Operations Management:

Sequence of Topics
Operations Management: Processes and
Supply Chains
Thirteenth Edition

Chapter 1
Using Operations to
Create Value

Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved
Operations Management
The systematic design, direction, and control of processes that transform
inputs into services and products for internal, as well as external, customers

Questions to answer:
1. What are all three leaders trying to
A LITTLE
BACKGROUND accomplish?
O N O P E R AT I O N S 2. Why did the Rickshaw Bags leader say
M A N A G E M E N T AT
3 C O M PA N I E S you have to “know how it’s made”?
3. Why do they believe it is important to
study Operations Management?

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sWT7t3gi1CK-BizK6mL

Operations Management Video

HOW DO OPERATIONS AND SUPPLY CHAINS FIT INTO
THE OVERALL BUSINESS?

This chart depicts

the integration
between different
functional areas
of a business
(big 3 areas +
support areas)
 OPERATIONS AND SUPPLY CHAINS –
WHAT ARE THEY?

• Operations – Process or series of processes that transform

inputs into services and products for internal, as well as external,
customers

• Supply Chain - Synchronization of a firm’s processes with those

of its suppliers and customers to match the flow of materials,
services, and information with customer demand

Sometimes Operations is part of the Supply Chain, sometimes it is

not. It all depends on the company’s structure.
 WHAT IS THE SUPPLY CHAIN?

An interrelated series of processes within and across

firms that produces a service or product to the
satisfaction of customers

External Internal Customers

Process Process
Process
Process Process
Process
Process
Process Process
Process Process
Process
 THE SUPPLY CHAIN LINKS EXTERNAL PARTIES
WITH INTERNAL GROUPS

The synchronization
of a firm’s processes
with those of its
suppliers and
customers to match
the flow of
materials, services,
and information
with customer
demand
SIMPLE EXAMPLE OF A SUPPLY CHAIN
EXAMPLE OF SUPPLY CHAIN IN A RETAIL
BUYING PROCESS
 ANOTHER SUPPLY CHAIN
EXAMPLE WITH COMPLEXITY
EXAMPLE: MCDONALD’S SUPPLY CHAIN
EXAMPLE: NIKE SUPPLY CHAIN
 OPERATIONS ARE MADE UP OF PROCESSES

• Process
Any activity or group of Process
activities that takes one or Inputs Output
more inputs, transforms
them, and provides one or
more outputs for its
customers

• Operation
A group of resources Operation
performing all or part of
one or more processes
Operation
 EXAMPLES OF PROCESSES

Inputs Process Outputs

Cooking the meat,

Five Guys –
Buns, pickles, meat, assembling the entire Completed burger
making a
lettuce, etc. burger, and wrapping for a customer
hamburger
it

Manufacturing Parts from suppliers, Completed parts

Make the part and
– simplified customer order delivered to the
pack for shipping
process information customer
Claim itself, information
Evaluate payment to Payments and
Service – from doctor, agreements
medical facility and letter explaining
medical claim in place, year-to-date
individual what got paid
payouts, and on and on
 EXAMPLES OF OPERATIONS

Inputs Process Outputs Operations

Cooking the
Five Guys – meat, Completed Cooking meat or entire
Buns, pickles,
making a meat, lettuce, etc.
assembling the burger for a process could be
hamburger entire burger, customer considered one operation
and wrapping it
Completed
Manufacturing – Parts from Making and shipping the
Make the part parts
suppliers, entire part or just one
simplified customer order
and pack for delivered to
step of making the part
process shipping the
information could be one operation
customer
Claim itself,
Payments Evaluation of payment
information from Evaluate
and letter (there may be many
Service – doctor, agreements payment to
explaining operations within this,
medical claim in place, year-to- medical facility
what got too) or the entire process
date payouts, and and individual
paid could be one operation
on and on
 PROCESSES
EXAMPLES OF BUSINESS

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 https://simplicable.com/new/business-process-examples
CONTINUED DISCUSSION ON
EXAMPLES OF BUSINESS PROCESSES
PROCESSES ARE A KEY PART OF OPERATIONS.
REMEMBER THAT EVERYONE HAS A PROCESS –
AND IT CAN BE IMPROVED!
 SUPPLIERS AND CUSTOMERS CAN BE INTERNAL
OR EXTERNAL

• 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
 S O W H AT ?

WHY IS
THERE A
NEED FOR
INTERNAL
C U S TO ME RS
AND
SUPPLIERS?
 WHAT’S DIFFERENT ABOUT SERVICE AND
MANUFACTURING PROCESSES?

1. Nature of Output
2. Degree of Customer Contact

More like manufacturing: More like a service:

• 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
KEY “PROCESSES” IN THE SUPPLY CHAIN

Each activity in a process should add value to the preceding activities; waste
and unnecessary cost should be eliminated!
(We discuss this in a future class).
 T H E S U P P LY CH A I N – S U P P L I E R R E L AT I O N S H I P
PROCESS
A process that selects the suppliers of services, materials, and
information and facilitates the timely and efficient flow of these
items into the firm.

Decisions have a big influence on cost, lead times, inventory levels,

quality, etc.
 T H E S U P P LY CH A I N – N E W S E RV I C E / P R O D U C T
D E V E L O P ME N T

A process that designs and develops new services or products from inputs
from external customer specifications or from the market.

Decisions are a big driver for cost, lead time, inventory, customer satisfaction,
etc.
T H E S U P P LY CH A I N – O R D E R F U L F I L L ME N T P R O C E S S

A process that includes the activities required to produce and deliver the
service or product to the external customer.

This includes the “operations” process of the business. Performance here

influences all aspects of the business.
 T H E S U P P LY CH A I N – C U S TO ME R R E L AT I O N S H I P
PROCESS
A process that identifies, attracts and builds relationships with
external customers and facilitates the placement of orders by
customers (customer relationship management).

This may include price, terms and conditions, payment terms, delivery
options, etc.
 T H E S U P P LY C H A I N – S U P P O RT P R O C E S S E S

Processes like Accounting, Finance, Human Resources, Management

Information Systems and Marketing that provide vital resources and inputs
to the core processes.

Like the others, these can help improve or disrupt the business.
W E H AV E ES TA BL I S H E D P R O CE S S E S , O P E R AT I O N S A N D A
S U P P LY CH A I N .
B U T W H AT D RI V E S H O W T H E Y S H O U L D P E RF O R M?

T H E O P ERAT IO N S S T R AT E G Y A N D RE L AT E D P L A N S MU S T
B E L I N KED TO T H E O V E R AL L C O RP O RAT E S T R AT E G Y TO
S U CCEE D FO R T H E L O N G - T E RM.

Operations Strategy
The means by which operations implements the firm’s
corporate strategy and helps to build a customer-driven
firm
O P E R AT I O N S S T RAT E G Y C O ME S F R O M T H I S P R O C E S S
 COMPETITIVE PRIORITIES AND CAPABILITIES

Competitive Priorities
The critical dimensions that
a process or supply chain
must possess to satisfy its
internal or external
customers, both now and in
the future.

Competitive Capabilities
The cost, quality, time, and
flexibility dimensions that a
process or supply chain
actually possesses and is
able to deliver.
EXAMPLE OF A BUSINESS
STRATEGY PROCESS
 Order Qualifiers Order Winners
Minimum level required from A criterion customers use to
a set of criteria for a firm to differentiate the services or
do business in a particular products of one firm from
market segment. those of another.
THIS IS
H O W TO
IDENTIFY
W H AT I T
TA K E S TO
SELL YOUR
P R O D U CT
OR
S E RV I CE.
 EXAMPLE OF ORDER QUALIFIERS AND ORDER
WINNERS
Which is an Order Qualifier, and
which is an Order Winner?

Used Car Cell Phone

Type (sedan, SUV, coupe, etc.) Brand (iPhone or non-iPhone?)

Make (Ford, Honda, Mazda, etc.) Size

Mileage (< 50,000, <75,000, Features

<100,000, etc.)
Carrier
Condition (exterior, interior, etc.)
Other
Other
 ORDER WINNERS OR QUALIFIERS?

Cost Definition Process Considerations Example

Low-cost Delivering a service or a Processes must be designed and Costco
operations product at the lowest possible operated to make them efficient
cost

Quality Definition Process Considerations Example

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

Time Definition Process Considerations Example

Delivery speed Quickly filling a customer’s Design processes to reduce lead Netflix
order time
On-time delivery Meeting delivery-time Planning processes used to increase United Parcel
promises percent of customer orders shipped Service (UPS)
when promised
Development Quickly introducing a new Process involve cross-functional Zara
speed service or a product integration and involvement of
critical external suppliers
 SUCCESSFUL IMPLEMENTATION OF A
STRATEGY OR PLAN DEPENDS ON
SUCCESSFUL DESIGN AND EXECUTION OF
PROCESSES.

ONE OF THE KEY ASPECTS OF

SUCCESSFUL EXECUTION IS HAVING THE
RIGHT PERFORMANCE METRICS
(MEASURES) OF THE PROCESS.
 I T I S CRU CI A L T H AT A MA N A G E R U N D E R S TA N D S
I N F O R MAT I O N O N T H E P RO C E S S , K N O W S W H AT I T ME A N S
A N D CA N U S E I T P R O P E RLY !

Types of information - Examples

• On-time delivery
• Schedule performance
• In full delivery
• Number of defects delivered
• Internal quality performance
• Productivity / Return on investment
• Cost

Warning! All of these measures can be

manipulated – intentionally and unintentionally.
Example of types of metrics used for manufacturers

in te n d e d conseque nces??
lone can c a u se u n
Which ones if used a
 E X A MP LE : P RO D U C T I O N P E R F O R MA N C E S C O RE C A R D

Area M T W Th F Sa Su
Area 1 Plan 300 300 300 300 300 300 300
Actual 275 290 301 302 301 289 303

Area 2 Plan 5500 5500 5500 5500 5500 0 0

Actual 4800 5600 5600 5600 5500 4000 2000

Area 3 Plan 150 120 150 135 200 150 100

Actual 145 119 140 130 190 175 106

Final
Assembly
Plan 8 8 7 9 12 0 0

Actual 12 12 10 10 12 0 0

Which area is doing the best? worst?

FIGURES DON’T LIE….BUT, LIARS FIGURE!
le
More examples of measures or metrics Schedu
nc e
Adhere

Key
- es
On
e Mileston
Tim ry Productiv
e l ive it y
d

Quality
Inv
en
Lev tory
els
Cy
cl e
Tim Cost
e

t Safety
Firs gh
h r ou
T lds
Y i e
 S O W H AT ?

WHY IS IT
I MP O RTA N T TO
H AV E T H E
RIGHT
P E RF O RMA N CE
ME A S U RE S ?
O N E O F T H E MO S T U S E D ME T R I C S I S “ P R O D U CT I V I T Y ”

Productivity – Comparing results of the process (Output) to

effort to get he results (Input)

Output
Productivity 
Input

Productivity is similar to Return on Investment (ROI) metric –

How much are we getting for what we’ve “invested” into the
process?

It also helps us “normalize” performance. Many times, it’s

more meaningful to compare a ratio than using raw numbers.
Example of companies that focus on productivity measures.
 E X A MP LE 1 .1 – CA L C U L AT I N G L A B O R P R O D U C T I V I T Y

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.
 E X A MP LE 1 .1 – C A L C U L AT I N G MU LT I FA C TO R
PRODUCTIVITY

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.
 MO RE E X A MP L E S O F L A B O R A N D MU LT I FA C TO R
PRODUCTIVITY
This Year Last Year Year Before Last
Factory unit sales (qty) 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 $33,000 —
cost of sales ($)

1. Calculate the year-to-date labor productivity:

This Year Last Year Year Before Last

factory unit sales 2,762,103 2,475,738 2,175,447

= 24.66/hr = 21.91/hr = 𝟏𝟖. 𝟗𝟏/ 𝐡𝐫
employment 112,000 113,000 115,000

2. Calculate the multifactor productivity:

This Year Last Year

sales of mfg products $49,363 $40,831

= 1.27 = 1.24
total mfg cost $39,000 $33,000
 CLASS DISCUSSION!

HOW WOULD YOU CALCULATE THE TARGETS

FOR LABOR, MATERIAL, OR OVERHEAD IF
YOU WANT TO IMPROVE PRODUCTIVITY BY
10%?
 CH. 1 – PRACTICE PROBLEM 1

1. Given a Multifactor productivity of:

Where, Labor = $400 Material = $1000 Overhead = $300
a. Your boss comes to you and said she agreed to improve overall multifactor
productivity by 10%. You know that means you have to do this. Calculate how
much would total costs have to be reduced to improve by the 10% commitment?

b. Your friends working in the corporate office cannot reduce any of the Overhead
charges. Your other friends in the supply chain cannot reduce the Material costs.
So, if all of the improvements were in Labor costs, what is the new Labor cost?

c. The reduction in Labor costs results in a percentage reduction in Labor costs of

______?

d. Well, it turns out the Supply Management team has stepped up and said they’d
take on 50% of the cost reduction. What’s the new Material cost?

e. That reduction in Material costs results in a percentage reduction in Material

costs of ______?
 CH. 1 – PRACTICE PROBLEM 1 ANSWERS

1. a.
• 2.35 current productivity X 1.10 (increase by 10%) = 2.585
• Solve for new cost = Divide $4000 by 2.585 = $1547.39
• Cost reduction: $1700 – $1547.39 = $152.61

2. b.
• New Labor costs is $400 – $152.61 = $247.39

3. c.
• Percentage reduction = $152.61 / $400 = 38.15%
• OR ($400 – $247.39) / $400 = 38.15%

4. d.
• 50% of cost reduction = $152.61 / 2 = $76.31

1. e. Percent Material cost reduction = $76.31 / $1000 = 7.63%

 CHAPTER 1 PRACTICE – PROBLEM 2

Student tuition at Acme 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?
 SOLUTIONS – PROBLEM 2-A

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
 SOLUTIONS – PROBLEM 2-B

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 per
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
 SO WHAT?
( W H AT W I L L T H I S M E A N TO Y O U ? )

1. Everything is a process, and all processes

can be measured

2. It’s all linked – decisions in one area can

and most probably will impact other areas

3. People work to their measures – we want to

win

4. Productivity – getting more for less

 Amazon Fulfillment Center

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