Using Operations to Compete Chapter 1 Copyright 2013

Using Operations to Compete Chapter 1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 -01

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. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 -0 2

What is Supply Chain Management? Supply Chain Management 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. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 -0 3

The Role of Operations in the Organization Integration between Different Functional Areas of a Business Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 -0 4

A Process View Process Any activity or group of activities that takes one or more inputs, transforms them, and provides one or more outputs for its customers. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 -0 5

Service and Manufacturing Processes Differ Across Nature of Output and Degree of Customer Contact More like a manufacturing process • Physical, durable output • Output can be inventoried • Low customer contact • Long response time • Capital intensive • Quality easily measured More like a service process • Intangible, perishable output • Output cannot be inventoried • High customer contact • Short response time • Labor intensive • Quality not easily measured Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 01 - 06

The Supply Chain View Each activity in a process should add value to the preceding activities; waste and unnecessary cost should be eliminated. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 -0 7

The Supply Chain View Supplier relationship process – A process to select the suppliers of services, materials, and information and facilitate the flow of these into the firm. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 -0 8

The Supply Chain View New service/product development – A process to design and develop new services or products from customer or market inputs. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 -0 9

The Supply Chain View Order fulfillment process – A process to produce and deliver services or products to the external customer. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 10

The Supply Chain View Customer relationship process – A process that identifies, attracts and builds relationships with external customers and facilitates the placement of orders. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 11

The Supply Chain View Support Processes - Processes like Accounting, Human Resources, Engineering, and Information Systems that provides vital resources and inputs to the core processes Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 12

Operations Strategy • Specifies the means by which operations implements corporate strategy and helps build a customer-driven firm • Corporate strategy provides an overall direction that serves as the framework for carrying out all the organization's functions Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 01 - 13

Operations Strategy Corporate Strategy • Environmental scanning • Core competencies • Core processes • Global strategies Market Analysis • Market segmentation • Needs assessment Competitive Priorities • Cost • Quality • Time • Flexibility New Service/ Product Development • Design • Analysis • Development • Full launch Operations Strategy No Yes Decisions • Managing processes • Managing supply chains Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Performance Gap? Competitive Capabilities • Current • Needed • Planned 01 - 14

Competitive Priorities and Capabilities Competitive Priorities Competitive capabilities The critical dimensions that a process or supply chain must possess to satisfy its internal or external customers, both now and in the future. The cost, quality, time, and flexibility dimensions that a process or supply chain actually possesses and is able to deliver. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 15

Order Winners and Qualifiers Order Winners Order Qualifiers The criterion customers use to differentiate the services or products of one firm from those of another. The minimum level required from a set of criteria for a firm to do business in a particular market segment. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 16

Examples COST Definition Process Considerations Example 1. Lowcost operations Delivering a service or a product at the lowest possible cost Processes must be designed and operated to make them efficient Costco 2. Top quality Delivering an outstanding service or product May require a high level of customer contact and may require superior product features Rolex 3. Consiste nt quality Producing services or products that meet design specifications on a consistent basis Processes designed and Mc. Donald’s monitored to reduce errors and prevent defects QUALITY Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 17

Examples TIME Definition Process Considerations Example 4. Delivery speed Quickly filling a customer’s order Design processes to reduce lead time Dell 5. On-time delivery Meeting deliverytime promises Planning processes to increase percent of customer orders shipped when promised United Parcel Service (UPS) 6. Developme nt speed Quickly introducing a new service or a product Cross-functional integration Zara and involvement of critical external suppliers Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 18

Examples FLEXIBILITY Definition Process Considerations Example 7. Customizat ion Satisfying the unique needs of each customer by changing service or products designs Low volume, close customer contact, and easily reconfigured Ritz Carlton 8. Variety Handling a wide assortment of services or products efficiently Capable of larger volumes than processes supporting customization Amazon. com 9. Volume flexibility Accelerating or decelerating the rate of production of service or products quickly to handle large fluctuations in demand Processes must be designed for excess capacity The United States Postal Service (USPS) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 19

Relationship of Order Qualifiers to Competitive Priorities Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 20

Relationship of Order Winners to Competitive Priorities Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 21

Operations Strategy OPERATIONS STRATEGY ASSESSMENT OF THE BILLING AND PAYMENT PROCESS Competitive Priority Low-cost operations Measure Gap Action § Cost per § $0. 0813 § Target is § Eliminate microfilming § Weekly § $17, 000 § Target is § Develop Web-base § Percent § 0. 90% § Acceptable § No action § Percent § 0. 74% § Acceptable § No action billing statement postage Consistent quality Capability errors in bill information errors in posting payments $0. 06 $14, 000 and storage of billing statements process for posting bills Delivery speed § Lead time to § 48 hours § Acceptable § No action Volume flexibility § Utilization § Too high to § Acquire temporary process merchant payments § 98% support rapid increase in volumes Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. employees § Improve work methods 01 - 22

Trends in Operations Management Productivity The value of outputs (services and products) produced divided by the values of input resources (wages, costs of equipment, etc. ) Productivity = Output Input Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 23

Example 1. 1 Calculate the Labor Productivity: a. Three employees process 600 insurance policies in a week. They work 8 hours per day, 5 days per week. Labor productivity = Policies processed Employee hours 600 policies = = 5 policies/hour (3 employees)(40 hours/employee) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 24

Example 1. 1 Calculate the Multifactor 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. Multifactor productivity = Value of output Labor cost + Materials cost + Overhead cost (400 units)($10/unit) $4, 000 = = = 2. 35 $400 + $1, 000 + $300 $1, 700 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 25

Application 1. 1 This Year Last Year Before Last Factory unit sales 2, 762, 103 2, 475, 738 2, 175, 447 Employment (hrs) 112, 000 113, 000 115, 00 Sales of manufactured products ($) $49, 363 $40, 831 — Total manufacturing cost of sales ($) $39, 000 $33, 000 — § Calculate the year-to-date labor productivity: Last Year This Year factory unit sales 2, 762, 103 employment 112, 000 = 24. 66/hr 2, 475, 738 113, 000 Year Before Last = 21. 91/hr 2, 175, 447 115, 000 = $18. 91/hr § Calculate the multifactor productivity: This Year sales of mfg products $49, 363 total mfg cost $39, 000 = 1. 27 Last Year $40, 831 $33, 000 = 1. 24 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 01 - 26

Trends in Operations Management • Global Competition – Advantages: • Increased market penetration • Comparative cost advantages – Disadvantages: • Political risks • Lower skilled workers • Vulnerability to supply chain disruptions – Japanese Earthquake in March 2011 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 27

Trends in Operations Management • Ethical, Workforce Diversity, and Environmental Issues – Ethical decision-making in different countries – Environmental concerns – Sustainability initiatives Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 0 1 - 28

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Solved Problem 1 Student tuition at Boehring University is $150 per semester credit hour. The state supplements school revenue by $100 per semester credit hour. Average class size for a typical 3 -credit course is 50 students. Labor costs are $4, 000 per class, material costs are $20 per student per class, and overhead costs are $25, 000 per class. a. What is the multifactor productivity ratio for this course process? b. If instructors work an average of 14 hours per week for 16 weeks for each 3 -credit class of 50 students, what is the labor productivity ratio? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 30

Solved Problem 1 SOLUTION a. Multifactor productivity is the ratio of the value of output to the value of input resources. Value of output = 50 student class 3 credit hours student $150 tuition + $100 state support credit hour = $37, 500/class Value of inputs = Labor + Materials + Overhead = $4, 000 + ($20/student 50 students/class) + $25, 000 = $30, 000/class Multifactor productivity = Output Input $37, 500/class $30, 000/class Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall = 1. 25 0 1 - 31

Solved Problem 1 SOLUTION b. Labor productivity is the ratio of the value of output to labor hours. The value of output is the same as in part (a), or $37, 500/class, so Labor hours of input = 14 hours week 16 weeks class = 224 hours/class Labor productivity = Output $37, 500/class Input 224 hours/class = $167. 41/hour Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 01 - 32

Solved Problem 2 Natalie Attire makes fashionable garments. During a particular week employees worked 360 hours to produce a batch of 132 garments, of which 52 were “seconds” (meaning that they were flawed). Seconds are sold for $90 each at 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 © 2013 Pearson Education, Inc. publishing as Prentice Hall 0 1 - 33

Solved Problem 2 SOLUTION Value of output= (52 defective 90/defective) + (80 garments 200/garment) = $20, 680 Labor hours of input = 360 hours Labor productivity = Output Input $20, 680 360 hours = $57. 44 in sales per hour Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 0 1 - 34

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