Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
sch25243_ch01_001-020.indd Page 1 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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. sch25243_ch01_001-020.indd Page 2 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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. sch25243_ch01_001-020.indd Page 3 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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 sch25243_ch01_001-020.indd Page 4 9/11/12 4:52 PM user-f502 4 Part One /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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). sch25243_ch01_001-020.indd Page 5 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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” sch25243_ch01_001-020.indd Page 6 10/5/12 3:11 PM user-f502 6 Part One /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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. sch25243_ch01_001-020.indd Page 7 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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 sch25243_ch01_001-020.indd Page 8 10/5/12 3:11 PM user-f502 8 Part One /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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. sch25243_ch01_001-020.indd Page 9 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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 sch25243_ch01_001-020.indd Page 10 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles sch25243_ch01_001-020.indd Page 11 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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.” sch25243_ch01_001-020.indd Page 12 9/11/12 4:52 PM user-f502 12 Part One /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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. sch25243_ch01_001-020.indd Page 13 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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. sch25243_ch01_001-020.indd Page 14 9/11/12 4:52 PM user-f502 14 Part One /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles Introduction 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 sch25243_ch01_001-020.indd Page 15 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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 sch25243_ch01_001-020.indd Page 16 9/11/12 4:52 PM user-f502 16 Part One /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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. sch25243_ch01_001-020.indd Page 17 10/5/12 3:12 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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 sch25243_ch01_001-020.indd Page 18 9/11/12 4:52 PM user-f502 18 Part One /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles Introduction 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. sch25243_ch01_001-020.indd Page 19 9/11/12 4:52 PM user-f502 /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles 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. sch25243_ch01_001-020.indd Page 20 9/11/12 4:52 PM user-f502 20 Part One /202/MH01834/sch25243_disk1of1/0073525243/sch25243_pagefiles Introduction 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.