BURKS-Instructor Notes- INTRO2BUS- CHAP 12 OPERATIONS

LEARNING OBJECTIVES

1. Describe the nature of the operations and materials management process and explain
how it builds competitive advantage and profitability.
2. Identify the five main components of operations and materials management costs and
the methods companies use to reduce them.
3. Differentiate between three major kinds of operating systems that companies use to
produce goods and services.
4. Understand the way total quality management can significantly improve both quality
and productivity.
5. Describe three materials management methods companies use to improve the flow of
resources into and out of the production system and increase operations efficiency.

I. THE NATURE OF OPERATIONS AND MATERIALS MANAGEMENT

Once a company has chosen which products to make and sell to customers, as
explained in the chapters on marketing, product development, and sales, the process of
assembling, manufacturing, or providing services to customers begins.
1. Operations or an operating system is the value-creation activities that use technology
to convert inputs into finished goods and add value to them.
2. Materials management involves controlling the flow of resources into and out of the
operating system, balancing quality with cost and timing of inputs.
3. Managing outputs means controlling
a. the inventory of finished goods.
b. ensuring enough employees available to provide customer service as needed.
c. distributing goods and services to customers.

A. The Operations and Materials Management Process

The functional activities involved in operations and materials management are
viewed as a three-stage process, whether used to provide goods or services.
1. A company’s material management skills in acquiring inputs, by balancing cost with
quality, determines how much value it creates for customers at the first stage.
2. The way a company combines the skills and knowledge of its employees with its
machinery and computer systems to actually change the inputs into goods or services
determines the value it adds in the operations stage.
3. A company’s skill in managing the flow of goods and services to customers, balancing
production and lead time with customer demand, creates value as finished goods or
services are ready for customers in the output stage.
4. The transformation process is circular. Companies use the revenues from sales to buy
more inputs and begin the value creation cycle again. By creating better value and
maintaining a competitive advantage, a company’s sales revenues increase over time,
maintaining its profitability.
B. Operations, Materials Management, and Competitive Advantage
The four building blocks of competitive advantage are superior productivity,
quality, innovation, and responsiveness to customers.
1. Productivity requires a constant search to improve value for customers by increasing
the range or type of products offered, while controlling costs. Amazon and McDonald’s
are examples used in the text to explain how companies accomplish this.
2. Innovation involves creating new and improved products, as well as finding new and
better methods to increase product quality while reducing operating costs.
3. Responsiveness to customers means having goods in stock when needed, delivering as
quickly as possible, and responding to customer complaints in a timely way.
4. Balancing costs versus revenues requires managers to pay attention to all four sources
of competitive advantage at once. Cutting services in one area to cut costs can be short-
sighted if it results in dissatisfied customers.

II. OPERATIONS AND MATERIALS MANAGEMENT COSTS AND

PROFITABILITY
The five main sources of operating costs affected by OMM activities are the costs
of (1) raw materials and components, (2) plant, (3) labor, (4) inventory, and (5)
distribution.

A. Raw Material and Component Costs

The goal of materials management is to find companies that supply high quality
raw materials and components at low costs.
1. Locating low cost suppliers, using a global approach such as outsourcing, are
important ways to reduce OMM costs.
2. Purchasing suppliers can assure control over a needed flow of inputs.
B. Plant Costs
Another goal of OMM is to reduce plant costs, the cost of machinery, computers,
tools, buildings, and equipment needed to convert inputs into finished products, while
maintaining customer value.
1. The efficient design of operating systems can reduce the cost of production.
2. Companies may outsource parts or all of their production processes to reduce costs.
3. Leasing facilities instead of owning them avoids the need to invest scarce capital in
buildings and equipment.
4. Franchising reduces operating costs of the “parent” company by having franchisees
invest the capital needed for a retail outlet.

C. Labor Costs
The cost of labor is a function of the number of employees needed to produce a
given level of outputs and the amount each employee must be paid.
1. The amount an employee must be paid depends on the level of skill, knowledge, and
experience needed.
2. The technology and complexity of a company’s operating system is a factor in
determining the qualifications and cost of labor needed.
3. Maquiladoras are areas in Mexico where many U.S. companies established
manufacturing facilities to take advantage of Mexico’s lower labor costs and lack of
regulation.
4. Locating a facility in a foreign country has its risks, such as the stability of the
political system, dependability of the infrastructure, and regulations in the economic
system.
5. Reducing costs may involve redesign of production systems or involving customers in
providing part of the operation. Self-service gas stations, supermarkets, and car washes
are examples of involving the customer.
6. The Internet has allowed many companies to cut operating costs through electronic bill
paying, shopping, and planning vacations.

D. Inventory Costs
A company’s capital is tied up in its inventory and no revenue is received until
customers buy the finished products or services. A major goal of companies today is to
reduce the costs of inventory at each stage of the OMM process.
1. Inventory is the supply of resources—materials, supplies, and goods held available in
stock.
2. At the input stage, raw materials, component parts, and customers are inventory.
3. At the operations stage, inventory consists of work-in-process.
4. Finished goods inventory is the amount of completed product ready to ship to
customers. Ideally, finished goods would be shipped to customers immediately, reducing
the cost of holding them.
5. Forecasting demand and balancing it with production is a critical part of OMM that
directly affects profitability and customer satisfaction.
6. Companies seek ways to reduce inventory costs by using IT systems for forecasting
needs, tracking inventory, and reducing production time to reduce costs and maximize
revenues.

E. Distribution Costs

Distribution costs include the costs of disposing, delivering, and shipping

products to customers.
1. The cost of shipping and delivery can be reduced by changes to packaging, for
example using pallets or plastic materials instead of glass to ship products such as
mayonnaise, ketchup, and mustard. This reduces the cost of labor and waste disposal as
well.
2. Multinationals reduce costs by manufacturing products in the countries where they are
sold.
3. Licensing producers to manufacture products in other countries shifts distribution
costs.
4. Use of the Internet eliminates the need for many bricks-and-mortar facilities.
III. TYPES OF OPERATING SYSTEMS
Three types of operating systems used to produce goods and services are small-
batch production, mass production, and flexible production. Techniques developed for
Total Quality Management (TQM) are used to improve the efficiency and effectiveness
of operations and add to profitability.

A. Small-batch Production
Small-batch production is an operating system used to make one-of-a-kind or
small quantities of customized products.
1. Customized products are designed and made to more closely match the needs of
particular users.
2. Small-batch production relies heavily on employees’ judgment about how and when to
use machines and equipment.
3. The advantage of small-batch production is its flexibility.
4. Small-batch systems have high operating costs because of the time and skill needed to
change from one customized product to another, requiring premium prices to be
profitable.

B. Mass Production
Mass production is an operating system that uses automated machines, rules, and
standardized operating procedures (SOPs) to control the work process.
1. These systems produce large quantities of standardized products.
2. The work to produce standardized products is routine and less employee judgment is
needed.
3. Components must be standardized from beginning to end of the process to meet quality
and specifications to avoid problems of defects in the final product.
4. Operating costs in mass production are lower because it is a highly efficient operating
system. When large numbers of units are made, companies learn to reduce the costs by
designing efficient machines, technology, and methods.
5. Since costs are lower companies are able to charge less, appealing to larger numbers of
customers.

C. Flexible Production
Flexible manufacturing systems combine the advantages of small-batch and
mass production. They use computer-integrated manufacturing, flexible employees, and
work teams to respond to rapidly changing customer needs while keeping costs low.
1. Computer-integrated manufacturing (CIM) uses computers and software to control
the changeover of machines and robots from one operation to another. This can be done
much more rapidly and at a much lower cost than in mass production or small-batch
systems.
2. Flexible employees and work groups contribute to the advantages of flexible
manufacturing through new organization structures and skill development.
3. Flexible work teams are responsible for performing all of the jobs needed to complete
a part or all of a product. They are cross-trained to perform all of the jobs needed and are
self-managed.
4. Production layouts group flexible workers and equipment into pods or cells for
efficiency.

D. Improving Operations Quality: Total Quality Management

Total Quality Management (TQM) is an operations technique whose goal is the
continuous improvement of the production process to increase quality, reduce production
time and waste, and reduce operating costs.
1. TQM empowers employees to make them responsible for improving work processes to
raise product quality and reduce costs.
2. Benchmarking involves studying another company known for its high performance in
a functional activity and seeks to match them. It is a way to set stretch goals.
3. Important steps in TQM include:
a. Identify defects, trace them to their source, and fix quality problems
b. Design products that are easy to assemble
c. Identify customer needs, translate the needs into quality requirements, and
shape the production system to meet the quality requirements
d. Work to break down the barriers between functional departments to get needed
cooperation to improve operating methods
e. Solicit suggestions from employees at all levels, including the lowest, through
quality control circles, to improve the quality of the organization’s products.

IV. MATERIALS MANAGEMENT METHODS

Many companies today are managing the complex flow of resources into and out
of the operating system using computer-aided materials management, global supply chain
management, and just-in-time inventory systems to build competitive advantage.

A. Computer-Aided Materials Management

Computer-Aided Materials Management (CAMM) is used to manage the flow
of materials and component parts into and out of the operating system.
1. CAMM makes it possible to change from the old systems that push materials and
components through an operating system based on estimated forecasts, which might be
accurate or not, of the number of units needed for sale.
2. CAMM makes it possible to use a pull approach that uses real-time customer orders
instead of estimated forecasts. This reduces the accumulation of overstocks and the cost
of maintaining inventory all along the line.
B. Just-In-Time Inventory Systems
Just-in-time inventory systems (JIT) requires that inputs and components
needed to assemble a product be delivered to the operating system just as they are needed
for production.
1. JIT requires that inputs arrive just when needed, neither early or late.
2. This reduces inventory costs to a minimum.
3. CAMM is needed to coordinate production with a company’s suppliers.
4. Just-in-time systems expand and strengthen the linkages between suppliers,
manufacturers, and customers. Your suppliers suppler and your customer’s customer
become yours as well.

REVIEW OF LEARNING OBJECTIVES

1. Describe the nature of the operations and materials management process and
explain how it builds competitive advantage and profitability.
Operations management controls the processes at the center of the value chain
used by a company to transform inputs to outputs. Materials management controls the
flow of resources into and out of the operating system. They can be used to build
competitive advantage by creating superior productivity, quality, innovation, and
responsiveness to customers.
2. Identify the five main components of operations and materials management costs
and the methods companies use to reduce them.
The five main sources of operations and materials management costs are raw
materials and components, labor, plant, inventory and distribution. Methods used to
reduce costs are purchasing suppliers, global purchasing and outsourcing of production,
using efficient designs, licensing and franchising, and using just-in-time inventory
systems.

3. Differentiate between three major kinds of operating systems that companies use
to produce goods and services.
Three main types of production systems are small-batch systems which make one-
of-a-kind or small quantities of product, mass production which uses automated machines
and standard operating procedures to control the work process and reduce operating
costs, and flexible production which uses computer-based equipment and inventory
control systems to achieve the benefits of small-batch production at a much lower cost.

4. Understand the way total quality management can significantly improve both
quality and productivity.
Total Quality Management (TQM) is an operations technique whose goal is the
continuous improvement of the production process to increase quality, reduce production
time and waste, and reduce operating costs. TQM empowers employees to make them
responsible for improving work processes to raise product quality and reduce costs. It
uses benchmarking to study another company known for its high performance in a
functional activity and seeks to match them. Important steps in TQM include: identifying
defects, tracing them to their source, and fixing quality problems, designing products that
are easy to assemble, identifying customer needs, translating the needs into quality
requirements, and shaping the production system to meet the quality requirements,
working to break down the barriers between functional departments to get needed
cooperation to improve operating methods, and soliciting suggestions from employees at
all levels, including the lowest, through quality control circles.

5. Describe three materials management methods companies use to improve the flow
of resources into and out of the production system and increase operations
efficiency.
Three materials management methods companies use are computer-aided
materials management, global supply chain and delivery logistics management, and just-
in-time inventory control.