COMPETING WITH

1 OPERATIONS

For Operations Management, 9e by

Krajewski/Ritzman/Malhotra
© 2010 Pearson Education
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
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Operations Management

 The systematic design, direction, and

control of processes that transform
inputs into services and products for
internals, as well as external, customers

 Processes can be linked together to form

a supply chain – interrelated processes
within a firms and across different firms
that produce a service or product to the
satisfaction of the customers

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 Operations Management is…

“The systematic design, direction and control of

processes that transform inputs into services and
products for internal, as well as external, customers.”

Transformation Processes
Inputs Outputs
(Adding value)

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OM as a Set of Decisions
USING OPERATIONS TO COMPETE

 In practice, managers Competing with Operations

make strategic and Project Management

tactical decisions MANAGING PROCESSES

1. Each part of the

Process Strategy
organization designs Process Analysis
Quality and Performance
and operates Capacity Planning
Lean Systems
processes
MANAGING SUPLY CHAINS

2. Each function is
Supply Chain Design
connected through Supply Chain Integration
Location
shared resources Inventory Management
Forecasting
Operations Planning and Scheduling
Resource Planning

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 10 Critical OM Decisions

6. Human resources
1. Goods and service and job design
design
7. Supply chain
2. Quality management
3. Process and
capacity design 8. Inventory
4. Location selection 9. Scheduling
5. Layout design 10. Maintenance

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Across the Organization
Finance
Acquires financial
resources and capital
for inputs

Material & Sales

Service Inputs Revenue

Support Functions
• Accounting
• Information Systems
• Human Resources
Operations • Engineering Marketing
Translates Generates sales
materials and of outputs
service into
outputs
Product &
Service Outputs
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A Process View
External environment

Internal and external

customers

Inputs Outputs
Processes and
• Workers operations • Goods
• Managers • Services
• Equipment 1 3
• Facilities
5
• Materials
• Land 2 4
• Energy

Information on
performance

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A Process View

More like a More like a

manufacturing service
process process

• Physical, durable output • Intangible, perishable output

• Output can be inventoried • Output cannot be inventoried
• Low customer contact • High customer contact
• Long response time • Short response time
• Capital intensive • Labor intensive
• Quality easily measured • Quality not easily measured

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The Supply Chain View

Support Processes

New
Customer

External customers
service/
External suppliers

product relationship
development management

Supplier Order
relationship fulfillment
process process

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The Supply Chain View

 Core processes are sets of activities that

deliver value to external customers
1. Supplier relationship process
2. New service/product development process
3. Order fulfillment process
4. Customer relationship process

 Support processes provide vital

resources and inputs to the core
processes

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Support Processes
EXAMPLES OF SUPPORT PROCESSES
Capital acquisition The provision of financial resources for the
organization to do its work and to execute its
strategy
Budgeting The process of deciding how funds will be
allocated over a period of time
Recruitment and hiring The acquisition of people to do the work of
the organization
Evaluation and compensation The assessment and payment of people for
the work and value they provide to the
company
Human resource support and development The preparation of people for their current
jobs and future skills and knowledge needs
Regulatory compliance The processes that ensure that the company
is meeting all laws and legal obligations
Information systems The movement and processing of data and
information to expedite business operations
and decisions
Enterprise and functional management The systems and activities that provide
strategic direction and ensure effective
execution of the work of the business

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Operations Strategy

 Specifies the means by which operations

implements corporate strategy and helps
build a customer-driven firm

 Corporate strategy provides an overall

direction that serves as the framework for
carrying out all the organization's functions

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Operations Strategy
Corporate Strategy
• Environmental scanning Market Analysis
• Core competencies • Market segmentation
• Core processes • Needs assessment
• Global strategies
Competitive Priorities
• Cost
• Quality
• Time
• Flexibility

New Service/
Product Development
• Design
• Analysis No
• Development
• Full launch
Performance
Yes Gap?
Operations Strategy

Competitive Capabilities
Decisions
• Current
• Managing processes
• Needed
• Managing supply chains
• Planned

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Corporate Strategy

 Environmental scanning

 Developing core competencies

1. Workforce
2. Facilities
3. Market and financial know-how
4. Systems and technologies

 Developing core processes

 Global strategies
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Market Analysis

 Market segmentation

 Needs assessment
 Service or product needs
 Delivery system needs
 Volume needs
 Other needs

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Competitive Priorities

DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE PRIORITIES

COST Definition Process Considerations Example

1. Low-cost Delivering a service or a Processes must be designed and Costco
operations product at the lowest operated to make them efficient
possible cost
QUALITY
2. Top quality Delivering an outstanding May require a high level of Ferrari
service or product customer contact and may require
superior product features
3. Consistent Producing services or Processes designed and McDonald’s
quality products that meet design monitored to reduce errors and
specifications on a prevent defects
consistent basis
TIME
4. Delivery speed Quickly filling a Design processes to reduce lead Dell
customer’s order time
5. On-time Meeting delivery-time Planning processes to increase United Parcel
delivery promises percent of customer orders Service (UPS)
shipped when promised
6. Development Quickly introducing a new Cross-functional integration and Li & Fung
speed science or a product involvement of critical external
suppliers

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Competitive Priorities

DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE PRIORITIES

FLEXIBILITY Definition Process Considerations Example

7. Customization Satisfying the unique Low volume, close customer Ritz Carlton
needs of each customer contact, and easily reconfigured
by changing service or
products designs
8. Variety Handling a wide Capable of larger volumes than Amazon.com
assortment of services or processes supporting
products efficiently customization
9. Volume Accelerating or Processes must be designed for The United States
flexibility decelerating the rate of excess capacity Postal Service
production of service or (USPS)
products quickly to
handle large fluctuations
in demand

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Order Winners and Qualifiers

Order Winner
Sales ($)

Order Qualifier

Sales ($)
Low High

Achievement of competitive priority

Low Threshold High

Achievement of competitive priority

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Using Competitive Priorities

At an airline
 Customer relationship
 Top quality
 Consistent quality
 Delivery speed
 Variety

 New service development

 Development speed
 Customization

 Top quality

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Using Competitive Priorities

At an airline
 Order fulfillment
 Low-cost operations
 Top quality
 Consistent quality
 On-time delivery
 Variety

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Using Competitive Priorities

At an airline
 Supplier relationship
 Low-cost operations
 Consistent quality
 On-time delivery
 Variety
 Volume flexibility

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Operations Strategy
OPERATIONS STRATEGY ASSESSMENT OF THE BILLING AND PAYMENT PROCESS

Competitive Priority Measure Capability Gap Action

Low-cost operations  Cost per  $0.0813  Target is  Eliminate microfilming and
billing $0.06 storage of billing statements
statement
 Weekly  $17,000  Target is  Develop Web-base process for
postage $14,000 posting bills
Consistent quality  Percent  0.90%  Acceptable  No action
errors in
bill
information
 Percent  0.74%  Acceptable  No action
errors in
posting
payments
Delivery speed  Lead time  48 hours  Acceptable  No action
to process
merchant
payments
Volume flexibility  Utilization  98%  Too high to  Acquire temporary employees
support  Improve work methods
rapid
increase in
volumes

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Productivity Improvement: Example
Calculate the productivity for the following operations:

a. Three employees process 600 insurance policies in a week.

They work 8 hours per day, 5 days per week.

SOLUTION
Policies processed
a. Labor productivity =
Employee hours

600 policies
= = 5 policies/hour
(3 employees)(40 hours/employee)

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Productivity Improvement: Example
Calculate the productivity for the following operations:

b. A team of workers makes 400 units of a product, which is

sold in the market for $10 each. The accounting department
reports that for this job the actual costs are $400 for labor,
$1,000 for materials, and $300 for overhead.

SOLUTION
Value of output
a. Multifactor productivity =
Labor cost + Materials cost
+ Overhead cost

(400 units)($10/unit) $4,000

= = = 2.35
$400 + $1,000 + $300 $1,700

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Application
This Year Last Year Year Before Last
Factory unit sales ($) 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,00
Sales of manufactured $49,363 $40,831 —
products ($)
Total manufacturing $39,000 $33,000 —
cost of sales ($)

 Calculate the year-to-date labor productivity:

This Year Last Year Year Before Last
factory unit sales 2,762,103 2,475,738 2,175,447
= 24.66/hr = 21.91/hr = $18.91/hr
employment 112,000 113,000 115,000

 Calculate the multifactor productivity:

This Year Last Year
sales of mfg products $49,363 $40,831
= 1.27 = 1.24
total mfg cost $39,000 $33,000

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Problem 1

Student tuition at Boehring University is $150 per semester

credit hour. The state supplements school revenue by $100 per
semester credit hour. Average class size for a typical 3-credit
course is 50 students. Labor costs are $4,000 per class,
material costs are $20 per student per class, and overhead
costs are $25,000 per class.

a. What is the multifactor productivity ratio for this course

process?

b. If instructors work an average of 14 hours per week for 16

weeks for each 3-credit class of 50 students, what is the labor
productivity ratio?

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Problem 1: Solution

a. Multifactor productivity is the ratio of the value of output to

the value of input resources.

$150 tuition +
50 student 3 credit hours $100 state support
Value of output =
class student credit hour

= $37,500/class

Value of inputs = Labor + Materials + Overhead

= $4,000 + ($20/student  50 students/class) + $25,000
= $30,000/class

Output $37,500/class
Multifactor productivity = = = 1.25
Input $30,000/class

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Problem 1: Solution

b. Labor productivity is the ratio of the value of output to

labor hours. The value of output is the same as in part (a),
or $45,000, so

14 hours 16 weeks
Labor hours of input =
week class

= 224 hours/class

Output $45,000/class
Labor productivity = =
Input 224 hours/class

= $200.89/hour

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Problem 2

Natalie Attire makes fashionable garments.

During a particular week employees worked
360 hours to produce a batch of 132 garments,
of which 52 were “seconds” (meaning that they
were flawed). Seconds are sold for $90 each at
Attire’s Factory Outlet Store. The remaining 80
garments are sold to retail distribution at $200
each.

What is the labor productivity ratio of this

manufacturing process?

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Problem 2: Solution

Value of output = (52 defective  90/defective)

+ (80 garments  200/garment)

= $20,680

Labor hours of input = 360 hours

Output $20,680
Labor productivity = =
Input 360 hours

= $57.44 in sales per hour

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Trends in Operations Management

 Productivity improvement

 Global competition

 Ethical, workforce, and

environmental issues

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Challenges in OM

Using operations to compete

Managing processes

Managing supply chains

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 Addressing the Challenges in
Operations Management

Managing Value Chains

Managing Processes
Using Operations
Supply Chain Strategy
to Compete

Process Strategy Location

Operations As a
Competitive Weapon Inventory Management
Process Analysis

Operations Strategy Process Performance Forecasting

& Quality

Constraint Management Sales & Operations

Project Management Planning

Process Layout
Resource Planning

Lean Systems Scheduling

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