Download Sample Chapter 1 - McGraw Hill Higher Education

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Part One
Introduction
1. The Operations Function
2. Operation and Supply Chain Strategy
3. Product Design
The introductory part of this text provides an overview of the operations and supply
chain functions, operations and supply chain strategy, and product design. After
reading this part, students should have an appreciation for the importance to the
firm of decisions made in the operations function and its associated supply chain.
Also, the need for strategy to guide all decision making is emphasized. New-product
design is treated as a cross-functional decision responsibility that precedes the production and delivery of goods or services.
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Chapter One
The Operations
Function
Chapter outline
“What Is OM?”
Vol. XI
2
1.1
Why study operations management?
1.2
Definition of operations management and supply chains
1.3
Decisions at Pizza U.S.A.
1.4
Operations decisions—a framework with contingencies
1.5
Cross-functional decision making
1.6
Operations as a process
1.7
Contemporary operations themes
1.8
Key points and terms
Operations management, as a field, deals with the production of goods and services. Every day we come in contact with an abundant array of goods or services,
all of which are produced under the supervision of operations managers. Nonprofit and government services are also managed by operations managers. Without effective management of operations, a modern industrialized society cannot
exist. The operations function is the engine that creates goods and services for the
enterprise and underpins the global economy.
Operations managers have important positions in every organization. One example is the plant manager who is in charge of a factory. Other managers who work
in the factory—including production and inventory control managers, quality managers, and line supervisors—are also operations managers. Collectively, this group
of managers is responsible for producing the supply of goods in a manufacturing
business. We should also include in the group of operations managers all manufacturing managers at the corporate or divisional level. These managers might include
a corporate vice president of operations (or manufacturing) and a group of corporate staff operations managers concerned with quality, production and inventory
control, facilities, and equipment.
Operations managers have important responsibilities in service industries as
well. In the private sector, operations managers take leadership roles in hotels, restaurants, airlines, banks, and retail stores. In each of these organizations, operations
managers are responsible for producing and delivering the supply of services. In
government offices, there are operations managers in the post office, police department, and housing department, to name only a few.
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Chapter 1 The Operations Function 3
At first glance, it may appear that service operations have little in common with manufacturing
operations. However, the unifying feature of these
operations is that both can be viewed as transformation processes inside organizations that are
themselves embedded within supply chains. In
manufacturing, inputs of raw materials, energy,
labor, and capital are transformed into finished
goods. In service operations, the same types of inputs are transformed into services. Managing the
transformation process in an efficient and effective
manner is the task of the operations manager in
any type of organization.
Most Western economies have shifted dramatically from the production of goods to the production
Operations managers make important decisions in both
of services. It may come as a surprise that today
manufacturing and service organizations.
more than 80 percent of the U.S. workforce is employed in service industries.1 Even though the preponderance of employment is in the
service sector, manufacturing remains important to provide the goods needed for export and internal consumption. Because of the importance of both service and manufacturing operations, they are treated on an equal basis in this text.
In the past when the field was related primarily to manufacturing, operations
management was called production management. Later the name was expanded to
“production and operations management,” or, more simply, “operations management,” to include the service industries as well. The term “operations management”
as used in this text refers to both manufacturing and service industries.
Today, individuals who work in operations and supply chain management can
belong to a number of professional societies. These societies provide opportunities
to become certified, network with other professionals, and learn about and share
best practices. See the Operations Leader box titled “Professional Societies Affiliated with Operations and Supply Chain Management.” The Operations Leader
boxes throughout this book highlight best practices and useful professional
knowledge in a variety of industries.
1.1
WHY STUDY OPERATIONS MANAGEMENT?
All businesses want to hire bright people who can make the best decisions
for the business as a whole, not the best marketing, finance, or operations
decisions. They want employees who can see the big picture of how these
functional areas interact. You will severely limit your career if you take a
narrow functional perspective.
Every decision is cross-functional in nature2. You will be working with operations and need to understand operations no matter what career path you choose.
Operations is a major function in every organization, and regardless of the function in which you work, you will interact with the operations function that produces goods or services (or both). The organization in which someone works only
1
U.S. Census Bureau, Statistical Abstract of the United States, Washington, DC, 2012 ed.
The “hand shake” symbol in the margin identifies a point of cross-functional emphasis and is designed
to illustrate that the various functions must work together for an organization to be successful and thrive.
2
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Introduction
Operations Leader
Professional Societies Affiliated with Operations and
Supply Chain Management
ASSOCIATION FOR OPERATIONS
MANAGEMENT
The global leader and premier
source of the body of knowledge
in operations management, including production, inventory,
the supply chain, materials management, purchasing, and logistics (see www.apics.org for more
information).
AMERICAN SOCIETY FOR QUALITY
The world’s leading organization devoted
to advancing learning, quality improvement, and knowledge exchange to improve business results and create better
workplaces and communities worldwide
(see www.asq.org for more information).
INSTITUTE FOR SUPPLY MANAGEMENT
The largest and one of the most respected supply management associations in the world, whose mission is to
lead the supply management and purchasing profession through its standards
of excellence, research, promotional activities, and
education (see www.ism.ws for more information).
COUNCIL OF SUPPLY CHAIN
MANAGEMENT PROFESSIONALS
The preeminent worldwide professional
association for supply chain management
professionals, whose vision is to lead the
evolving supply chain management
profession by developing, advancing, and
disseminating supply chain knowledge and research
(see http://cscmp.org for more information).
with people from his or her own function does not exist. That is why we take a
cross-functional perspective in this text so that the content is useful to all majors.
As you study operations management, you will find that many of the ideas, techniques, and principles can be applied across the business, not just in operations. For
example, all work is accomplished through a process (or sequence of steps). The
principles of process thinking found in this text can be applied to all functions. After
graduating, many students find that the ideas learned in operations management
are among the most useful, regardless of the industry or career they enter.
Operations management is an exciting and challenging field of study. The material is both qualitative and quantitative, and both are essential to good management practices. You are embarking on a journey that is interesting and useful no
matter what career you choose!
1.2
DEFINITION OF OPERATIONS MANAGEMENT
AND SUPPLY CHAINS
All organizations (for-profit and nonprofit) thrive by producing and delivering a
good or a service deemed to be of value to customers. Value is the tangible and intangible benefits that customers derive from consuming a good or service at a price they
are willing to pay. For example, value in a pair of shoes may be shoes that are good
looking and comfortable and will last a long time at a price you can afford. What is of
value to one customer (or set of customers) may not be of value to another. Flying in
first class may be of value to business travelers, but for leisure travelers flying in first
class may not be of value because of the price of first-class seats. Value, thus, is always defined in the eyes of the customer (or set of customers).
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Chapter 1 The Operations Function 5
Organizations that are successful strive to identify the value inherent in the
goods or services being offered to customers. They then deploy this understanding
to guide the decisions that affect the production and delivery of those goods and
services. These decisions have an impact on the design, execution, and performance of operations and should be coordinated with decisions made by managers
of the purchasing and the logistics functions.
The purchasing function is responsible for finding other organizations to serve
as sources and then buying the material and service inputs for the transformation
process of the organization. The logistics function, in contrast, is typically responsible for the actual movement of goods and/or services across organizations. Collectively, the operations, purchasing, and logistics functions manage the
production of the goods or services that are moved through the production process and delivered to customers.
Most organizations exist as part of a larger supply chain. The supply chain is
the network of manufacturing and service operations (often multiple organizations) that supply one another from raw materials through production to the ultimate customer. The supply chain consists of the physical flow of materials, money,
and information along the entire chain of purchasing, production, and distribution. For example, the food supply chain reaches from the farm to the food processor to the wholesaler and then the retailer. The supply chain links together the
work and output of many different organizations.
In subsequent chapters, we will be discussing the various decisions and decision aids that help operations and the supply chain produce value. An example of
an operations leader in producing and delivering goods deemed to be of value at
a price customers are willing to pay is Dell Computer Corporation (see the Operations Leader box).
To summarize, operations management can be defined as follows:
The operations function of an organization is responsible for producing and delivering goods or
services of value to customers of the organization. Operations managers make decisions to
manage the transformation process that converts inputs into desired finished goods or services.
Three points in this definition deserve emphasis:
1. Decisions. The above definition refers to decision making as an important element of operations management. Since all managers make decisions, it is natural to focus on decision making as a central theme in operations. This decision
focus provides a basis for dividing operations into parts according to major
decision types. In this text, we identify the four major decision responsibilities
of operations management as process, quality, capacity, and inventory. These
decisions provide the framework for organizing the text and describing what
operations managers do. We will discuss these decisions in greater detail in
subsequent chapters. A hallmark of this text is treating decision making within
operations in connection with other functions in the organization and across the
supply chain.
2. Function. Operations is a major function in any organization, along with
marketing and finance. In a manufacturing company, the operations function
typically is called the manufacturing or production department. In service
organizations, the operations function may be called the operations department
or some name peculiar to the particular industry (e.g., the policy service
department in insurance companies). In general, the generic term “operations”
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Introduction
Operations Leader
Dell Delivers Products and Value
In 1984 Michael Dell founded Dell Computer Corporation with $1000 in start-up capital and a business model
to sell custom-configured personal computers directly
to customers while passing along cost
savings to customers by cutting out the
middlemen. The company ended FY
2012 with $62.1 billion in revenue, and
offers a range of products beyond personal desktop and mobile computing
products; servers, storage, and networking products;
printing and imaging products; electronics and accessories; enhanced business and consumer services; and
business solutions. Nearly half of Dell’s revenue comes
from outside of the United States.
A key to Dell’s continuing success is its customerdriven approach to innovation. This approach signals a
commitment to delivering new products and services
that are valued by customers and that address customer
needs. The approach begins with listening to the customer via structured interactions, working with strategic
partners to deliver innovative and cost-effective solutions to customer needs, and helping to establish industry standards. This approach explains how Dell has
pioneered the direct-selling system to allow customer
orders to be placed over the Internet or over the phone
and, since 2007, through select retail outlets, and more
recently, through its own Dell retail stores. Orders for
products, once taken, are assembled in one of Dell’s
factories and often shipped to customers within days,
with the factories carrying very little finished goods
inventory.
In addition to the importance of the operations
function at Dell, purchasing and logistics activities
are critical. Purchasing managers source the many
components required to manufacture Dell products,
and logistics managers handle the global movement
of components and finished goods to satisfy customer demand. Managing Dell’s fast and rapidly
changing supply chain is a challenging task that they
perform well.
Dell today is pursuing environmentally friendly best
practices: Its global headquarters campus is now powered by 100 percent green energy; its desk computer
systems have been designed to reduce carbon dioxide
emissions; Dell was the first computer manufacturer to
offer free computer recycling to customers worldwide;
and its “Plant a Tree for Me” and “Plant a Forest for
Me” programs have planted over 100,000 trees.
Source: Adapted from www.dell.com, 2012.
refers to the function that produces goods or services. While separating operations out in this manner is useful for analyzing decision making and assigning
responsibilities, we must also integrate the business by considering the crossfunctional nature of decision making in the firm.
3. Process. Operations managers plan and control the transformation process and its
interfaces in organizations as well as across the supply chain. This process view
provides common ground for defining service and manufacturing operations as
transformation processes and is a powerful basis for the design and analysis of operations in an organization and across the supply chain. Using the process view, we
consider operations managers as managers of the conversion process in the firm.
But the process view also provides important insights for the management of productive processes in functional areas outside the operations function. For example,
a sales office may be viewed as a production process with inputs, transformation,
and outputs. The same is true for an accounts payable office and for a loan office in
a bank. In terms of the process view, operations management concepts have applicability beyond the functional area of operations. Toyota, for example, uses lean
thinking (described in Chapter 7) to improve processes throughout the firm, including processes in human resources, accounting, finance, information systems, and
even the legal department. Process improvement is not restricted to operations.
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Chapter 1 The Operations Function 7
Since the field of operations management can be defined by decisions, function,
and processes, we will expand on these three elements in detail in this chapter. But
first we provide an example of the decisions that would be made by operations in
a typical company that makes and markets pizzas.
1.3
DECISIONS AT PIZZA U.S.A.
Pizza U.S.A., Inc., produces and markets pizzas on a national basis. The firm consists of 85 company-owned and franchised outlets (each called a store) in the
United States. The operations function in this company exists at two levels: the
corporate level and the level of the individual store.
The major operations decisions made by Pizza U.S.A. can be described as follows:
Process
Corporate staff makes some of the process decisions, since uniformity across different stores is desirable. They have developed a standard facility design that is sized
to fit a particular location. Each store incorporates a limited menu with equipment
that is designed to produce high volumes of pizza. As pizzas are made, customers
can watch the process through a glass window; this provides entertainment for
both children and adults as they wait for their orders to be filled. Because this is a
service facility, special care is taken to make the
layout attractive and convenient for the customers.
Within the design parameters established by the
corporate operations staff, the store managers seek
to improve the process continually over time. This is
done both by additional investment in the process
and by the use of better methods and procedures,
which often are developed by the employees themselves. For example, a store might re-arrange its layout to speed up the process of producing pizzas.
Managers of the pizza stores are responsible
for hiring, training, supervising, and, if necessary,
firing workers. They must decide on exact job responsibilities and on the number of people
needed to operate the store. They also advertise
Pizza U.S.A. satisfies its customers by carefully managing
job openings, screen applications, interview canthe four key decision areas in operations.
didates, and make the hiring decisions. They
must measure the amount of work required in relation to production and also
evaluate the performance of each individual. Management of the workforce is
one of the most important daily responsibilities of the store manager. Note that
we consider the workforce an integral part of the process.
Quality
Certain standards for quality that all stores must follow have been set by the corporate
staff. The standards include procedures to maintain service quality and ensure the
quality of the pizzas served. While perceptions of service quality may differ by customer, the quality of the pizzas can be specified more exactly by using criteria such as
temperature at serving time and the amount of raw materials used in relation to standards, among others. Service-quality measures include courtesy, cleanliness, speed of
service, and a friendly atmosphere. Each Pizza U.S.A. store manager must carefully
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Introduction
Operations Leader
Careers in Operations and Supply Chain
from Monster.com
SUPPLY CHAIN ANALYST
PayPal, owned by online shopping site eBay, is hiring
a supply chain management professional responsible
for end-to-end support for PayPal’s new Here product.
The job requires international
travel to manufacturing and distribution sites. Responsibilities include product and distribution management, on time
and on budget; reviewing inventory reports with supply partners; arranging freight shipments globally;
and coordinating and collaborating with internal
groups within PayPal and eBay. The job description
also requests “maniacal attention to detail.”
BUSINESS METRICS/ANALYTICS
SUPPLY CHAIN ANALYST
Cardinal Health is seeking an analyst to develop,
quantify, and evaluate the transformation of internal
and external information into business intelligence.
Qualified candidates will demonstrate knowledge of
concepts and principles of business metrics and analytical techniques/tools. The position requires listening
to internal/external customers’ needs and proactively
providing them a quality experience through effective
communication.
VICE PRESIDENT OF OPERATIONS
Envista Credit Union is seeking an executive whose responsibilities include organizing, planning, and directing all operations functions associated with branches
and central operations. This individual will participate in the development of strategic implementation plans and related objectives. Candidates must
have strong communication skills and acknowledge
the important relationship with customer members
in supporting the credit union’s vision and mission.
CONTINUOUS IMPROVEMENT
PLANT LEAD
ConAgra Foods seeks a partner to roll out a system
establishing a zero-loss manufacturing culture.
Coordinating with the Plant Manager, this Plant
Lead executes plans for sustainability, develops and
maintains training and tracking standards, and
coaches sites on improvement methodologies. This
position serves as a key development role for a
future Plant Manager.
MATERIALS SOURCING MANAGER
Herbalife, a direct-sales nutrition company, is hiring
a senior level sourcing manager for global spending
of $200 million on raw materials. Responsibilities include reducing raw materials costs yearly, analyzing
market intelligence for trends in commodity markets, and making strategic recommendations to senior management for each category of raw
materials. This job also requires maintaining appropriate inventory levels and developing strategic supplier relationships.
Source: Abstracted from www.monster.com, April 2012.
monitor quality internally and with suppliers to make sure that it meets company
standards. All employees are responsible for the quality of their work to ensure that
service quality and food quality are meeting the standards of the company.
Capacity
Decisions about capacity determine the maximum level of output of pizzas. The
capacity available at any point in time is determined by the availability of equipment and labor inputs for the pizza-making process at that time. First, when the
initial location and process decisions are made, the corporate staff determines the
physical capacity of each facility. Individual store managers then plan for annual,
monthly, and daily fluctuations in capacity within the available physical facility.
During peak periods, they may employ part-time help, and advertising is used in
an attempt to raise demand during slack periods. In the short run, individual
personnel must be scheduled in shifts to meet demand during store hours.
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Chapter 1 The Operations Function 9
Inventory
Each store manager buys the ingredients required to make the recipes provided
by corporate staff. The store managers select their own suppliers from a list approved by the corporation and decide how much flour, tomato paste, sausage,
and other ingredients to order and when to place orders. Store operators must
carefully integrate purchasing and inventory decisions to control the flow of
materials in relation to capacity. For example, they do not want to purchase ingredients for more pizzas than they have the capacity to bake. They also do not
want to run out of food during peak periods or waste food when demand is
low. Supply chain management is an important part of keeping all materials in
stock when needed.
Because Pizza U.S.A. is only one example of an operation, students often ask:
What do operations managers do in more general terms? The Monster.com Operations Leader box provides examples of five typical operations management
and supply chain positions and describes the associated decision-making responsibilities. The descriptions have been greatly simplified for purposes of illustration.
As the Operations Leader box indicates, there is a great variety of management
positions in operations and the supply chain. These range from entry-level supervisory positions to middle- and top-management positions with considerable responsibility. These positions also show the breadth of operations and apply to
both manufacturing and service operations.
There are many opportunities for international employment in operations management since operations are located around the world. Many operations in other
countries are seeking to implement world-class best practices, and so what is
learned in this course can be applied globally.
1.4
OPERATIONS DECISIONS—A FRAMEWORK WITH CONTINGENCIES
The four decision groupings showcased in the Pizza U.S.A. example provide a
framework for understanding the various decisions made by operations managers. Although many different frameworks are possible, the primary one used here
is a conceptual scheme for grouping decisions according to decision responsibilities. The four key decision areas—process, quality, capacity, and inventory—
encompass the breadth of the operations manager’s job. This novel and useful
decision framework is shown in Figure 1.1 and summarized in Table 1.1. In the
FIGURE 1.1
Decision-making
framework for
operations in the
supply chain
Human
Resources
Suppliers
Finance
Process
Quality
Information
Systems
Capacity
Marketing
Inventory
Accounting
Customers
10
4. Inventory
3. Capacity
2. Quality
1. Process
Operations
Decision
TABLE 1.1
• Inventory control systems are used to manage materials from purchasing through raw materials, work in process, and finished goods inventories. Inventory managers decide how
much inventory is needed, where to locate the inventory, and a host of related decisions.
• Inventory-related decisions determine the type and level of inventory to be held.
• Long-range capacity is determined by the size of the physical facilities or by outsourcing to a
reliable supplier. In the short run, capacity sometimes can be augmented by subcontracting,
extra shifts, or rental of space. Capacity planning also determines the proper number of people in operations. Staffing levels are set to meet the needs of market demand and the desire
to maintain a stable workforce. In the short run, capacity must be allocated to specific tasks
and jobs in operations by scheduling people, equipment, and facilities.
• Capacity-related decisions are aimed at providing the right resources at the right place at
the right time.
• Quality requires total organizational support. Managers from all functions should be concerned with quality and should participate in setting the specifications for all new products
and in defining the levels of customer service required.
• The operations function is responsible for the quality of goods and services produced. Decisions must ensure that quality is designed and built into all stages of producing and delivering goods and services to customers.
• Quality-related decisions affect the value and functionality of the goods or services produced and delivered to customers. These decisions determine whether and to what extent
customer specifications are satisfied.
• The operations function typically manages more employees and physical assets than does
any other function in the firm.
• Since many process decisions require large capital investments, financial managers are concerned with the investments in assets required by the operations function. Human resource
managers are concerned with recruiting, hiring, staffing, and evaluation decisions concerning
the workers in operations.
• Process-related decisions determine the physical process used to produce the product or
service and the associated workforce policies and practices. Many of these decisions are
long-range in nature and cannot be reversed easily, particularly when significant capital investment is needed. It is therefore important that the transformation process be designed
in relation to the long-term strategic posture of the organization and the capabilities of the
workforce.
Focus
Operations Decisions—A Framework
• How much inventory should be held?
• How should inventory be monitored—
internally or by vendors?
• What should the order size be?
• How frequently should replenishment occur?
• Who should hold the inventory?
Where should facilities be located?
How large should facilities be?
How many shifts should be scheduled?
What priority rule should be used to select
jobs for processing?
• What activities can be outsourced or subcontracted?
•
•
•
•
• What should the level of quality standards be
for goods or services?
• Which workers need training?
• Should incoming inspection from suppliers be
used?
• How should ongoing process performance be
monitored?
• What type of equipment and technology
should be used?
• How should materials flow be designed and
managed?
• What should the layout of the facility be?
• What specific tasks are to be performed by
front-line workers?
• When should shift changes occur?
Examples
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Chapter 1 The Operations Function 11
table, descriptions of the decision areas are provided as well as example questions
that the operations manager might need to address.
Careful attention to the four operations decision areas in the framework is
the key to the successful management of operations. Indeed, the well-managed
operations function can be defined in terms of this operations decision framework. If decisions in each of the four groupings of operations support the strategy of the firm, provide value, and are well integrated with the other functions
of the organization, the operations function can be considered well managed.
This cross-functional nature of operations decision making is addressed in the
following section. Further, decisions in the operations function must also account for the supply chain around them. With upstream suppliers and downstream customers, decisions made within operations can also have impact
outside of the firm.
In the past, some students felt that operations management was a collection
of concepts and tools with no central theme. The operations decision framework is specifically designed to overcome this problem. Each major section of
this text is devoted to one of the four decision categories.3 The framework thus
provides an integrating mechanism for the text that covers both the decisions
faced by operations managers as well as the cross-functional issues that must be
considered.
Throughout the text, best practices in operations are presented. Additionally,
discussion and examples of firms in which the best practice is not the best for
their particular situation are included. These contingencies, situations, or conditions that require different solutions, offer a more nuanced view of operations
decision making. If there was a single best practice that works for all firms, then
operations would not be the challenging function to manage that it is. Therefore,
by offering insight into specific conditions in which best practices may not be
best, the text addresses the various types of operations that exist in today’s
business world.
1.5
CROSS-FUNCTIONAL DECISION MAKING
The operations function is a critical element in every business. No business can
survive without good decisions being made by operations managers. The operations function is one of the three primary functions in an organization, along with marketing and finance. In addition, an
organization has supporting functions that include human
resources, information systems, and accounting. Some organizations also have separate purchasing and logistics functions that support operations. In others, the operations,
purchasing, and logistics functions are joined together to become the supply chain function.
Functional areas are concerned with a particular focus of
responsibility or decision making in an organization. The
marketing function is typically responsible for creating deManagerial decision making is cross-functional mand and generating sales revenue; the operations function
is responsible for the production of goods or services
in nature.
3
Students have called these four categories QPIC, pronounced “Q Pick.”
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Introduction
(generating supply); and finance is responsible for the acquisition and allocation
of capital. Within for-profit businesses, functional areas tend to be closely associated with organizational departments because businesses typically are organized on a functional basis. Supporting functions are essential to provide staff
support to the three primary functions.
Every function must be concerned not only with its own decision responsibilities but with integrating decisions with other functions. The four areas of
operations decisions, for example, cannot be made separately; they must be
carefully integrated with one another and, equally important, with decisions
made in purchasing, marketing, logistics, finance, and other parts of the organization. In the Pizza U.S.A. example, if marketing decides to change the price of
pizza, this is likely to affect sales and change the capacity needs of operations as
well as the amount of ingredients (materials) used. Also, if finance cannot raise
the necessary capital, operations may have to redesign the process to require
less capital or manage pizza-related inventories more efficiently. This in turn
may affect the response time to serve customers, costs, and so on.
Decision making is therefore highly interactive and systemic in nature. Unfortunately, functional silos have developed in many organizations and impede
cross-functional decision making. As a result, the overall organization suffers
due to an emphasis on functional prerogatives.
But some companies are different. Texas Instruments, for example, has been
a leader in fostering cross-functional integration. They do this by forming crossfunctional management teams for new-product introductions and for dayto-day improvement. Each member of the team is trained in common
methodologies, and the team is given responsibility for achieving its own goals.
Some of the key cross-functional decision-making relationships are shown in
Table 1.2.
1.6
OPERATIONS AS A PROCESS
Operations can be defined as a transformation system (or process) that converts
inputs into outputs. Inputs to the system include energy, materials, labor, capital,
and information (see Figure 1.2). Process technology is then used to convert inputs
into outputs. The process technology is the methods, procedures, and equipment
used to transform materials or inputs into products or services.
Viewing operations as a process is very useful in unifying seemingly different operations from different industries. For example, the transformation process in manufacturing is one of material conversion from raw materials into
finished products. When an automobile is produced, steel, plastics, aluminum,
cloth, and many other materials are transformed into parts that are then assembled into the finished automobile. Labor is required to operate and maintain the equipment, and energy and information are also required to produce
the finished automobile.
In service industries a transformation process is also used to transform inputs
into service outputs. For example, airlines use capital inputs of aircraft and equipment and human inputs of pilots, flight attendants, and support personnel to produce safe, reliable, fast, and efficient transportation. Transformations of many
different types occur in all industries, as indicated in Table 1.3. By studying these
different types of transformation processes, you can learn a great deal about how
to analyze and manage any operation.
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Chapter 1 The Operations Function 13
TABLE 1.2
Examples of CrossFunctional Decision
Making
Key Decision Area
Marketing
Market segment and needs
Market size (volume)
Distribution channels
Pricing
New-product introduction
Interface with Operations Decisions
Quality design and quality management
Type of process selected (assembly line, batch, or project)
and capacity required
Inventory levels and storage locations
Quality, capacity, and inventory
Cross-functional teams
Purchasing
Sourcing strategy
Supplier selection and evaluation
Purchase price and supply contracts
Process span, quality of inputs, capacity levels, and inventory
levels
Process span, quality of design, and inventory levels
Inventory levels and monitoring
Logistics
Transportation modes
Materials handling and packaging
Warehousing
Process design, inventory levels, storage locations
Quality of design, inputs, and outputs
Process span, capacity, and inventory levels and storage
locations
Finance and Accounting
Availability of capital
Efficiency of conversion process
Net present value and cash flow
Process costing or job costing
Measurement of operations
Inventory levels, degree of automation, process type
selected, and capacity
Process type selection, process flows, and value-added
determination
Automation, inventory, and capacity
Type of process selected
Costing systems used
Human Resources
Skill level of employees
Number of employees and part-time
or full-time employment
Training of employees
Job design
Teamwork
Process type selected and automation
Capacity and scheduling decisions
Quality improvement and skills
Process and technology choice
All decisions in operations
Information Systems
Determination of user needs
Design of information systems
Software development
Hardware acquisition
Systems should support all users in operations
Systems should help streamline operations and support all
decisions in operations
Software is needed for capacity, quality, inventory, and
scheduling decisions
Hardware is needed to support automation decisions in
operations and to run software
Operations as a process provides a basis for seeing an entire business as a
system of interconnected processes. This makes it possible to analyze an organization and improve it from a process point of view. All work, whether in finance, marketing, accounting, or other functions, is accomplished by processes.
For example, financial analysis of a stock, closing the books at the end of the
year, or conducting market research are each conducted by carrying out an appropriate process. Thus, process principles and tools can be applied in every
function in a business.
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FIGURE 1.2
An operation as a
productive system.
EXTERNAL BUSINESS
ENVIRONMENT
OPERATIONS MANAGEMENT
INPUTS
OUTPUTS
Energy
Materials
Transformation
(conversion)
process
Labor
Capital
Goods or services
Information
Feedback information for
control of process inputs
and process technology
NATURAL ENVIRONMENT
All of these processes and systems interact with their internal and external environments. We have indicated the nature of internal interaction
through cross-functional decision making. Interaction with the external
environment occurs through the economic, physical, social, and political
environment of operations. Examples include economic changes such as rising
labor costs, social changes such as customer preference for ‘green’ products,
and political changes such as regulations. Each of these can mean that the operations function will have to change the way it was producing products and
services.
Operations is surrounded by both internal and external environments
and constantly interacts with them. The interactive nature of these relationships makes it necessary to constantly monitor the environment and make
decisions related to corresponding changes in operations when needed. In the
fast-changing world of today’s global business, constant change in operations
has become essential as a means of survival. Viewing operations as a process
or a constantly updating transformation system helps us understand how
operations cannot be insulated from changes in the environment but rather
must adapt to them.
TABLE 1.3
Examples of
Productive
Systems
Operation
Inputs
Outputs
Bank
Tellers, staff, computer equipment,
facilities, and energy
Cooks, waiters, food, equipment, facilities,
and energy
Doctors, nurses, staff, equipment,
facilities, and energy
Faculty, staff, equipment, facilities, energy,
and knowledge
Equipment, facilities, labor, energy, and
raw materials
Planes, facilities, pilots, flight attendants,
maintenance people, labor, and energy
Financial services (loans,
deposits, safekeeping, etc.)
Meals, entertainment, and
satisfied customers
Health services and healthy
patients
Educated students, research,
and public service
Finished goods
Restaurant
Hospital
University
Manufacturing plant
Airline
Transportation from one location
to another
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Chapter 1 The Operations Function 15
1.7
CONTEMPORARY OPERATIONS THEMES
Several contemporary themes are important in operations today and will appear
repeatedly throughout this text. These contemporary themes make operations an
exciting and interesting place for aspiring operations managers and those who
want the challenge of leadership in a fast-moving career.
Services and
Manufacturing
Successful management of operations in both service and manufacturing are critical as they are highly interrelated in today’s economy. Services such as banking,
insurance, consulting, telecommunications, and transportation are critical to support manufacturing, and likewise, manufactured products support all service industries. While service operations are addressed in detail in Chapter 5, services
and manufacturing are covered in all chapters through examples and application of
concepts. Leading service businesses that excel in operations are Walmart,
Nordstrom, Starbucks, Amazon.com, FedEx, and Delta Airlines, to name only a
few. They excel by applying the operations concepts that are presented in this text,
including the decision areas of process, quality, capacity, and inventory.
CustomerDirected
Operations
Every operation should be externally directed to meet customer requirements based
on the “voice of the customer.” This concept is often taught in marketing courses
and is being integrated into operations courses as well. A key point is that operations efficiency need not be sacrificed in the pursuit of meeting customer needs.
Rather, the customer can be a powerful driver for reducing waste and improving the
efficiency of all processes because firms can reduce or eliminate activities that customers do not value. This idea will be developed in the chapters on quality, product
design, process design, service operations, scheduling, and inventory control.
For example, GE Fleet Services manages large fleets of automobiles, trucks, and
related equipment for other companies. They have heard the voice of their customers
and responded by applying operations methodologies such as Six Sigma and quality
improvement tools to respond to their customers’ needs. As a result, they have increased sales growth and customer satisfaction by using customer-directed operations.
“Operations
Management:
Featuring
St. Alexius
Medical Center,”
Vol. X
Lean
Lean systems have become the predominant operations systems in most modern industries. Lean is concerned with eliminating waste (non-value-adding activities) in
every part of the business and improving the flow of goods and services. For example, an order entry process may have unnecessary steps that waste time and do not
add value for the customer. As a result, the order entry process can be redesigned to
reduce the time it takes to enter an order and to do only what is necessary to meet the
customer’s needs. Lean has been successfully applied in many industries and organizations, including numerous implementations in the health care industry, in manufacturing industries, and in government services. Lean employs the concepts of
Just-in-Time production and extends those ideas to identifying value provided to the
customer. Lean and lean thinking can be applied to every part of an organization, not
just the operations function, and to all organizations within a supply chain.
Integration of
Operations
with Other
Functions
Integration of operations decisions with other functions in the organization is another important element of this text. Some organizations are still managing functions as separate departments with little integration between them. The best
operations are now seeking increased integration through the use of cross-functional
teams, information systems, management coordination, rotation of employees, and
other methods of integration across functions. Integration across functions gets
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Introduction
everyone pulling in the same direction. Most of the implementation problems with
new systems or new approaches can be traced to a lack of organizational cooperation and integration. Accordingly, cross-functional decision making is stressed
throughout the text and is a hallmark of this book.
Environmental
Concerns and
Sustainability
“BP: Greenhouse
Gas Reduction
Projection,” Vol. XII
Supply Chain
Management
Globalization
of Operations
The focus on sustainability of the natural environment has been heightened in
recent years with concerns over global warming, water contamination, air pollution, and so on. Organizations are increasingly being asked to produce and deliver
products or services while minimizing the negative impact on the global ecosystem and not endangering the ability to meet the needs of future generations. See
the Operations Leader box titled “Sustainability in Interface Inc.’s Operations
Transformation Process” for an example of one firm’s success in facing these issues. Operations has made tremendous strides in reducing pollution of the environment from air to ground to water, but there is still a long way to go. The most
progressive organizations have found that reduction of pollution often pays off in
terms of savings from various types of waste reduction. Developing better transformation processes that pollute less can even reduce the cost of goods and services through reductions in the inputs to these processes.
Another contemporary theme in operations is supply chain management, which is
discussed in several chapters and in detail in Chapter 10. It includes the integration of
the work and the requirements of suppliers, producers, and customers. Managing the
supply chain requires managers to consider the entire flow of materials, information,
and money throughout the supply chain, from raw materials through production and
distribution to the final customers. Supply chain management can be improved by
using lean operations to speed up the flow of materials and reduce waste along the
supply chain. It is also facilitated by fast and accurate information processing between
suppliers and customers that can be accomplished today via the Internet and other
forms of electronic data transfer. These electronic information exchanges between
suppliers and customers are called e-business and, much like the convenience the
Internet has brought to consumers, organizations across supply chains gain time and
efficiency from such electronic exchanges of information. Dell Computer Company is
an example of a leader in supply chain management and e-business.
Finally, the globalization of operations is a pervasive theme in business today.
One can hardly avoid information on the accelerating nature of international business. Strategies for operations should be formulated with
global effects in mind and not consider only narrow national interests. Even many small businesses compete globally, sourcing or selling goods and services in markets with
global competitors. Facility location must be considered in
view of its global implications. Technology can be transferred rapidly across national borders. All aspects of operations and the supply chains are affected by the global nature
of business; therefore, international issues will be addressed
throughout the text.
Many U.S. companies are powerful global competitors.
For example, Coke and Pepsi are produced and sold
throughout the world. McDonald’s has more than 33,000
restaurants in 120 countries. Similarly, Asian and European
Coke is produced and sold globally. Here, it is
firms have become fierce global competitors with operaavailable near the Qin Terracotta Warriors and
Horses in Xian, China.
tions located around the world.
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Chapter 1 The Operations Function 17
Operations Leader
Sustainability in Interface Inc.’s Operations
Transformation Process
Interest in sustainability continues to grow, and the operations function of most
organizations is deeply involved in such efforts. The philosophy of sustainability is
“meeting the needs of the
present without compromising the ability of future
generations to meet their own
needs.” Over the past 15 years,
carpet manufacturer Interface
Inc. has shifted its operations
toward this philosophy and
three bottom-line impacts: social, environmental, and financial. Or, in their words: People,
Planet, and Profit.
A typical operations transformation process requires a
continuous supply of new
raw material input. “In most
instances, extraction of raw material [from the natural
environment] exceeds its natural rate of regeneration.” Following production, customers use and then
dispose of products. Interface Inc. set out to change
this typical supply chain with its environmental costs
at both ends. They found that the most benign materials to use in manufacturing new products are their
own used products. Creating a closed-loop supply
Contingency
Approach
chain, they use their own
post-consumer waste (used
carpet) as raw material input
to their production system. It
is not a perfect system, as it
still requires some newly extracted raw materials, but
they believe they are moving
in the right direction for
achieving sustainability.
With production on four
continents and offices in
more than 100 countries, Interface Inc. is the global leader
in the design, production,
and sales of modular carpet
squares. Since undertaking the
goal of sustainability, Interface
Inc. reports the following results: waste sent to landfills
from manufacturing has decreased 66 percent; energy
and water use have decreased 45 and 75 percent, respectively; greenhouse gas emissions have been lowered 82 percent; and more than 133 million pounds of
post-consumer waste has been diverted from landfills
to serve as raw materials for new carpet squares.
Source: Adapted from Dave Gustashaw and Robert W. Hall,
“From Lean to Green: Interface, Inc.”. Target 24, no. 5
(2008), pp. 6–14.
Much of this text is based on best practices, operations tools, and concepts that
have improved performance in businesses in many industries. However, best
practices are not always best in every situation. So throughout the text, we also
discuss contingencies to enhance understanding of when a particular situation
or condition may require a different approach. For example, based on research
on quality management tools and concepts, we know that they are most
successfully applied when top management fully and publicly supports their
implementation. Therefore, the contingency is top management support, and
businesses may not receive the full benefit of some of the tools and concepts
without that support. Similarly, the “best” forecasting method depends on the
circumstances. The availability of past demand data or variability in the current demand of a good or service will result in different suggested forecast
methods. The contingency of the special circumstances leads to differing
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advice on the best forecasting methods to use. Understanding contingencies in
operations is an important enhancement to the many new ideas presented in
this text.
The foregoing contemporary themes are critical to high-performing operations.
They need more emphasis in all types of organizations—from manufacturing to
services, and for-profits and nonprofits—and can be the basis for rapid and continual improvement of operations. Using these ideas, operations can be more efficient, more competitive, and more effective in meeting customer needs and in
creating value for the company and the customer.
1.8
KEY POINTS AND TERMS
This text provides a broad overview of and introduction to the exciting and dynamic
field of operations management and the supply chain. It stresses decision making in
operations and the relationship of operations decisions to other functions. The four
major decision categories—process, quality, capacity, and inventory—are the organizing framework for the text.
Key points emphasized in the chapter are these:
• Operations produces and delivers goods or services deemed to be of value to customers in a global economy. The operations function is essential for both for-profit
and nonprofit organizations.
• Operations management focuses on decisions to manage the transformation
process that converts inputs into desired finished goods or services. These decisions are intended to maximize the value inherent in goods or services delivered to customers throughout the entire supply chain.
• The supply chain is the network of manufacturing and service operations
that supply each other from raw materials through manufacturing to the
ultimate customer. The supply chain consists of the physical flow of
materials, money, and information along the entire chain of purchasing,
production, and distribution. The supply chain connects many different
organizations.
• There are four key groupings of decisions in operations: process, quality, capacity, and inventory. These decisions are useful for diagnosing and improving
existing operations or identifying the requirements for new operations. These
decisions need to account for contingencies, or special situations, because a best
practice may not be best in all circumstances.
• Operations decisions are often cross-functional in nature. Decisions may impact
or be impacted by activities in other functions such as marketing and finance.
Often, cross-functional teams are formed to undertake complex systematic
decisions.
• We identify several contemporary themes in operations that are emerging
and will be important in the future. These themes are services and manufacturing, customer-directed operations, lean, integration of operations with
other functions, environmental concerns and sustainability, supply chain
management, globalization of operations, and a contingency approach to operations.
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Chapter 1 The Operations Function 19
Key Terms
STUDENT
INTERNET
EXERCISES
Operations
management 2
Value 4
Purchasing
function 5
Logistics function 5
Supply chain 5
Decision making 5
Process 5
Quality 5
Capacity 5
Inventory 5
Process view 6
Cross-functional
decision making 12
Transformation system 12
Internal and external
environments 14
Voice of the customer 15
Lean 15
Sustainability 16
Supply chain
management 16
e-business 16
Globalization of
operations 16
1. Operations Management Center
http://www.mhhe.com/omc
This site contains many useful references to operations management. Use it to
find information of interest to you on operations and write a short report about
what you found.
2. How Everyday Things Are Made
http://manufacturing.stanford.edu/hetm.html
This site contains online resources showing how “everyday” things are made—
from Harley-Davidson motorcycles, to Tupperware food containers, to jelly
beans, to denim. Create a presentation that explains various operations decisions
relevant to the production and delivery of a product of your choosing.
3. Monster.com
http://www.monster.com
Check the monster.com website for positions and career opportunities in operations management. Come to class prepared to discuss one or two jobs in
operations that you found interesting (not necessarily an entry-level job).
Discussion Questions
1. Why study operations management?
2. What is the difference between the terms
“production management” and “operations
management”?
3. What is the difference between operations management and supply chain management?
4. What are the key decisions made by purchasing
and logistics managers?
5. How does the work of an operations manager differ from the work of a marketing manager or a finance manager? How are these functions similar?
6. How is the operations management function related to activities in human resources, information
systems, and accounting?
7. Describe the nature of operations management in
the following organizations. In doing this, first
identify the outputs of the organization and then
use the four decision types to identify important
operations decisions and responsibilities.
a. A college library
b. A hotel
c. A small manufacturing firm
8. For the organizations listed in question 7, describe
the inputs, transformation process, and outputs of
the production system.
9. Describe the decision-making view and the view of
operations as a process. Why are both views useful
in studying the field of operations management?
10. Write a short paper on some of the challenges
facing operations management in the future. Use
newspapers, business magazines, or the Internet
as your sources.
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11. Review job postings from various sources for management positions that are available for operations
management graduates. Summarize the responsibilities of these positions.
12. How do changes such as demand changes, new
pollution control laws, the changing value of currency, and price changes affect operations? Name
specific impacts on operations and the supply
chain for each change.
13. Find examples of well-run and poorly run operations in recent business periodicals such as BusinessWeek, Fortune, and The Wall Street Journal. What
do you learn from these examples?
14. Identify some of the current trends in operations
and supply chain management that you think are
of critical importance.
15. Describe how the view of operations as a process
can be applied to the following types of work:
a. Acquisition of another company.
b. Closing the books at the end of the year.
c. Marketing research for a new product.
d. Design of an information system.
e. Hiring a new employee.
Selected Bibliography
Denove, C., and James D. Power, IV. Satisfaction: How
Every Great Company Listens to the Voice of the
Customer. New York: Portfolio Trade, 2007.
González, P., J. Sarkis, and B. Adenso-Diaz.
“Environmental Management System Certification
and Its Influence on Corporate Practices.”
International Journal of Operations & Production
Management 28, no. 11 (2008), pp. 1021–1041.
Heizer, Jay, and Barry Render. Operations Management,
10th ed. Upper Saddle River, NJ: Prentice Hall, 2010.
Jacobs, F. Robert, and Richard B. Chase. Operations
and Supply Management, 13th ed. New York:
McGraw-Hill/Irwin, 2010.
Krajewski, Lee J., Larry P. Ritzman, and Manoj
Malhotra. Operations Management: Processes and
Supply Chains, 9th ed. Upper Saddle River, NJ:
Prentice Hall, 2010.
Lawrence, William W. “Turnaround: Increasing
Operations Efficiency.” Industrial Management 50,
no. 1 (January/February 2008), pp. 8–12.
Machuca, José A. D., María del Mar González-Zamora,
and Víctor G. Aguilar-Escobar. “Service Operations
Management Research.” Journal of Operations
Management 25, no. 3 (2007), pp. 585–603.
Saunders, Candice, and Christy Dempsey. “Improving
Patient Flow.” Healthcare Executive 23, no. 6
(November 2008), pp. 46–48.
“Six Rules That Help Lean Initiatives Cut Costs.”
Controller’s Report 2008, no. 12 (December
2008), p. 19.
Stevenson, William J. Operations Management, 11th ed.
New York: McGraw-Hill/Irwin, 2011.
U.S. Census Bureau—Statistical Abstract of the United
States, Washington, DC, 2012.
Wren, Daniel A. The History of Management Thought, 5th
ed. New York: Wiley, 2006.