • The internal role concerns managing the people within the operations function
it being chosen over itself and also the people interface between operations and other functions within an
other competitors
organization, so as to meet people’s own personal needs, the needs of the operations
(who also meet the
minimum customer functions and also those of the overall business
requirements). • The external role involves managing the people interface outside the organization at
both the supplier and customer end of the supply chain.
Qualifiers – features
of a service or
product that mean Case 1.1 concerns a sandwich and coffee bar within London’s finance centre and
a customer will illustrates the characteristics of the operations management role.
shortlist it for
purchase. They do
not in themselves win > EXECUTIVE INSIGHT
orders but provide or Day-to-day aspects of the operations role include managing within budgets, scheduling,
create the opportunity
to compete against
serving customers, meeting output targets, and communicating and liaising with
other service/product other functions in your organization.
providers.
As you will see from Case 1.1, the breadth of the tasks and range of management skills
involved make the operations management area a demanding and, at the same time,
fascinating role. It links strategy to action, requires coordination across functions and
involves managing the largest part of an organization. To accomplish this, operations
manages most of the assets, costs and resources necessary to produce the services
and goods sold to consumers or other organizations. On the strategy dimension, the
operations role is especially fulfilling as it supports many of the attributes that help sell
the services and products involved, for example being on time, meeting the service or
product specifications, fast delivery and low price.

The operations role is best described as exciting, rich in issues, full of challenges, central
to the process of a business and about managing through and with people. The day-to-day
role is full of interest and variety, while its strategic contribution is central to maintaining
and growing sales and profits.

> EXECUTIVE INSIGHT

Strategic aspects of the operations role involve providing those order-winners and
qualifiers for which it is solely or jointly responsible in an effective manner in order to
make the company competitive.

Origins of the name ‘operations management’

The term ‘production management’ was predominantly used in the past with the early
emergence of the manufacturing sector in a country’s economy. Indeed, in many
companies this title is still appropriately in use. However, the enlargement of the role
to include responsibility for other tasks in the supply chain, such as purchasing and
despatch, led to a change in title to that of ‘operations management’. Furthermore,
the growth of the service sector in industrially developed countries has reinforced this
change to ‘operations management’ as a more appropriate, general title. The title of this
book, therefore, reflects both this shift and the dual emphasis of the operations task in
the service and manufacturing sectors.

The nature of organizations

To provide a service or product requires certain tasks to be completed. Essentially, they
include design, buying materials and/or services from others, creating the services and

Operations Management Managing Operations 5

 CASE 1.1 OPERATIONS MANAGEMENT TASKS AT PORTIOLI SANDWICH
AND COFFEE BAR

PHOTO

Opening at 7am to catch the early break- line with waiting time targets while staff
fast and coffee demands of nearby office costs are kept to a minimum.
staff, Portioli remains open throughout the
day until 5.30pm when customer demand SUPPLY CHAIN AND INVENTORY
falls away. MANAGEMENT
Demand forecasts would also be used to
CAPACITY MANAGEMENT manage the supply of beverages and food Customer lead time
One of the core operations tasks is to while taking into account existing inven- – the length of time a
meet the demands of customers in terms tory. This role would include ensuring that customer expects or
is prepared to wait for
of, for example, providing the full range product specifications (for example taste, a service or product
of products on offer, meeting the product freshness and look of the different foods) from the point of
specifications (for example the taste and were met by suppliers and maintained making an order.
freshness of the sandwiches and coffee) within the operations function by appro-
and matching customer lead time expect- priate storage and refrigeration provision.
ations. Using past experience to forecast To this end daily deliveries of a range of
demand in terms of the hour of the day, the breads, pastries, food ingredients and
day of the week and the week of the year salads are scheduled before 7am while
will provide data in terms of the number other food and beverages (such as but-
of customers and the types and quan- ter, coffee, tea and some sandwich fill-
tities of food and beverages involved. With ings) are held in stock, with deliveries
these insights, operations can determine arranged
Lecturers:once, twice or sometimes sever-
visit www.palgrave.com/business/
staff levels at different times of the day and al times a week. Working
hillom3e for teaching with suppliers
guidelines for this to
week to ensure that queue lengths are in guarantee
case study that ingredients meet agreed

6
 © elena moiseeva

specifications and that deliveries are on THE MARKET

time are key features of all outlets in the Demand has increased year on year over
Portioli Group. the past decade. The competitive criteria
that are considered as key features in Por-
SCHEDULING, DELIVERY SYSTEMS tioli’s sales growth include the quality and
AND MANAGING QUALITY freshness of the food and beverages sold,
Other aspects that directly affect the the range of products on sale, short wait-
smooth running of the delivery system ing times, prices that are in line with near-
include layout, procedures and the move- by competitors and a no-quibble refund
ment of staff from the part of the service should customers feel dissatisfied. The
delivery system in which customers are outlet itself is well positioned in relation to
served (known as the ‘front office’to those underground and bus services and, while
parts of the delivery system that do not in- some seating is available, most customers
Front office – the terface with the customer (known as the prefer the takeaway service on offer.
area of a service
delivery system in ‘back office’), where activities such as the
which contact with advance preparation of sandwich fillings Questions
customers normally take place.
takes place.
As food preparation starts at 6am and Review Portioli’s sandwich and coffee bar
Back office – the area staff typically work an eight-hour day, and identify, using the chapter outline at
of a service delivery scheduling appropriate levels of staff in the beginning of this chapter:
system in which there terms of the mix of skills needed is a key • How the operations process works
is normally no contact
with customers. operations task, especially given the need • Which chapter topics in the book are re-
for occasional overtime working to cover flected in the details provided.
for holidays and absence. Scheduling staff
to ensure that the necessary skills are Lecturers: visit www.palgrave.com/business/
available is an integral part of managing hillom3e for teaching guidelines for this
food and service quality levels at all times. case study
Operations Management Managing Operations 7
 products to meet the needs of customers (for example by adding to them in some way,
providing specialist diagnostic services, changing the shape of materials, assembling
parts, giving advice, processing information or requests, arranging services or selling a
product to customers), selling them and accounting for the cash or credit transactions
involved. When an organization is small, several of these tasks are typically completed
by one person. As a business grows, sets of tasks are separated off into departments
or functions and managed by different people. While the tasks remain the same (albeit
larger and more complex), the organizational structure to manage and provide them has
altered.

> EXECUTIVE INSIGHT

Operations’ task is to provide the services and make the products sold to customers.

To cope with the complexity that comes with size, organizations separate the tasks
involved in managing the business into functions and these ‘parts’ of a business are
then responsible for managing a range of tasks. Operations is one such function and, as
explained earlier, its prime role is to provide the services or produce the products that are
then sold to customers. Similarly, a sales and marketing function would be responsible
for selling to and working with customers, while the accounting and finance function
sends out the invoices for the services and goods sold and collects payment. In addition,
these executive, or ‘line functions’ as they are called, will be supported by specialist
departments (for example, IT) that provide advice and expertise within a given field to help
better manage these executive functions and the organization overall (see Figure 1.1).
As the function responsible for providing the services and products sold to customers,
operations plays a key role in any organization, no matter what its size.

Figure 1.1 Some typical functions within a business

Task Function responsible Type of function
• Generating new service and product ideas Services Sales and marketing
• Designing and developing new services Research and
and products Products
development
• Promoting services and products
Sales and marketing
• Selling services and products
• Contracting with suppliers and managing
the resulting external phase of the supply Executive/line
chain Operations
• Delivering the services and making the
products sold to customers
• Sending out invoices
• Collecting payment Accounting and finance
• Preparing financial statements
• Introducing new systems
• Developing existing systems Information technology
• Supporting the IT infrastructure Specialist support
• Recruiting staff
Human resources
• Employee relations

The operations manager’s task

The operations function is that part of an organization responsible for providing the
services or producing the goods that a company sells in its markets. Some organizations

8
 provide services such as medical care, the processing of information and requests,
banking facilities and retail sales, while others produce physical items such as furniture,
building materials and stationery.

The operations task, however, is common to all the diverse range of services and goods that
make up a national economy. It concerns the transformation process that involves taking
inputs and converting them into outputs, together with the various support functions
closely associated with this basic task. Figure 1.2 provides a simplified overview of what
is involved while Figure 1.3 gives examples from both the service and manufacturing
sectors. The level of complexity within the operations function will vary depending upon
several factors, including:
• The size of an organization and associated service/product volumes
• The nature of the services and products provided
Customer surrogates • The technology levels embodied in both the services/products involved and the
– when what is processes used within the operations function
processed represents
the customer – for • The extent to which the services and products are made in-house.
example, where
clothes are being
cleaned the clothes A final factor that impacts the design and management of the operations process or
represent the delivery system is the nature of what is processed. As Figure 1.4 illustrates, the presence
customer within
the service delivery
of the customer in the system will impact its design and the operations management
system. task involved, as explained more fully in Chapter 5. The examples given in Figure 1.4
have been chosen to illustrate these differences whereas often what constitutes the
offering is a mix of these. For example, car servicing will comprise interfacing with the
customer as well as processing the automobile (the customer surrogate) and invoice
preparation and payment. Purchasing furniture will involve customer advice and the
paperwork involved in the invoicing and guarantee phases of the purchase as well as
the product itself.

To sustain or improve corporate prosperity it is essential to achieve the level of

effectiveness required to compete successfully in chosen markets. To do this, it is
necessary for those activities responsible for the provision of services or goods to be
well managed. These tasks are, therefore, critical to the success of an organization.
Operations managers oversee these tasks. They control the inputs and processes that
together provide the services or produce the goods that a business sells. But, as with
other functional executives, operations managers have a strategic, as well as operational,
dimension to their responsibilities. They have to develop a functional strategy as part of
the corporate debate that identifies and agrees the strategic direction an organization
should follow.

It is, therefore, the development and control of both these activities that constitute the
role of the operations manager.

The operations manager within an organization

The operations manager is usually responsible for a whole range of tasks within
an organization. These tasks will differ depending upon whether it is a service or
manufacturing business, and the nature of the items provided. Figure 1.5 provides
examples of typical core tasks within operations which are central to the provision of the
service or product involved. In addition, and reporting into the operations function, will be
a number of support departments, as shown for each example. Finally, there will also be
a number of specialist functions that provide advice and expertise but report to elsewhere
in the organization.

Operations Management Managing Operations 9

 Figure 1.2 Overview of operations process – transforming inputs into outputs

ENVIRONMENT, NATIONAL/WORLD ECONOMY

INPUTS

People
Materials
Energy
OPERATIONS
Capital
Data

RESOURCES

PERFORMANCE MEASUREMENT

10
AND GOVERNMENT REGULATIONS

OUTPUTS

Services
Products
PROCESS
Information

SERVICES/
PRODUCTS

AND CONTROL

11
 Figure 1.3 An overview of the service and manufacturing sectors
Sector Organization Inputs Operations process Outputs
Airports Passenger reservations Customers booked on appropriate
Booking systems Flight schedules flights in terms of timing and
Aircraft Check-in convenience
Aircrews Aircraft and equipment Customers progressed through
Air passenger Ground staff maintenance the pre-boarding phase of the
transport Fuel Aircraft cleaning and provisioning service delivery system
Food Meals and crew scheduling Customers transported safely and
Boarding procedures on time to chosen destinations
In-flight procedures
Baggage claim
Buildings Updating records Information to internal and/or
Computing Printing external customers using agreed
Services
equipment Enveloping distribution alternatives and in
Computing
Stationery Distribution line with agreed schedules
centre
Toner
Energy
People
Buildings Table setting Food, wine and other drinks
Equipment Order taking provided in line with customers’
– kitchen and Food preparation and cooking selection and preferred timings
Restaurant restaurant Table waiting Aim is repeat visits from satisfied
Food Drinks provision customers
Energy Dishwashing
People General cleaning
Buildings Mixing Range of packed bakery items
Equipment Baking delivered to warehouses and
Food ingredients Packaging retail outlets that are fresh and in
Bakery
Packaging Equipment line with consumer shopping
Energy maintenance patterns
People Distribution
Range of cloths Cutting Range of garments
and threads Garment making Distribution to warehouses and
Accessories (for Packaging retail outlets to meet seasonal
example buttons Equipment demand patterns
Garments and ribbons) maintenance
Manufacturing
Buildings Warehousing
Equipment Distribution
Energy
People
Buildings Cylinder and plate preparation Packaging to meet customer
Equipment Equipment specifications
Paper and film maintenance Distribution to customers’
Packaging Inks Printing manufacturing plants in line with
Energy Slitting agreed schedules
People Packing
Distribution

Notes: 1. In services, customers (or their requests/enquiries), customer surrogates (a car being serviced in a garage is a
customer surrogate) and/or information are processed.
Notes: 2. In manufacturing, products are processed.
Note:s 3. As you will see later, customers may provide capacity as part of the ‘inputs’, for example in fast-food restaurants.

12
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