topic 1 nov 23, 2014

14 Part 1 • Operations Management

China and India are not the only popular outsourcing venues. Increased outsourcing competi-tion comes from other low-cost countries such as the Philippines, Vietnam, Malaysia, Mexico,Brazil, and Eastern Europe. In addition, many companies are bringing their supply chain closer tohome, a concept known as near-sourcing.

All this means that the dynamic nature of global competition is accelerating, and companiesneed to fight harder to remain competitive. Operations and supply chain managers are an impor-tant part of that fight, whether it’s maintaining overseas operations, coordinating supply chains,negotiating contracts, or monitoring quality. In the next section, we explore the concepts of com-petitiveness, and its surrogate, productivity.

• Internet Exercises

PRODUCTIVITY AND COMPETITIVENESS

A global marketplace for products and services means more customers and more intense com-petition. In the broadest terms, we speak of competitiveness in reference to other countriesrather than to other companies. That’s because how effectively a nation competes in the globalmarketplace, affects the economic success of the nation and the quality of life for its citizens.The OECD (Organization for Economic Cooperation and Development) defines competitivenessas “the degree to which a nation can produce goods and services that meet the test of interna-tional markets while simultaneously maintaining or expanding the real incomes of its citizens.”The most common measure of competitiveness is productivity. Increases in productivityallow wages to grow without producing inflation, thus raising the standard of living. Produc-tivity growth also represents how quickly an economy can expand its capacity to supplygoods and services.

Productivity is calculated by dividing units of output by units of input.

Output can be expressed in units or dollars in a variety of scenarios, such as sales made, productsproduced, customers served, meals delivered, or calls answered. Single-factor productivity com-pares output to individual inputs, such as labor hours, investment in equipment, material usage, orsquare footage. Multifactor productivity relates output to a combination of inputs, such as (labor �capital) or (labor � capital � energy � materials). Capital can include the value of equipment,facilities, inventory, and land. Total factor productivity compares the total quantity of goodsand services produced with all the inputs used to produce them. These productivity formulas aresummarized in Table 1.2.

Productivity =Output

Input

Competitiveness:the degree to which a nation can

produce goods and services that

meet the test of international

markets.

Productivity:the ratio of output to input.

Single-Factor Productivity

Multifactor Productivity

Total Factor Productivity

Goods and services produced

All inputs used to produce them

Output

Labor + Energy + Capital

Output

Labor + Materials + Overhead

Output

Capital

Output

Materials

Output

Labor

Table 1.2

Measures ofProductivity

Chapter 1 • Introduction to Operations and Supply Chain Management 15

Osborne Industries is compiling the monthly productivity report for its Board of Directors.From the following data, calculate (a) labor productivity, (b) machine productivity, and (c) themultifactor productivity of dollars spent on labor, machine, materials, and energy. The aver-age labor rate is $15 an hour, and the average machine usage rate is $10 an hour.

Solution

(a)

(b)

(c)

The Excel solution to this problem is shown in Exhibit 1.1.

= 100,000

$250,000 = 0.4 units per dollar spent

= 100,000

(10,000 * $15) + (5,000 * $10)

+ $35,000 + $15,000

Multifactor productivity = Output

Labor costs + Machine costs

+ Material costs + Energy costs

Machine productivity = Output

Machine hours =

100,000

5,000 = 20 units/hour

Labor productivity = Output

Labor hours =

100,000

10,000 = 10 units/hour

Example 1.1

CalculatingProductivity

Units produced 100,000Labor hours 10,000Machine hours 5,000Cost of materials $35,000Cost of energy $15,000

• Animated Demo Problem

Exhibit 1.1

OsborneIndustries

B5*B7

B6*B8

B4/B5

B4/B6

B4/B14

• Excel File


The most common input in productivity calculations is labor hours. Labor is an easily identi-fied input to virtually every production process. Productivity is a relative measure. Thus, produc-tivity statistics provided in government reports typically measure percent changes in productivityfrom month to month, quarter to quarter, year to year, or over a number of years.

Productivity statistics can be misleading. Examining the formula for productivity,output/input, it becomes apparent that productivity can be increased in different ways. For exam-ple, a country or firm may increase productivity by decreasing input faster than output. Thus,although the company may be retrenching, its productivity is increasing. Seldom is this avenue forincreasing productivity sustainable.

Figure 1.9 shows the growth rate in productivity for select countries for 2008, a year of globalrecession. Only five countries exhibited positive growth rates, led by Korea and the United Stateswith increases of 1.2%. Examining the outputs and inputs more closely in Figure 1.10, we findthat Korea and the United States achieved those increases in very different ways. Korea saw small

Republic of KoreaUnited States

NorwayBelgium

United KingdomGermanyJapanTaiwanFranceSpainAustraliaNetherlandsCanadaItalySwedenDenmarkSingapore

20–2–4–6–8

Figure 1.9

ProductivityGrowth, 2008(output per laborhours)

Source: U.S. Bureau of Labor

Statistics. International

Comparisons of Manufacturing

Productivity and Unit Labor Costs—

2008, Washington, DC: October 22,

2009, p. 3.

Republic of Korea

Input (in hours worked)

Output (in units)

United States

Norway

Belgium

United Kingdom

Germany

Japan

Taiwan

France

Spain

Australia

Netherlands

Canada

Italy

SwedenDenmark

Singapore

2 40–2–4–6

Figure 1.10

Percent Change inInput and Output,2008

Source: U.S. Bureau of Labor

Statistics. International

Comparisons of Manufacturing

Productivity and Unit Labor Costs—

2008, Washington, DC: October 22,

2009, p. 3.

increases in both its output and the input required to produce that output. The recession in theUnited States caused a decrease in both output and input; however, the cut in input (i.e., laborhours) was more severe, thereby producing a slight increase in productivity.

Productivity statistics also assume that if more input were available, output would increaseat the same rate. This may not be true, as there may be limits to output other than those on whichthe productivity calculations are based. Furthermore, productivity emphasizes output produced,not output sold. If products produced are not sold, inventories pile up and increases in outputcan actually accelerate a company’s decline.

As the business world becomes more competitive, firms must find their own path to sustain-able competitive advantage. Effectively managed operations are important to a firm’s competitive-ness. How a firm chooses to compete in the marketplace is the subject of the next section: Strategyand Operations.


Mission andVision

CorporateStrategy

OperationsStrategy

MarketingStrategy

FinancialStrategy

Voice of theCustomer

Voice of theBusiness

Figure 1.11

StrategicPlanning

STRATEGY AND OPERATIONS

Strategy is how the mission of a company is accomplished. It unites an organization, provides con-sistency in decisions, and keeps the organization moving in the right direction. Operations andsupply chain management play an important role in corporate strategy.

As shown in Figure 1.11, the strategic planning process involves a hierarchy of decisions.Senior management, with input and participation from different levels of the organization, developsa corporate strategic plan in concurrence with the firm’s mission and vision, customer requirements(voice of the customer), and business conditions (voice of the business). The strategic plan focuseson the gap between the firm’s vision and its current position. It identifies and prioritizes what needsto be done to close the gap, and it provides direction for formulating strategies in the functionalareas of the firm, such as marketing, operations, and finance. It is important that strategy in each ofthe functional areas be internally consistent as well as consistent with the firm’s overall strategy.

Strategy formulation consists of five basic steps:

1. Defining a primary task2. Assessing core competencies3. Determining order winners and order qualifiers4. Positioning the firm5. Deploying the strategy

PRIMARY TASKThe primary task represents the purpose of a firm—what the firm is in the business of doing. It alsodetermines the competitive arena. As such, the primary task should not be defined too narrowly. Forexample, Norfolk Southern Railways is in the business of transportation, not railroads. Paramount is

Strategy:provides direction for

achieving a mission.

Primary task:what the firm is in the

business of doing.

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in the business of communication, not making movies. Amazon’s business is providing the fastest,easiest, and most enjoyable shopping experience, while Disney’s is making people happy! The pri-mary task is usually expressed in a firm’s mission statement.

Mission statements clarify what business a company is in—for Levi Strauss it’s “brandedcasual apparel”; for Intel it’s supplying “building blocks to the Internet economy”; for Binney& Smith (Crayola) it’s “colorful visual expression”; for Currency Doubleday it’s “ideas thatlink business with life’s meaning”; for eBay it’s “trading communities”; and for Merck it’s“preserving and improving human life.” Mission statements are the “constitution” for an orga-nization, the corporate directive, but they are no good unless they are supported by strategyand converted into action. Thus, the next step in strategy formulation is assessing the corecompetencies of a firm.

CORE COMPETENCIESCore competency is what a firm does better than anyone else, its distinctive competence. A firm’score competence can be exceptional service, higher quality, faster delivery, or lower cost. Onecompany may strive to be first to the market with innovative designs, whereas another may lookfor success arriving later but with better quality.

Based on experience, knowledge, and know-how, core competencies represent sustainablecompetitive advantages. For this reason, products and technologies are seldom core competencies.The advantage they provide is short-lived, and other companies can readily purchase, emulate, orimprove on them. Core competencies are more likely to be processes, a company’s ability to docertain things better than a competitor. Thus, while a particular product is not a core competence,the process of developing new products is. For example, while the iPod was a breakthrough prod-uct, it is Apple’s ability to turn out hit product after hit product (e.g., iPhone, iPad, MacBook, etc.)that gives it that competitive advantage.

Core competencies are not static. They should be nurtured, enhanced, and developed over time.Close contact with the customer is essential to ensuring that a competence does not become obso-lete. Core competencies that do not evolve and are not aligned with customer needs can becomecore rigidities for a firm. Walmart and Dell, seemingly unstoppable companies in their field, wentastray when they failed to update their competencies to match changes in customer desires. ForDell, the low cost and mail order delivery of computers did not match the customer’s desire to seeand test computers before purchase, or to receive personalized after-purchase customer service. ForWalmart, the obsession with lower costs led to image problems of a behemoth corporation with littleregard for employees, suppliers, or local communities. Customers preferred to pay slightly morefor the better designed products of more community-involved companies like Target. To avoidthese problems, companies need to continually evaluate the characteristics of their products or ser-vices that prompt customer purchase; that is, the order qualifiers and order winners.

ORDER WINNERS AND ORDER QUALIFIERSA firm is in trouble if the things it does best are not important to the customer. That’s why it’sessential to look toward customers to determine what influences their purchase decision.

Order qualifiers are the characteristics of a product or service that qualify it to be consideredfor purchase by a customer. An order winner is the characteristic of a product or service that winsorders in the marketplace—the final factor in the purchasing decision. For example, when pur-chasing a DVD or Blu-ray player, customers may determine a price range (order qualifier) andthen choose the product with the most features (order winner) within that price range. Or theymay have a set of features in mind (order qualifiers) and then select the least expensive player(order winner) that has all the required features.

Order winners and order qualifiers can evolve over time, just as competencies can be gainedand lost. Japanese and Korean automakers initially competed on price but had to ensure certainlevels of quality before the U.S. consumer would consider their product. Over time, the consumerwas willing to pay a higher price (within reason) for the assurance of a superior-quality Japanesecar. Price became a qualifier, but quality won the orders. Today, high quality, as a standard of theautomotive industry, has become an order qualifier, and innovative design or superior gas mileagewins the orders.


Core competency: what the firm does better

than anyone else.

Order qualifiers:what qualifies an item to be

considered for purchase.

Order winner:what wins the order.

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As shown in Figure 1.12, order qualifiers will only take a firm so far. The customer expects thequalifiers, but is not “wowed” by them. For example, a low price might be a qualifier, but reducingthe price further may not win orders if the features or design are not adequate. At a minimum, a firmshould meet the qualifiers. To excel, the firm needs to develop competencies that are in tune withthe order winners. Marketing helps to identify these qualifiers and winners. Oftentimes, thesecharacteristics are in the purview of operations and supply chain management, such as cost, speedto the market, speed of delivery, or customization. Other characteristics such as product or servicedesign are supported by operations and supply chain management, but are not completely undertheir control.

POSITIONING THE FIRMNo firm can be all things to all people. Strategic positioning involves making choices—choosing oneor two important things on which to concentrate and doing them extremely well. A firm’s position-ing strategy defines how it will compete in the marketplace—what unique value it will deliverto the customer. An effective positioning strategy considers the strengths and weaknesses of theorganization, the needs of the marketplace, and the positions of competitors.2

Let’s look at firms that have positioned themselves to compete on cost, speed, quality,and flexibility.

Competing on CostCompanies that compete on cost relentlessly pursue the elimination of all waste. In the past, com-panies in this category produced standardized products for large markets. They improved yield bystabilizing the production process, tightening productivity standards, and investing in automation.Today, the entire cost structure is examined for reduction potential, not just direct labor costs.High-volume production and automation may or may not provide the most cost-effective alterna-tive. A lean production system provides low costs through disciplined operations.

Competing on SpeedMore than ever before, speed has become a source of competitive advantage. The Internet has con-ditioned customers to expect immediate response and rapid product shipment. Service organiza-tions such as McDonald’s, LensCrafters, and Federal Express have always competed on speed.Now manufacturers are discovering the advantages of time-based competition, with build-to-orderproduction and efficient supply chains. In the fashion industry where trends are temporary, Gap’ssix-month time-to-market can no longer compete with the nine-day design-to-rack lead time ofSpanish retailer, Zara.


Time

High

Low

Order qualifiers

Order winners

Sufficientto winorders

Com

pany

per

form

ance

Figure 1.12

Order Winnersand OrderQualifiers

Source: Adapted from Nigel Slack,

Stuart Chambers, Robert

Johnston, and Alan Betts,

Operations and Process

Management, Prentice Hall,

2006, p. 47.

Positioning:how the firm chooses

to compete.

Speed:Fast moves, fast adaptations,

tight linkages.

Eliminate all waste.

2These factors can be depicted in a SWOT matrix, which lists the current strengths (S) and weaknesses (W) internalto the company, and the opportunities (O) and threats (T) external to the company.

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A L O N G T H E S U P P L Y C H A I N

Trader Joe’s Unique StrategyThere are two basic approaches to strategy. Do what every-one else does, only better; or do something entirely differ-ent. Trader Joe’s has chosen the “differentiation” strategy.TJ is a specialty grocery store chain located primarily inurban areas that stocks unusual goods at value prices. Thestores are small, cramped, and low-rent; not at all what youwould expect for upscale shoppers. With only about 10% ofthe stock of a traditional supermarket, selection is limited;but what a selection it is—unusual recipes, high quality in-gredients, imported wines and cheeses, health foods, exoticproducts from around the world, and private label special-ties. The stock is constantly changing, with new productsbeing brought in as others are phased out. This creates a“treasure hunt” type atmosphere that encourages frequentvisits from loyal customers. The stores are fun and quirky,too. The staff gives excellent, if irreverent, service with thefeel of a mom-and-pop store (only Mom and Pop wearHawaiian shirts).

Behind this strategy is an operations and supply chainnetwork that is cost conscious and efficient. Product selec-tion is carefully tended to. Every item sold in TJ is tested,tasted, or used by one of its buyers or employees. TJ stocksfresh items only in season and does not worry about run-ning out of items or replenishing stock within a certaintime frame. Scarcity helps to create the adventuresome at-mosphere. The supply chain is simpler without nationalbrands and general merchandise to contend with, but itdoes involve more legwork for TJ buyers to personallyfind, vet, and purchase the merchandise to be sold. Thissometimes involves making single purchases of largeamounts (often sell-outs) or traveling across the globe tofind those special items.

The stores themselves are rustic, with hand-painted signsand chalkboards to announce daily specials. Store managersare called captains; assistant managers are known as firstmates. Company policy is for full-time employees to makeat least the median household income for their communities.Store captains can make six figures annually. Turnoveramong full-time crew is a mere 4%. Seventy percent of thecrew are part-time; part-timers can earn health-care benefits,a draw for creative types who wouldn't normally seek super-market jobs.

TJ doesn’t accept coupons, issue loyalty cards, or featureweekly sales. Instead it adopts an everyday, low-price strat-egy, with the highest margin in the industry. Advertising islocal and folksy. The TJ model attempts to make groceryshopping an enriching experience rather than a weekly choreto be avoided.

TJ has a well-crafted strategy, matching the product of-ferings to its customer base, creating a culture of customerservice and excitement, and building an operations and sup-ply chain network that provides value (and a treasure, per-haps) for the customer.

1. How is TJ able to offer upscale products at bargainprices?

2. How does TJ compare with Whole Foods or Costco?3. Is TJ strategy scalable? In other words, as the company

grows, will it be able to maintain the same focusedstrategy?

Sources: Christopher Palmeri, “Trader Joe’s Recipe for Success.”BusinessWeek (February 21, 2008); Irwin Speizer, “The Grocery ChainThat Shouldn’t Be.” Fast Company (December 19, 2007); Len Lewis.The Trader Joe’s Adventure: A Unique Approach to Business into a Retailand Cultural Phenomenon (Chicago: Dearborn Trade Publication, 2005).

Ric Francis/©AP/Wide World Photos

Competing on QualityMost companies approach quality in a defensive or reactive mode; quality is confined to minimiz-ing defect rates or conforming to design specifications. To compete on quality, companies mustview it as an opportunity to please the customer, not just a way to avoid problems or reducerework costs.

To please the customer, one must first understand customer attitudes toward and expectationsof quality. One good source is the American Customer Satisfaction Index compiled each year bythe American Society for Quality and the National Quality Research Center. Examining recentwinners of the Malcolm Baldrige National Quality Award and the criteria on which the award arebased also provides insight into companies that compete on quality.

The Ritz-Carlton Hotel Company is a Baldrige Award winner and a recognized symbol ofquality. The entire service system is designed to understand the individual expectations of morethan 500,000 customers and to “move heaven and earth” to satisfy them. Every employee is em-powered to take immediate action to satisfy a guest’s wish or resolve a problem. Processes areuniform and well defined. Teams of workers at all levels set objectives and devise quality actionplans. Each hotel has a quality leader who serves as a resource and advocate for the developmentand implementation of those plans.

Competing on FlexibilityMarketing always wants more variety to offer its customers. Manufacturing resists this trend be-cause variety upsets the stability (and efficiency) of a production system and increases costs. Theability of manufacturing to respond to variation has opened up a new level of competition. Flexibilityhas become a competitive weapon. It includes the ability to produce a wide variety of products, tointroduce new products and modify existing ones quickly, and to respond to customer needs.

National Bicycle Industrial Company fits bicycles to exact customer measurements. Bicyclemanufacturers typically offer customers a choice among 20 or 30 different models. Nationaloffers 11,231,862 variations and delivers within two weeks at costs only 10% above standardmodels. Computerized design and computer-controlled machinery allow customized products tobe essentially mass produced. The popular term for this phenomenon is mass customization.

STRATEGY DEPLOYMENT“The difficulty is not in knowing what to do. It’s doing it,” said Kodak’s former CEO, GeorgeFisher. Implementing strategy can be more difficult than formulating strategy. Strategies unveiledwith much fanfare may never be followed because they are hard to understand, too general, or un-realistic. Strategies that aim for results five years or so down the road mean very little to theworker who is evaluated on his or her daily performance. Different departments or functionalareas in a firm may interpret the same strategy in different ways. If their efforts are not coordi-nated, the results can be disastrous.

Consider Schlitz Brewing Company, whose strategy called for reduced costs and increasedefficiency. Operations achieved its goals by dramatically shortening its brewing cycle—and, in theprocess, lost 6 of every 10 customers when the clarity and taste of the beer suffered. The effi-ciency move that was to make the company the most profitable in its industry instead caused itsstock value to plummet from $69 per share to $5 per share. Schiltz has since been sold to PabstBrewing Company who combed through company documents and interviewed retired Schlitzbrewmasters and taste-testers to derive and reintroduce the original 1960’s “with gusto” formula.

Strategy deployment converts a firm’s positioning strategy and resultant order winners andorder qualifiers into specific performance requirements.

Companies struggling to align day-to-day decisions with corporate strategy have found successwith two types of planning systems—policy deployment and the balanced scorecard.

Policy DeploymentPolicy deployment, also known as hoshin planning, is adapted from Japan’s system of hoshin kanri,which is roughly translated from Japanese as “shining metal pointing direction”—a compass.

Policy deployment tries to focus everyone in an organization on common goals and priorities bytranslating corporate strategy into measurable objectives throughout the various functions and lev-els of the organization. As a result, everyone in the organization should understand the strategic


Flexibility:the ability to adjust to changes

in product mix, production volume,

or design.

Mass customization:the mass production of

customized products.

• Virtual Tour

Policy deployment:translates corporate strategy into

measurable objectives.

Quality:a way to please the customer.


plan, be able to derive several goals from the plan, and determine how each goal ties into theirown daily activities.

Suppose the corporate strategic plan of competing on speed called for a reduction of 50% inthe length of the supply chain cycle. Senior management from each functional area would assesshow their activities contribute to the cycle, confer on the feasibility of reducing the cycle by 50%,and agree on each person’s particular role in achieving the reduction. Marketing might decide thatcreating strategic alliances with its distributors would shorten the average time to release a newproduct. Operations might try to reduce its purchasing and production cycles by reducing its sup-plier base, certifying suppliers, using e-procurement, and implementing a just-in-time (JIT) sys-tem. Finance might decide to eliminate unnecessary approval loops for expenditures, beginprequalifying sales prospects, and explore the use of electronic funds transfer (EFT) in conjunc-tion with operations’ lean strategy.

The process for forming objectives would continue in a similar manner down the organiza-tion with the means of achieving objectives for one level of management becoming the target,or objectives, for the next level. The outcome of the process is a cascade of action plans (orHoshins) aligned to complete each functional objective, which will, in turn, combine to achievethe strategic plan.

Hoshins:the action plans generated from the

policy deployment process.

Is your company pointed in onedirection? AT&T uses theanalogy of migrating geese toexplain the concept of policydeployment. Naturalistsbelieve the instinctive V-formation allows the geese tofollow one leader and migratein a cohesive unit toward theirdestination. Policy deploymentdoes the same thing—itenables business leaders tomobilize the organizationtoward a common destination,aligning all employees behinda common goal and acollective wisdom.

Figure 1.13

Derivation of an Action PlanUsing PolicyDeployment

© blickwinkel/Alamy


Figure 1.13 shows an abbreviated operations action plan for reducing supply chain cycle time.Policy deployment has become more popular as organizations are more geographically dispersedand culturally diverse.

Balanced ScorecardThe balanced scorecard, developed by Robert Kaplan and David Norton,3 examines a firm’s perfor-mance in four critical areas:

1. Finances—How should we look to our shareholders?2. Customers—How should we look to our customers?3. Processes—At which business processes must we excel?4. Learning and Growing—How will we sustain our ability to change and improve?

It’s called a balanced scorecard because more than financial measures are used to assess performance.Operational excellence is important in all four areas. How efficiently a firm’s assets are managed,products produced, and services provided affects the financial health of the firm. Identifying and un-derstanding targeted customers helps determine the processes and capabilities the organization mustconcentrate on to deliver value to the customer. The firm’s ability to improve those processes anddevelop competencies in new areas is critical to sustaining competitive advantage.

Table 1.3 is a balanced scorecard worksheet. The worksheet selects areas of the strategy mapto incorporate in annual objectives for the company. The objectives are then operationalized with


Balanced scorecard:a performance assessment that

includes metrics related to

customers, processes, and learning

and growing, as well as financials.

Table 1.3

The BalancedScorecardWorksheet

3See Robert S. Kaplan and David P. Norton, “Transforming the Balanced Scorecard from Performance Measurement toStrategic Management.” Accounting Horizons (March 2001), pp. 87–104; and Robert S. Kaplan and David P. Norton,“Having Trouble with Your Strategy? Then Map It,” Harvard Business Review (September/October 2000), pp. 167–176.

Key Performance Goal for KPI Results Mean Dimension Objectives Indicator 2011 to Date Score Performance

Productivity Become industry cost leader % reduction in cost per unit 20% 10% 50%

Growth Increase market share Market share 50% 40% 80%

Quality Zero defects % good quality first pass 100% 80% 80%

Timeliness On-time delivery % of on-time deliveries 95% 90% 95%

Integrate into production % orders delivered to assembly 50% 40% 80%

Reduce inspections % suppliers ISO 9000 certified 90% 60% 67%

Reduce time to produce Cycle time 10 mins. 12 mins. 83%

Improve quality # warranty claims 200 1000 20%

Distribution Reduce transportation costs % FTL shipments 75% 30% 40% 40%

Improve response to % queries satisfied on 90% 60% 67%customer inquiries first pass

Reduce inventory obsolescence Inventory turnover 12 6 50%

Reduce customer backlog % order backlogged 10% 20% 50%

# of six sigma Black Belts 25 2 8%

% trained in SPC 80% 50% 63%

% customers who can track orders 100% 60% 60%

% suppliers who use EDI 80% 50% 63%

# of employee suggestions 100 60 60%

% of products new this year 20% 10% 50%

Fina

nces

Lear

ning

& G

row

ing

Proc

esse

sC

usto

mer

s

Suppliers

Products

Service

Risk

Human capitalDevelop quality improvementskills

Provide technology to improveprocesses

Create innovative culture

Informationcapital

Organizationalcapital

65%

87%

73%

52%

67%

50%

35%

61%

55%


InformationCapital

OrganizationalCapital

Suppliers

Products

Distribution

Service

Risk

HumanCapital

Finances

Customers

0%

20%

40%

60%

80%

100%

Figure 1.14

A Radar Chart of the BalancedScorecard

Growth

Productivity

0% Finances 100%

Quality

Timeliness

0% Customers 100%

SuppliersDistribution Service

Products

0%Processes

100%

Information capital

OrganizationalcapitalHuman capital

0%Learning and Growing

100%

Risk

Figure 1.15

A Dashboard forthe BalancedScorecard

key performance indicators (KPI). The goals for the year are given, and the KPI results are recorded.The score converts the different performance measures into percentage completed. For example,if the goal is to achieve 12 inventory turns a year and the company manages only 6, then thegoal is 50% achieved. The mean performance column averages the score for each dimension.The scorecard performance can be visualized in many ways, two of which are illustrated inFigures 1.14 and 1.15.

Figure 1.14 is a radar chart of the balanced scorecard. Goals 0% to 40% achieved appear inthe red “danger” zone, 40% to 80% achieved are in the yellow “cautionary” zone, and 80% to100% achieved are in the green “moving ahead” zone. In this example, the company is in the dan-ger zone for human capital and distribution, but is doing well with growth, quality, timeliness, andservice. Figure 1.15 shows the same information in an alternative format. The dashboard presentseach scorecard perspective in a different graphic. The red zone is set at 25% or less goal achieve-ment, yellow from 25% to 75%, and green in excess of 75%, although different limits can be setfor each perspective. The company excels in growth, quality, and timeliness, and is not in dangeron any measure. Note that different limits can be set for each gauge, and measures other than per-centages can be used. Dashboards are popular ways for managers to quickly interpret the massiveamounts of data collected each day and in some cases can be updated in real time.

Key performance indicators(KPI):a set of measures that help

managers evaluate performance

in critical areas.

OPERATIONS STRATEGYThe operations function helps strategy evolve by creating new and better ways of delivering a firm’scompetitive priorities to the customer. Once a firm’s competitive priorities have been established, itsoperating system must be configured and managed to provide for those priorities. This involves awhole series of interrelated decisions on products and services, processes and technology, capacityand facilities, human resources, quality, sourcing, and operating systems. As shown in Figure 1.16,all these decisions should “fit” like pieces in a puzzle. A tight strategic fit means competitors mustreplicate the entire system to obtain its advantages. Thus, the competitive advantage from an inte-grated operating system is more sustainable than short-lived products or technologies. Beginningwith quality, the remaining chapters in Part I put together the pieces of the operations strategy puzzle.


Facilities

Capacity Quality

ServicesProducts

Sourcing OperatingSystems

Processesand

Technology

HumanResources

Figure 1.16

An IntegratedOperationsStrategy

ORGANIZATION OF THIS TEXT

The organization of this textbook reflects the emergence of supply chain management as an integralpart of the study of operations. The first half of the text concentrates on issues and decisions that arecommon to most enterprises—ensuring quality, designing products and services, analyzing processes,designing facilities, developing human resources, and managing projects. The second half emphasizesactivities that are influenced by and are most likely shared with entities along the supply chain—sourcing and logistics, forecasting demand, establishing inventory levels, coordinating sales and oper-ations, developing resource plans, leaning operations and supply chains, and scheduling work. Adiagram of the chapters in each half of the text is shown in Table 1.4. Please note that your professormay elect to cover these topics in a different order than presented in the text. This is perfectly under-standable given the interdependency of decisions in operations and supply chain management.

Table 1.4

Organization of the Text

Part I—Operations Management

Chapter 1 Introduction to Operations and Supply Chain Management

Chapter 2 Quality Management

Chapter 3 Statistical Process Control

Chapter 4 Product Design

Chapter 5 Service Design

Chapter 6 Processes and Technology

Chapter 7 Capacity and Facilities Design

Chapter 8 Human Resources

Chapter 9 Project Management

(continued)


Table 1.4

(continued)

SUMMARY

Operations can be viewed as a transformation process thatconverts inputs into outputs of greater value.

Operations management is the study of processes directlyrelated to the creation and distribution of goods and services.Increasingly, these operations are taking place outside of theboundaries of a traditional enterprise. Thus, while today’smanagers need to understand how to efficiently manage oper-ations within their own firm, they also need to develop skillsin coordinating operations across a global supply chain. Thistext teaches students how to analyze processes, ensure quality,create value, and manage the flow of information, productsand services across a network of customers, enterprises, andsupply chain partners.

Firms choose to compete in different ways. A firm’s strat-egy defines how it will compete in the marketplace—its own

best way. Strategy formulation involves defining the primarytask, assessing core competencies, determining order winnersand order qualifiers, and positioning the firm. An effective strat-egy meets the order qualifiers and excels on the order winners.A competitive position is not sustainable unless the operatingsystem that supports it is configured and managed effectively.

Policy deployment is a planning system that helps alignday-to-day operating decisions with the company’s overallstrategy. The balanced scorecard reinforces a firm’s strategyby providing customer-oriented and process-oriented measuresof performance, in addition to traditional financial measures.

Decision making for the future can be scary at best. Fortu-nately, there are quantitative tools available for making deci-sions under uncertain conditions. The supplement to thischapter reviews several of them for us.

• Practice Quizzes

LEARNING OBJECTIVES OF THIS COURSE

The learning objectives of this course are threefold:

1. To gain an appreciation of the strategic importance of operations and supply chain manage-ment in a global business environment and to understand how operations relates to other business functions. Regardless of your major, as you pursue a career in business, you will need to understand the basic issues, capabilities, and limitations of the operations function. By the con-clusion of this course, you will be able to describe the impact of operations and supply chain man-agement on other functions within a firm, as well as on the competitive position of the firm. Youwill also be more aware of the global nature of operations and the complexity of supply chains.

2. To develop a working knowledge of the concepts and methods related to designing andmanaging operations and to create value along the supply chain. In this course, you willlearn the basic steps involved in bringing a product to market from its design through produc-tion and delivery. You will also learn such skills as how to forecast demand, lay out a facility,manage a project, work with suppliers, and schedule work.

3. To develop a skill set for continuous improvement. From this course, you will gain the abilityto conceptualize how systems are interrelated, to organize activities effectively, to analyzeprocesses critically, to make decisions based on data, and to push for continual processimprovement. These skills will serve you well in whatever career you choose.

Part II—Supply Chain Management

Chapter 10 Supply Chain Management Strategy and Design

Chapter 11 Global Supply Chain Procurement and Distribution

Chapter 12 Forecasting

Chapter 13 Inventory Management

Chapter 14 Sales and Operations Planning

Chapter 15 Resource Planning

Chapter 16 Lean Systems

Chapter 17 Scheduling


SUMMARY OF KEY TERMS

balanced scorecard a performance assessment that includesmetrics related to customers, processes, and learning andgrowing, as well as financials.

competitiveness the degree to which a nation can produce goodsand services that meet the test of international markets.

core competencies the essential capabilities that create a firm’ssustainable competitive advantage.

craft production the process of handcrafting products or servicesfor individual customers.

division of labor dividing a job into a series of small tasks eachperformed by a different worker.

flexibility in operations, the ability to adjust to changes in prod-uct mix, production volume, or product and process design.

hoshins the action plans generated from the policy deploymentprocess.

interchangeable parts the standardization of parts initially asreplacement parts; enabled mass production.

key performance indicators a set of measures that help managersevaluate performance in critical areas.

lean production an adaptation of mass production that prizesquality and flexibility.

mass customization the mass production of customized products.mass production the high-volume production of a standardized

product for a mass market.operations a function or system that transforms inputs into out-

puts of greater value.operations management the design and operation of productive

systems.

order qualifiers the characteristics of a product or service thatqualify it to be considered for purchase.

order winner the characteristic of a product or service that winsorders in the marketplace.

policy deployment a planning system for converting strategyto measurable objectives throughout all levels of anorganization.

positioning determining how a firm will compete in the market-place.

primary task the task that is most central to the operation of afirm; it defines the business that a firm is in and is often ex-pressed in a mission statement.

productivity the ratio of output to input.quality revolution an emphasis on quality and the strategic role

of operations.scientific management the systematic analysis of work methods

proposed by Frederick Taylor in the early 1900s.speed fast moves, fast adaptations, tight linkages.strategy a common vision that unites an organization, provides

consistency in decisions, and keeps the organization movingin the right direction.

supply chain management managing the flow of information,products, and services across a network of customers,enterprises, and supply chain partners.

value chain a series of activities from supplier to customer thatadd value to a product or service.

QUESTIONS

1-1. What activities are involved in the operations function?How does operations interact with other functional areas?

1-2. What constitutes “operations” at (a) a bank, (b) a retailstore, (c) a hospital, (d) a cable TV company?

1-3. Briefly describe how operations has evolved from theIndustrial Revolution to the Internet Revolution.

1-4. What is competitiveness? How is it measured? How hasthe Internet affected competitiveness?

1-5. Investigate the role of government in improving industrialcompetitiveness. Begin with the U.S. Council on Com-petitiveness at www.compete.org. Find a similar sitefor at least one other country. Compare their prioritiesand initiatives.

1-6. Describe the global activities of a corporation of yourchoice. How many foreign plants do they have? Where arethey located? How much of their business is foreign? Areany global strategies evident?

1-7. Choose an industry on which you will be the class“expert” for the duration of this course. Write an initialprofile of major players, customers, structure, andcompetitive issues.

1-8. Find an interesting Web site related to the operations func-tion in a firm with which you are familiar. Write a summaryof what you find.

1-9. Look for articles related to supply chain online or at For-tune, BusinessWeek, or CNN. How do they relate to theprimary topics discussed in this chapter?

1-10. The World Bank ranks countries in terms of globalization.Go to the research section of www.worldbank.com andchoose four countries to compare.

1-11. The World Trade Organization has its advocates and itsadversaries. Find out more about the organization by visit-ing its Web site at www.wto.org. What kinds of activitiesdoes the organization support? What rules and regulationsdoes it enforce? Who are its member states, and how ismembership achieved?

1-12. Cultural differences can make it difficult to do business inother countries. Go to www.worldbusinessculture.com andchoose a country to explore. Share your discoveries withyour professor and classmates in a one- to two-page write-up.

1-13. Much of the negotiation in trade agreements centers onethical/legal issues such as intellectual property protection,


bribery and payoffs, and copyright and patent infringe-ment. Transparency International at www.transparency.orgpublishes a bribery index by country. Report on whichcountries and industries are most susceptible to bribery.

1-14. Ethics is easier when there are laws to fall back on.Search the Internet for information on the Foreign Cor-rupt Practices Act. Briefly describe what it entails. Thenfind two companies that explicitly state a code of conducton their Web page, and in particular, reference theForeign Corrupt Practices Act. How does each companyapproach the issue?

1-15. Gather mission or vision statements from four different com-panies. What do they tell you about the organizations? Istheir mission or vision reflected in the way they do business?

1-16. List and explain the five steps of strategy formulation. Fol-low the steps to outline a strategy for a company or organi-zation with which you are familiar.

1-17. Explain the concept of core competencies in your ownwords. Provide examples of a core competency for a bank,a retail store, and an auto manufacturer.

1-18. What is your core competency? Make a list of the core com-petencies you will need to compete successfully in the jobmarket. Design a strategy for developing the competencies

that you do not have and capitalizing on the competenciesthat you do have.

1-19. What is the difference between an order winner and anorder qualifier? Tell how you have used the two concepts ina purchasing decision.

1-20. Discuss the requirements from an operations perspective ofcompeting on (a) quality, (b) cost, (c) flexibility, (d) speed,(e) innovation, and (f) service. Give examples of manufac-turing or service firms that successfully compete on eachof the criteria listed.

1-21. What role should operations play in corporate strategy?1-22. Name several strategic decisions that involve operations

and supply chain management.1-23. Why do companies need policy deployment? What does

it do?1-24. What is the balanced scorecard? How does it relate

to operations?1-25. Examine the annual reports of a company of your choosing

over three years. Use quotes from the reports to describe thecompany’s overall strategy and its specific goals each year.How well do you think the company deploys its strategy?

1-26. Use either policy deployment or a balanced scorecard tomap out a personal strategy for your future.

1-1. Tried and True Clothing has opened four new stores in col-lege towns across the state. Data on monthly sales volumeand labor hours are given below. Which store location hasthe highest labor productivity?

1-4. It is time for the annual performance review of Go-Com’saccount executives. Account values and hours spent eachweek acquiring and servicing accounts are shown below.Each agent works approximately 45 weeks out of the year,but the time spent on accounts each week differs consider-ably. How would you rate the performance of each individ-ual? Which agent is most productive? Which agents showthe most potential?

PROBLEMS• GO Tutorial

Store Annandale Blacksburg Charlottesville DanvilleSales volume $40,000 $12,000 $60,000 $25,000Labor hours 250 60 500 200

Agents Albert Bates Cressey DuongNew accounts $100,000 $40,000 $80,000 $200,000Existing accounts $40,000 $40,000 $150,000 $100,000Labor hours 40 20 60 80

Labor Hours Units of OutputUnited States 89.5 136Germany 83.6 100Japan 72.7 102

1-2. Tried and True’s accountant (from Problem 1-1) suggeststhat monthly rent and hourly wage rate also be factoredinto the productivity calculations. Annandale pays thehighest average wage at $6.75 an hour. Blacksburg pays$6.50 an hour, Charlottesville $6, and Danville $5.50. Thecost to rent store space is $1800 a month in Annandale,$2000 a month in Blacksburg, $1200 a month in Char-lottesville, and $800 a month in Danville.a. Which store is most productive?b. Tried and True is not sure it can keep all four stores open.

Based on multifactor productivity, which store would youclose? What other factors should be considered?

1-3. At last year’s bass tournament, Jim caught 12 bass in afour-hour period. This year he caught 15 in a six-hour pe-riod. In which year was he most productive? If the averagesize of the bass last year was 20 lb and the average size thisyear was 25 lb, would your decision change?

1-5. The Bureau of Labor Statistics collects input and outputdata from various countries for comparison purposes.Labor hours are the standard measure of input. Calculatethe output per hour from the following data. Which countryis most productive?

1-6. Omar Industries maintains production facilities in several lo-cations around the globe. Average monthly cost data and out-put levels are as follows.a. Calculate the labor productivity of each facility.b. Calculate the multifactor productivity of each facility.c. If Omar needed to close one of the plants, which one

would you choose?


Installation 1 2 3Square yards 1225 1435 2500No. of workers 4 3 5No. of hours per worker 3 5 6

Center 1 2 3Pieces processed/hr 1000 2000 3000No. of workers/hr 10 5 2Hourly wage rate $5.50 $10 $12Overhead rate/hr $10 $25 $50

Week 1 2 3 4Units of output 2000 4000 5000 7000No. of workers 4 4 5 6Hours per week per worker 40 48 56 70Material (lbs) 286 570 720 1000

Jake Josh Jennifer JohnNo. ads sold 100 50 200 35No. hours spent 40 15 85 10

Alaskan Brr Cold DeepSeal Frost Case Freeze

Purchase cost $3270 $4000 $4452 $5450Daily energy consumption 3.61 3.88 6.68 29.07

(kwh)Volume (cu ft) 25 35 49 72

Units (in 000s) Cincinnati Frankfurt Guadalajara BeijingFinished goods 10,000 12,000 5,000 8,000Work-in-process 1,000 2,200 3,000 6,000

Costs (in 000s) Cincinnati Frankfurt Guadalajara BeijingLabor costs $3,500 $4,200 $2,500 $800Material costs $3,500 $3,000 $2,000 $2,500Energy costs $1,000 $1,500 $1,200 $800Transportation costs $250 $2,500 $2,000 $5,000Overhead costs $1,200 $3,000 $2,500 $500

Candidates Hall Walker DayneRushing yards 2110 3623 6925No. of carries 105 875 1186No. of touchdowns 15 20 70

a. Calculate the multifactor productivity for each center.b. Workers in Center 1 are scheduled to receive a 10% pay

raise next month. How will that affect productivity?c. A new processing machine is available for Center 3

that would increase the output to 5000 pieces an hour atan additional overhead rate of $30 an hour. ShouldMerrifield install the new processing machine?

1-10. Posey Ceramics makes ceramic vases for a chain of de-partment stores. The output and cost figures over the pastfour weeks are shown here. Labor costs $10 an hour, andmaterials are $4 a pound. Calculate the (a) labor produc-tivity (in hrs), (b) material productivity (in lbs), and (c)multifactor productivity for each week. Comment on theresults.

1-7. Rushing yardage for three Heisman Trophy candidates isgiven below. Which candidate is the most productive run-ning back? How did you measure productivity?

1-8. Carpet City recorded the following data on carpet installa-tions over the past week. Use the data to calculate the averagerate (in yards per hour) at which carpet can be installed.

1-9. Merrifield Post Office is evaluating the productivity of itsmail processing centers. The centers differ in the degree ofautomation, the type of work that can be performed, andthe skill of the workers.

1-11. Jake and his friends sell newspaper ads for the CampusTimes to supplement their income each year. From the databelow, determine which person is the most productive.

1-12. Nicholas is the facilities manager for Green Market Gro-ceries. The store is remodeling and wants to determinewhich brand of freezer to use for its frozen goods section.The freezers vary by size, cabinet type, accessibility, re-frigerant, and interliner. These variables affect both thepurchase cost and the operating cost (e.g., energy con-sumption) of each freezer. Currently, the cost of energy perkilowatt hour (kwh) is $0.10. Green Market expenses capi-tal purchases over a three-year period. Given the cost andcapacity data below, calculate the “productivity” (i.e., thecubic feet of freezer space per dollar) for each freezeralternative. Which freezer brand would you recommend toNicholas?


CASE PROBLEM 1.1

Visualize ThisVisualize This (VT) is a small start-up company specializ-ing in virtual reality and computer visualizations. Locatedin the research park of a major university, the companywas founded by Isaac Trice, a university professor, andstaffed with the brightest of his former students. By all ac-counts the technology is cutting edge. Facilities include alab of 14 high-end computer workstations adjacent to aCAVE (computer-aided virtual environment) and a smalloffice. A conference room and central lobby are sharedwith other tenants in the building. Originally the companyhad partnered with the Swedish firm Salvania to create vir-tual environments for medical and industrial design. Triceand his staff would develop the software for each applica-tion, create a visual database supported with engineeringor medical data, and run design sessions for their clientsin the CAVE. Salvania provided the capital, generated theclients, and handled the business end of the operations.

In its first two years of business, VT completed fourprojects. With each project, VT advanced its skills in visu-alization and developed customized tools to help itsclients design intricate products. The clients werepleased but did not anticipate repeating the intensivedesign process for several years. Unfortunately, Salvaniawas unable to remain solvent and dissolved its partner-ship with VT. VT was able to keep its workstations (whosesalvage value was low), but gave up its rights to theCAVE and furloughed all but three employees. To stayafloat, VT needed new clients and a steady stream ofincome. Trice hit the streets and came back with thefollowing possibilities:

• Designing computer-based training sessions for banktellers of an international finance institution

• Conducting software certification for the sales staff ofa large software vendor

• Designing virtual reality tours through history for amajor museum

• Developing Web-based virtual models for a women’sclothing retailer

• Creating virtual catalogues in which a customer canenlarge, rotate, and dissect a product online.

“This isn’t what I had in mind for my company,” Tricelamented as he shared the list with his employees. “Iwanted to be developing the next generation of visualiza-tion tools in concert with the brightest minds in industry,not digitizing pictures of products and making them turnaround, or teaching people to use software that’s noteven our own!”

That said, Trice and his staff of three began goingthrough the list analyzing the pros and cons of eachalternative.

1. Help Professor Trice formulate a strategy for hiscompany by going through the steps of strategy for-mulation. For ideas, search the Internet for othercompanies that provide visualization solutions.

2. What capabilities does VT need to develop in order topursue the strategy developed in question 1?

3. How can Trice reconcile his goals for the organizationwith the needs of the marketplace?

4. Compare the processes required to satisfy each cus-tomer on Trice’s client list. Consider the mix of equip-ment and personnel, the length and scope of eachproject, and the potential for future business. How dothe requirements differ from the projects alreadycompleted by VT?

5. Which projects would you recommend to VT? Why?

CASE PROBLEM 1.2

Whither an MBA at Strutledge?Strutledge is a small private liberal arts school locatedwithin 50 miles of a major urban area in the southeast UnitedStates. As with most institutions of higher education, Strut-ledge’s costs are rising, and its enrollments are decreasing.In an effort to expand its student base, build valuable tieswith area businesses, and simply survive, the Board of Re-gents is considering establishing an MBA program.

Currently no undergraduate degree is given in busi-ness, although business courses are taught. The dean ofthe school visualizes the MBA as an interdisciplinary

program emphasizing problem solving, communication,and global awareness. Faculty expertise would be sup-plemented by instructors from local industry. The use oflocal faculty would better connect the university with thebusiness community and provide opportunities for em-ployment of the program’s graduates.

In terms of competition, a major state-funded universitythat offers an MBA is located in the adjacent urban area.Strutledge hopes that state budget cutbacks and perceptionsof overcrowded classrooms and overworked professors atpublic institutions will open the door for a new entrant into

(Continued)

topic 1 nov 23, 2014

Documents

labor productivity

productivity formulas

singlefactor productivity

monthly productivity

units of output

services producedall

services thatmeet

ratio of output