Operations Management Processes

and Supply Chains

Eleventh Edition

Chapter 1
Using Operations
to Create Value

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
What is Operations Management?
• Operations Management
– The systematic design, direction, and control of
processes that transform inputs into services and
products for internal, as well as external,
customers
• 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
Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Role of Operations in an Organization
Figure 1.1 Integration between Different Functional Areas of a Business

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
How Processes Work (1 of 2)
Figure 1.2 Processes and Operations

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
How Processes Work (2 of 2)
• Every process and every person in the organization
has customers
– External customers
– Internal customers
• Every process and every person in the organization
relies on suppliers
– External suppliers
– Internal suppliers

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Service and Manufacturing Processes
Differ Across Nature of Output and Degree of Customer Contact
Figure 1.3 Continuum of Characteristics of Manufacturing and Service Processes

• Physical, durable output • Intangible, perishable output

• Output can be inventoried • Output cannot be inventoried
• Low customer contact • High customer contact
• Long response time • Short response time
• Capital intensive • Labor intensive
• Quality easily measured • Quality not easily measured
Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Corporate Strategy
• Corporate Strategy
– Provides an overall direction that serves as the
framework for carrying out all the organization’s
functions
 Environmental Scanning
 Core Competencies
 Core Processes
 Global Strategies

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Operations Strategy (1 of 3)
• Operations Strategy
– The means by which operations implements the firm’s
corporate strategy and helps to build a customer-driven
firm

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Operations Strategy (2 of 3)
Figure 1.5 Connection
Between Corporate Strategy
and Key Operations
Management Decisions

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Market Analysis
• Market Analysis
– Understand what the customers want and how
to provide it.
 Market Segmentation
 Needs Assessment

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Competitive Priorities and Capabilities
Competitive Priorities Competitive Capabilities
• The critical dimensions that a • The cost, quality, time, and
process or supply chain must flexibility dimensions that a
possess to satisfy its internal process or supply chain actually
or external customers, both possesses and is able to deliver.
now and in the future.

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Order Winners and Qualifiers
Order Winners Order Qualifiers
• A criterion customers use to • Minimum level required from
differentiate the services or a set of criteria for a firm to
products of one firm from do business in a particular
those of another. market segment.

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Order Winners and Qualifiers (1 of 3)
Table 1.3 Definitions, Process Considerations, and Examples
of Competitive Priorities
Cost Definition Process Considerations Example
1. Low-cost Delivering a service or Processes must be designed Costco
operations a product at the lowest and operated to make them
possible cost efficient
Quality blank Blank blank
2. Top quality Delivering an May require a high level of Rolex
outstanding service or customer contact and may
product require superior product
features
3. Consistent Producing services or Processes designed and McDonald’s
quality products that meet monitored to reduce errors
design specifications and prevent defects
on a consistent basis

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Order Winners and Qualifiers (2 of 3)
Table 1.3 [continued]

Cost Definition Process Considerations Example

Time Blank Blank Blank
4. Delivery Quickly filling a Design processes to reduce Netflix
speed customer’s order lead time
5. On-time Meeting delivery-time Planning processes used to United
delivery promises increase percent of customer Parcel
orders shipped when Service
promised (UPS)
6. Development Quickly introducing a Cross-functional integration Zara
speed new service or a and involvement of critical
product external suppliers

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Order Winners and Qualifiers (3 of 3)
Table 1.3 [continued]

Cost Definition Process Considerations Example

Flexibility Blank Blank Blank
7. Customization Satisfying the unique Low volume, close Ritz Carlton
needs of each customer contact, and (luxury hotel)
customer by changing easily reconfigured
service or product
designs
8. Variety Handling a wide Capable of larger volumes Amazon.com
assortment of services than processes supporting
or products efficiently customization
9. Volume Accelerating or Processes must be The United
flexibility decelerating the rate of designed for excess States Postal
production of services capacity and excess Service (USPS)
or products quickly to inventory
handle large
fluctuations in demand

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Measuring Productivity

Output
Productivity 
Input

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Example 1.1 (1 of 2)
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.

Policies processed
Labor productivity 
Employee hours
600 policies

(3 employees)( 40 hours employee )
 5 policies hour

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Example 1.1 (2 of 2)
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.
Value of output
Multifactor productivity 
Labor cost + Materials cost + Overhead cost

(400 units)($10/unit) $4,000

   2.35
$400 + $1,000 + $300 $1,700

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Application 1.1
blank This Year Last Year Year Before Last
Factory unit sales 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,000
Sales of manufactured $49,363 $40,831 —
products ($)
Total manufacturing $39,000 $33,000 —
cost of sales ($)

• Calculate the year-to-date labor productivity:

blank This Year Last Year Year Before Last
factory
factory unit
unit sales
sales 2,762,103 divided by
2,762,103 2,475,738 divided by
2,475,738 2,175,447 divided by
2,175,447
divided by equipment = 24.66
112,000 equals 24.66/hr
per = 21.91/hr
113,000 equals = $$18.91
21.91 per 115,000 equals 18.91/hr
employment 112,000
hour 113,000hour 115,000
per hour

• Calculate the multifactor productivity:

blank This Year Last Year
sales of mfg products
sales of manufacturing products $49,363
$49,363 divided by $40,831 divided by
$40,831
divided by total manufacturing
$39,000
= 1.27
equals 1.27 $33,000 = 1.24
equals 1.24
cost total mfg cost $39,000 $33,000
Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Solved Problem 1 (1 of 3)
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?

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Solved Problem 1 (2 of 3)
a. Multifactor productivity is the ratio of the value of output
to the value of input resources.
 $150 tuition + 
 
 50 student   3 credit hours   $100 state support 
Value of output =   
 class   student  credit hour 
 
 
= $37,500 class
Value of inputs = Labor + Materials + Overhead
= $4,000 + ( $20 student  50 students class ) + $25,000
= $30,000 class
Output $37,500 class
Multifactor productivity = = = 1.25
Input $30,000 class

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Solved Problem 1 (3 of 3)
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 $37,500/class, so

14 hours  16 weeks 

Labor hours of input =   
 week   class 
= 224 hours class
Output $37,500 class
Labor productivity = =
Input 224 hours class
= $167.41 hour

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Solved Problem 2 (1 of 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 Attire’s 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?

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.
Solved Problem 2 (2 of 2)
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

Copyright © 2016, 2013, 2010 Pearson Education, Inc. All Rights Reserved.