OPERATIONS MANAGEMENT Goods Services and Value Chains CHAPTER

OPERATIONS MANAGEMENT Goods, Services and Value Chains CHAPTER 1 Goods, Services, and Operations Management DAVID A. COLLIER AND JAMES R. EVANS Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 1

Chapter 1 Goods, Services & Operations Management • Operations management (OM) is the science and art of ensuring that goods and services are created and delivered successfully to customers. • The principles of OM help one to view a business enterprise as a total system, in which all activities are coordinated not only vertically throughout the organization, but also horizontally across multiple functions. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 2

Chapter 1 Learning Objectives 1. To understand the nature of typical OM activities in business, what operations managers do, and how everyone uses OM principles in their work, no matter what their functional job is. 2. To understand the nature of goods and services, their similarities and differences, the concept of a customer benefit package, and why they are important for managing operations. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 3

Chapter 1 Learning Objectives 3. To understand the concept of a process and value chain, and how they are used in operations to support the creation of goods and services. 4. To understand the role of quantitative methods in operations management and how models can be used to assist in making OM decisions. 5. To be able to identify the key themes that have evolved over the last half-century and understand their impact on goods, services, and operations. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 4

Chapter 1 Goods, Services & Operations Management OM Spotlight: Ferguson Metals • Ferguson Metals, located in Hamilton, Ohio, is a supplier of stainless steel and high temperature alloys for the specialty metal market. • Ferguson’s primary production operations include slitting coil stock and cutting sheet steel to customer specifications with rapid turnaround times from order to delivery (see Exhibit 1. 1). • Bob Vogel is the Vice President of Operations at Ferguson. He is involved in a variety of daily activities that draw upon knowledge of not only OM and engineering, but also finance, accounting, organizational behavior, and other subjects. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 5

Exhibit 1. 1 Operations Management at Ferguson Metals Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 6

Chapter 1 Goods, Services & Operations Management OM Spotlight: Ferguson Metals While understanding specialty metals is certainly a vital part of Mr. Vogel’s job, the ability to understand customer needs, apply approaches to continuous improvement, understand motivate people, work cross-functionally across the business, and integrate processes and technology within the value chain define Scott’s job as an operations manager. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 7

Chapter 1 Goods, Services & Operations Management Example of “What Operations Managers Do? ” • Brooke Wilson is a Process Manager for J. P. Morgan Chase in the Credit Card Division. Among his OM-related activities are • Planning and budgeting –representing the plastic card production area in all meetings, developing annual budgets and staffing plans, and watching technology that might affect the production of plastic credit cards. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 8

Chapter 1 Goods, Services & Operations Management Example of “What Operations Managers Do? ” • Inventory management – overseeing the management of inventory for items such as plastic blank cards, inserts such as advertisements, envelops, postage, and credit card rules and disclosure inserts. • Scheduling and capacity –daily to annual scheduling of all resources (equipment, people, inventory) necessary to issue new credit cards and reissue cards that are up for renewal, replace old or damaged cards, and one's that are stolen. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 9

Chapter 1 Goods, Services & Operations Management Example of “What Operations Managers Do? ” • Brooke Wilson is a Process Manager for J. P. Morgan Chase in the Credit Card Division. Among his OM-related activities are • Quality – embossing the card with accurate customer information and quickly getting the card in the hands of the customer. • Brooke was an accounting major in college. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 10

Chapter 1 Goods, Services & Operations Management Understanding Goods and Services • A good is a physical product that you can see, touch, or possibly consume. Examples of goods include: oranges, flowers, televisions, soap, airplanes, fish, furniture, coal, lumber, personal computers, paper, and industrial machines. • A durable good is a product that typically lasts at least three years. Vehicles, dishwashers, and furniture are some examples of durable goods. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 11

Chapter 1 Goods, Services & Operations Management Understanding Goods and Services • A non-durable good is perishable and generally lasts for less than three years. Examples are toothpaste, software, shoes, and fruit. • A service is any primary or complementary activity that does not directly produce a physical product. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 12

Chapter 1 Goods, Services & Operations Management Understanding Goods and Services • Service management integrates marketing, human resource, and operations functions to plan, create, and deliver goods and services, and their associated service encounters. • A service encounter is an interaction between the customer and the service provider. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 13

Chapter 1 Goods, Services & Operations Management Understanding Goods and Services A broader definition is • Service encounters consist of one or more moments of truth – any episodes, transactions, or experiences in which a customer comes into contact with any aspect of the delivery system, however remote, and thereby has an opportunity to form an impression. • Here, a service encounter includes the impression an empty parking lot has on whether the customer goes into a facility or the interaction with other customers such as while waiting in line. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 14

Chapter 1 Goods, Services & Operations Management Similarities Between Goods and Services 1. Goods and services provide value and satisfaction to customers who purchase and use them. 2. They both can be standardized or customized to individual wants and needs. 3. A process creates and delivers each good or service, and therefore, OM is a critical skill. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 15

Chapter 1 Goods, Services & Operations Management Differences Between Goods and Services 1. Goods are tangible while services are intangible. 2. Customers participate in many service processes, activities, and transactions. 3. The demand for services is more difficult to predict than the demand for goods. 4. Services cannot be stored as physical inventory. 5. Service management skills are paramount to a successful service encounter. 6. Service facilities typically need to be in close proximity to the customer. 7. Patents do not protect services. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 16

Exhibit 1. 2 How Goods and Services Affect Operations Management Activities Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 17

Exhibit 1. 3 Examples of Goods and Service Content Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 18

Chapter 1 Goods, Services & Operations Management Customer Benefit Packages • A customer benefit package (CBP) is a clearly defined set of tangible (goods-content) and intangible (service-content) features that the customer recognizes, pays for, uses, or experiences. • In simple terms, a CBP is some combination of goods and services configured in a certain way to provide value to customers. • A CBP consists of a primary good or service, coupled with peripheral goods and/or services. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 19

Chapter 1 Goods, Services & Operations Management Customer Benefit Packages • A primary good or service is the “core” offering that attracts customers and responds to their basic needs. For example, the primary service of a personal checking account is the capability to do convenient financial transactions. • Examples of a primary good or service: an airline flight, a personal digital assistance (PDA) device, a checking account, a brief case, a football game, tax preparation advice, and so on. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 20

Chapter 1 Goods, Services & Operations Management Customer Benefit Packages • A peripheral goods or services are those that are not essential to the primary good or service, but enhance it. • Examples of peripheral goods or services for a personal checking account: on-line access and bill payment, debit card, designer checks, paper or electronic account statement, etc. • Remember each primary or peripheral good or service requires a process to create and deliver it to customers. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 21

Chapter 1 Goods, Services & Operations Management Customer Benefit Packages • A variant is a CBP attribute that departs from the standard CBP and is normally location or firm specific. • A variant allows for adding unique goods or services such as a fishing pond or pool at an automobile dealership where kids can fish while the parents shop for vehicles. • Once a variant is incorporated and standardized into all CBP delivery sites on a continuous basis it becomes a permanent peripheral good or service. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 22

Exhibit 1. 4 A CBP Example for Purchasing a Vehicle Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 23

Exhibit 1. 5 Operations Management and the Customer Benefit Package Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 24

Exhibit 1. 6 Customer Wants and Needs, CBP Definition, and Process Design Automobile Example Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 25

Chapter 1 Goods, Services & Operations Management Customer Benefit Packages • It is very important that you understand Exhibits 1. 5 and 1. 6 and the difference between customer wants and needs versus the CBP features selected by management to fulfill those needs. • Processes create CBP features such as the (a) physical vehicle itself or (b) a leasing package that fits what the customer can afford. These CBP features fulfill certain customer’s wants and needs such as (a) physical transportation from point A to B, or (b) how can I pay for the vehicle? Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 26

Another Example of Consumer Benefit Package Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 27

Exhibit 1. 7 How Primary, Support, Supplier, and Management Processes Are Related Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 28

Exhibit 1. 8 Organization by Function versus Process Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 29

Chapter 1 Goods, Services & Operations Management OM Spotlight: Pal’s Sudden Service • Pal’s Sudden Service is a small chain of mostly drive-through quick service restaurants located in Northeast Tennessee and Southwest Virginia. • Pal’s competes against major national chains and outperforms all of them by focusing on important customer requirements such as speed, accuracy, friendly service, correct ingredients and amounts, proper food temperature, and safety. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 30

Chapter 1 Goods, Services & Operations Management OM Spotlight: Pal’s Sudden Service • Pal’s uses extensive market research to fully understand customer requirements: convenience; ease of driving in and out; easy-toread menu, simple, accurate order-system; fast service; wholesome food; and reasonable price. • Every process is flowcharted analyzed for opportunities for error, and then mistake-proofed if at all possible. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 31

Exhibit 1. 9 Pal’s Sudden Service Value Chain Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 32

Chapter 1 Goods, Services & Operations Management OM Spotlight: Pal’s Sudden Service • Entry-level employees – mostly high school students in their first job – receive 120 hours of training on precise work procedures and process standards in unique self-teaching, classroom, and on-the-job settings, and reinforced by a “Caught Doing Good” program that provides recognition for meeting quality standards and high performance expectations. • Pal’s collect performance measures such as complaints, profitability, employee turnover, safety, and productivity. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 33

Exhibit 1. 10 Satisfaction Data and Linear Trend Chart Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 34

Chapter 1 Goods, Services & Operations Management Break-Even Model The amount of sales at which the net profit is zero – or equivalently, the point where total cost equals total revenue – is called the break-even point. The equation for total cost is Total cost = Fixed cost + Variable cost. If 10, 000 units were produced and sold, the total cost would be Total cost = 100, 000 + 12(10, 000) = $220, 000. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 35

Chapter 1 Goods, Services & Operations Management Break-Even Model The revenue received from selling 10, 000 units would be 20(10, 000) = $200, 000, so at this production level, the firm would incur a loss of $220, 000 - $200, 000 = $20, 000. However, if 13, 000 units were produced and sold, the projected profit would be 20(13, 000) 100, 000 - 12(13, 000) = $4, 000. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 36

Chapter 1 Goods, Services & Operations Management Breakeven Model We can find the break-even point by developing a simple mathematical model. Let x be the sales volume at the break-even point. Then Total cost = 100, 000 + 12 x Total revenue = 20 x. Setting the total revenue equal to total cost we have 20 x = 100, 000 + 12 x and hence x = 12, 500. If sales are less than 12, 500 units, the firm will incur a loss; if sales are more than 12, 500, a profit will be realized. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 37

Exhibit 1. 11 Spreadsheet Model for Break-Even Analysis (Break Even Model. xls) Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 38

Exhibit 1. 12 Sensitivity Analysis of Variable Cost for the Break-Even Model Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 39

Exhibit 1. 13 Five Eras of Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 40

Exhibit 1. 14 U. S. 2001 Employment and Projected Change by Major Industry (slide 1) * Durable goods are items such as instruments, vehicles, aircraft, computer and office equipment, machinery, furniture, glass, metals, and appliances. ** Nondurable goods are items such as textiles, apparel, paper, food, coal, oil, leather, plastics, chemicals, and books. Source: United States Bureau of Labor Statistics, October 2001, http: //www. bls. gov/EMP Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 41

Exhibit 1. 14 U. S. 2001 Employment and Projected Change by Major Industry (slide 2) Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 42

U. S. Economy Structure and Service Related Jobs Goods-producing industries (manufacturing, construction, fishing, forestry, mining, and agriculture) account for 20 percent of the jobs in the U. S. economy. Service-providing industries account for 80 percent of the jobs in the U. S. economy. One-half of those jobs in goods-producing industries involve service processes such as human resource management, accounting, and financial. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 43

U. S. Economy Structure and Service Related Jobs Therefore, more than 90 percent of the jobs in the U. S. economy involve designing and managing service-, information- or entertainment-intensive processes. Most people in the United States are working in the service sector or service processes or in service-related aspects of manufacturing firms. Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 44

Exhibit 1. 15 Case: Dietary Department Organizational Chart Operations Management, 2 e/Ch. 1 Goods, Services, and Operations Management © 2007 Thomson South-Western 45