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COMPETING WITH

1 OPERATIONS

For Operations Management, 9e by


PowerPoint Slides
Krajewski/Ritzman/Malhotra
by Jeff Heyl © 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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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 &
Figure 1.1 Service Outputs
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A Process View
External environment

Internal and external


customers

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

Information on
performance

Figure 1.2

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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

Figure 1.3
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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

Figure 1.4

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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
TABLE 1.1 | 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
Figure 1.5
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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
TABLE 1.2 | 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 possible operated to make them efficient
cost
QUALITY
2. Top quality Delivering an outstanding May require a high level of customer Ferrari
service or product contact and may require superior
product features
3. Consistent quality Producing services or productsProcesses designed and monitored to McDonald’s
that meet design specifications reduce errors and prevent defects
on a consistent basis

TIME
4. Delivery speed Quickly filling a customer’s Design processes to reduce lead time Dell
order
5. On-time delivery Meeting delivery-time Planning processes to increase percent United Parcel Service
promises of customer orders shipped when (UPS)
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
TABLE 1.2 | DEFINITIONS, PROCESS CONSIDERATIONS, AND EXAMPLES OF COMPETITIVE
PRIORITIES

FLEXIBILITY Definition Process Considerations Example


7. Customization Satisfying the unique needs of Low volume, close customer contact, Ritz Carlton
each customer by changing and easily reconfigured
service or products designs

8. Variety Handling a wide assortment of Capable of larger volumes than Amazon.com


services or products efficiently processes supporting customization

9. Volume flexibility Accelerating or decelerating Processes must be designed for excess The United States
the rate of production of capacity Postal Service (USPS)
service or 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

Figure 1.6

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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
TABLE 1.3 | OPERATIONS STRATEGY ASSESSMENT OF THE BILLING AND PAYMENT PROCESS

Competitive Priority Measure Capability Gap Action


Low-cost operations  Cost per billing  $0.0813  Target is $0.06  Eliminate microfilming and storage of
statement billing statements

 Weekly  $17,000  Target is  Develop Web-base process for


postage $14,000 posting bills
Consistent quality  Percent errors  0.90%  Acceptable  No action
in bill
information

 Percent errors  0.74%  Acceptable  No action


in posting
payments

Delivery speed  Lead time to  48 hours  Acceptable  No action


process
merchant
payments
Volume flexibility  Utilization  98%  Too high to  Acquire temporary employees
support rapid
increase in  Improve work methods
volumes

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Trends in Operations Management

Productivity improvement
Global competition
Ethical, workforce, and environmental
issues

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Productivity Improvement
EXAMPLE 1.1
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 1.1
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 cost $39,000 $33,000 —
of sales ($)

 Calculate the year-to-date labor productivity:


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

 Calculate the multifactor productivity:


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

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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
2. Each function is MANAGING SUPLY CHAINS

connected through Supply Chain Design


shared resources Supply Chain Integration
Location
Inventory Management
Forecasting
Operations Planning and Scheduling
Resource Planning

Figure 1.7
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Challenges in OM

Part 1: Using operations to compete


Part 2: Managing processes
Part 3: Managing supply chains

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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.

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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Solved 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
of output =
class student credit hour

= $37,500/class

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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Solved 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
of input =
week class

= 224 hours/class

Output $45,000/class
ductivity = =
Input 224 hours/class

= $200.89/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

SOLUTION

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


+ (80 garments × 200/garment)

= $20,680

ours of input = 360 hours

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

= $57.44 in sales per hour

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