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USING OPERATIONS�TO CREATE VALUE

CHAPTER 1

ENG. SAIF SALEH ALZYOUD

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WHAT IS OPERATIONS MANAGEMENT?

Operations Management

The systematic design, direction, and control of processes that transform inputs into services and products for internal, as well as external, customers

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OPERATIONS MANAGEMENT

Process

Any activity or group of activities that takes one or more inputs, transforms them, and provides one or more outputs for its customers

Operation

A group of resources performing all or part of one or more processes

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WHAT IS SUPPLY CHAIN MANAGEMENT?

Supply Chain Management

The synchronization of a firm’s processes with those of its suppliers and customers to match the flow of materials, services, and information with customer demand

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SUPPLY CHAIN MANAGEMENT

Supply Chain

An interrelated series of processes within and across firms the produces a service or product to the satisfaction of customers

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ROLE OF OPERATIONS IN AN ORGANIZATION

Integration between Different Functional Areas of a Business

Figure 1.1

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HOW PROCESSES WORK

Figure 1.2

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HOW PROCESSES WORK

Every process and every person in the organization has customers

External customers
Internal customers

Every process and every person in the organization relies on suppliers

External suppliers
Internal suppliers

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NESTED PROCESSES

Nested Process

The concept of a process within a process

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SERVICE AND MANUFACTURING PROCESSES

Physical, durable output
Output can be inventoried
Low customer contact
Long response time
Capital intensive
Quality easily measured

Intangible, perishable output
Output cannot be inventoried
High customer contact
Short response time
Labor intensive
Quality not easily measured

More like a manufacturing process

More like a service process

Differ Across Nature of Output and Degree of Customer Contact

Figure 1.3

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A SUPPLY CHAIN VIEW

Each activity in a process should add value to the preceding activities; waste and unnecessary cost should be eliminated.

Figure 1.4

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THE SUPPLY CHAIN VIEW

Supplier relationship process – A process that selects the suppliers of services, materials, and information and facilitates the timely and efficient flow of these items into the firm

Figure 1.4

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THE SUPPLY CHAIN VIEW

New service/product development – A process that designs and develops new services or products from inputs from external customer specifications or from the market

Figure 1.4

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THE SUPPLY CHAIN VIEW

Order fulfillment process – A process that includes the activities required to produce and deliver the service or product to the external customer

Figure 1.4

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THE SUPPLY CHAIN VIEW

Customer relationship process – A process that identifies, attracts and builds relationships with external customers and facilitates the placement of orders by customers
(customer relationship management)

Figure 1.4

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THE SUPPLY CHAIN VIEW

Support Processes - Processes like Accounting, Finance, Human Resources, Management Information Systems and Marketing that provide vital resources and inputs to the core processes

Figure 1.4

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SUPPLY CHAIN PROCESS

Supply Chain Processes

Business processes that have external customers or suppliers
Examples

Outsourcing
Warehousing
Sourcing
Customer Service
Logistics
Crossdocking

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OPERATIONS STRATEGY

Operations Strategy

The means by which operations implements the firm’s corporate strategy and helps to build a customer-driven firm

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OPERATIONS STRATEGY

Corporate Strategy

Environmental scanning
Core competencies
Core processes
Global strategies

Market Analysis

Market segmentation
Needs assessment

Competitive Priorities

Cost
Quality
Time
Flexibility

New Service/

Product Development

Design
Analysis
Development
Full launch

Operations Strategy

Decisions

Managing processes
Managing supply chains

Competitive Capabilities

Current
Needed
Planned

Performance Gap?

No

Yes

Figure 1.5

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CORPORATE STRATEGY

Corporate Strategy

Provides an overall direction that serves as the framework for carrying out all the organization’s functions

Environmental Scanning
Core Competencies
Core Processes
Global Strategies

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MARKET ANALYSIS

Market Analysis

Understand what the customers want and how to provide it.

Market Segmentation
Needs Assessment

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COMPETITIVE PRIORITIES AND CAPABILITIES

Competitive Priorities
The critical dimensions that a process or supply chain must possess to satisfy its internal or external customers, both now and in the future.

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COMPETITIVE CAPABILITIES �

The cost, quality, time, and flexibility dimensions that a process or supply chain actually possesses and is able to deliver.

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ORDER WINNERS AND QUALIFIERS

Order Winners
A criterion customers use to differentiate the services or products of one firm from those of another.

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ORDER QUALIFIERS�

Minimum level required from a set of criteria for a firm to do business in a particular market segment.

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ORDER WINNERS AND QUALIFIERS

COST	Definition	Process Considerations	Example
Low-cost operations	Delivering a service or a product at the lowest possible cost	Processes must be designed and operated to make them efficient	Costco
QUALITY
Top quality	Delivering an outstanding service or product	May require a high level of customer contact and may require superior product features	Rolex
Consistent quality	Producing services or products that meet design specifications on a consistent basis	Processes designed and monitored to reduce errors and prevent defects	McDonald’s

Table 1.3

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ORDER WINNERS AND QUALIFIERS

TIME	Definition	Process Considerations	Example
Delivery speed	Quickly filling a customer’s order	Design processes to reduce lead time	Netflix
On-time delivery	Meeting delivery-time promises	Planning processes used to increase percent of customer orders shipped when promised	United Parcel Service (UPS)
Development speed	Quickly introducing a new service or a product	Cross-functional integration and involvement of critical external suppliers	Zara

Table 1.3

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ORDER WINNERS AND QUALIFIERS

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

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RELATIONSHIP OF ORDER WINNERS TO COMPETITIVE PRIORITIES

Figure 1.6

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RELATIONSHIP OF ORDER QUALIFIERS TO COMPETITIVE PRIORITIES

Figure 1.6

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

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ADDRESSING THE TRENDS AND CHALLENGES IN OPERATIONS MANAGEMENT

Measuring Productivity :

The Role of Management

Output

Input

Productivity =

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EXAMPLE 1.1

a. Three employees process 600 insurance policies in a week. They work 8 hours per day, 5 days per week.

Labor productivity =

Policies processed

Employee hours

Calculate the Productivity for the following operations:

= = 5 policies/hour

600 policies

(3 employees)(40 hours/employee)

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EXAMPLE 1.1

A team of workers makes 400 units of a product, which is sold in the market for $10 each. The accounting department reports that for this job the actual costs are $400 for labor, $1,000 for materials, and $300 for overhead.

Multifactor productivity =

Value of output

Labor cost + Materials cost

+ Overhead cost

= = = 2.35

(400 units)($10/unit)

$400 + $1,000 + $300

$4,000

$1,700

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APPLICATION 1.1


	factory unit sales
	employment

Calculate the year-to-date labor productivity:

Calculate the multifactor productivity:

	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	115,000
Sales of manufactured products ($)	$49,363	$40,831	—
Total manufacturing cost of sales ($)	$39,000	$33,000	—

This Year
	$49,363	= 1.27
	$39,000

Last Year
	2,475,738	= 21.91/hr
	113,000

Year Before Last
	2,175,447	= $18.91/hr
	115,000

This Year
	2,762,103	= 24.66/hr
	112,000


	sales of mfg products
	total mfg cost

Last Year
	$40,831	= 1.24
	$33,000

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ADDRESSING THE TRENDS AND CHALLENGES IN OPERATIONS MANAGEMENT

Global Competition

Ethical, Workforce Diversity, and Environmental Issues

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SOLVED PROBLEM 1

Student tuition at Boehring University is $150 per semester credit hour. The state supplements school revenue by $100 per semester credit hour. Average class size for a typical 3-credit course is 50 students. Labor costs are $4,000 per class, material costs are $20 per student per class, and overhead costs are $25,000 per class.

What is the multifactor productivity ratio for this course process?
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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SOLVED PROBLEM 1

Multifactor productivity is the ratio of the value of output to the value of input resources.

Value of output =

50 student

class

$150 tuition +

$100 state support

credit hour

3 credit hours

student

Value of inputs = Labor + Materials + Overhead

= $37,500/class

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

= $30,000/class

= = 1.25

$37,500/class

$30,000/class

Output

Input

Multifactor�productivity

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SOLVED PROBLEM 1

Labor productivity is the ratio of the value of output to labor hours. The value of output is the same as in part (a), or $37,500/class, so

Labor hours of input =

14 hours

week

16 weeks

class

Labor productivity =

$37,500/class

224 hours/class

Output

Input

= 224 hours/class

= $167.41/hour

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SOLVED PROBLEM 2

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

What is the labor productivity ratio of this manufacturing process?

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SOLVED PROBLEM 2

Labor productivity =

$20,680

360 hours

Output

Input

Labor hours of input = 360 hours

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

+ (80 garments × 200/garment)

= $20,680

= $57.44 in sales per hour

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