Ch01 Ppt Revised

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc.Beni AsllaniBeni Asllani

University of Tennessee at ChattanoogaUniversity of Tennessee at Chattanooga

Operations and CompetitivenessOperations and Competitiveness

Operations Management - 5th EditionOperations Management - 5th Edition

Chapter 1Chapter 1

Roberta Russell & Bernard W. Taylor, IIIRoberta Russell & Bernard W. Taylor, III

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-22

Lecture OutlineLecture Outline

What Do Operations Managers Do?What Do Operations Managers Do? Operations FunctionOperations Function Evolution of Operations ManagementEvolution of Operations Management Operations Management and E–businessOperations Management and E–business Globalization and CompetitivenessGlobalization and Competitiveness Primary Topics in Operations ManagementPrimary Topics in Operations Management Learning Objectives for this CourseLearning Objectives for this Course


What Do Operations Managers What Do Operations Managers Do? Do? (design, operate, and improve production system)(design, operate, and improve production system)

What is Operations?What is Operations? a function or system that transforms inputs into a function or system that transforms inputs into

outputs of greater value outputs of greater value ( role is to create value)( role is to create value)What is a Transformation Process?What is a Transformation Process?

a series of activities along a a series of activities along a value chain value chain extending from supplier to customer.extending from supplier to customer.

activities that do not add value are superfluous activities that do not add value are superfluous and should be eliminatedand should be eliminated

What is Operations Management?What is Operations Management? design, operation, and improvement of design, operation, and improvement of

productive systemsproductive systemsOperations Management includes organizing work , selecting process, Operations Management includes organizing work , selecting process, arranging layouts, locating facilities, designing jobs, measuring performance, arranging layouts, locating facilities, designing jobs, measuring performance, controlling quality , scheduling work, managing inventory and planning controlling quality , scheduling work, managing inventory and planning productionproduction. . The Operations Manager needs good technical , conceptual and behavioral The Operations Manager needs good technical , conceptual and behavioral skill. Operation is to transform inputs into outputs with value addition ; e.g. inputs are skill. Operation is to transform inputs into outputs with value addition ; e.g. inputs are converted into outputs ( products/ services) with added value- not sum of the inputs. converted into outputs ( products/ services) with added value- not sum of the inputs.


Physical: Physical: as in manufacturing operationsas in manufacturing operations Locational: Locational: as in transportation operationsas in transportation operations Exchange: Exchange: as in retail operationsas in retail operations Physiological: Physiological: as in health careas in health care Psychological: Psychological: as in entertainmentas in entertainment Informational: Informational: as in communicationas in communication

Transformation Process ( Transformation Process ( Input- transformation- Input- transformation- out put process - characteristic of a wide variety of operating systems.)out put process - characteristic of a wide variety of operating systems.)

Automobile industry : Steel sheet is formed in different shapes , painted and finished, and then assembled with many component parts to produce a working automobile. In hospital , patients are helped to become healthier through special care , meal, medicine, surgical procedure etc.


INPUT •Material•Machines•Labor•Management•Capital

TRANSFORMATIONPROCESS

OUTPUT •Goods•Services

FeedbackFeedback

Operations as a Operations as a Transformation ProcessTransformation Process

Requirements


Operations Function( Operations Function( Operations : Technical Operations : Technical core or hub of the organization, interacting with other functional areas core or hub of the organization, interacting with other functional areas and suppliers to produce products/services for the customers)and suppliers to produce products/services for the customers)

OperationsOperations MarketingMarketing Finance and Finance and

AccountingAccounting Human Human

ResourcesResources Outside Outside

Suppliers Suppliers Firm’s 4 primary functional area : Marketing, finance , operations, HR


How is Operations Relevant to my How is Operations Relevant to my Major?Major?

AccountingAccounting

Information Information TechnologyTechnology

ManagementManagement

““As an auditor you must As an auditor you must understand the fundamentals of understand the fundamentals of operations management.”operations management.”

““IT is a tool, and there’s no better IT is a tool, and there’s no better place to apply it than in operations.” place to apply it than in operations.”

““We use so many things you learn We use so many things you learn in an operations class—scheduling, in an operations class—scheduling, lean production, theory of lean production, theory of constraints, and tons of quality constraints, and tons of quality tools.”tools.”


How is Operations Relevant to my How is Operations Relevant to my Major?Major?

EconomicsEconomics

MarketingMarketing

FinanceFinance

““It’s all about processes. I live It’s all about processes. I live by flowcharts and Pareto by flowcharts and Pareto analysis.”analysis.”

““How can you do a good job How can you do a good job marketing a product if you’re marketing a product if you’re unsure of its quality or delivery unsure of its quality or delivery status?”status?”

““Most of our capital budgeting Most of our capital budgeting requests are from operations, requests are from operations, and most of our cost savings, and most of our cost savings, too.”too.”


Evolution of Operations Evolution of Operations Management (Management (began during industrial revolution in began during industrial revolution in 1700s)1700s)

Craft productionCraft production process of handcrafting products or services for process of handcrafting products or services for

individual customers individual customers ( every piece, unique, hand –fitted , and made by ( every piece, unique, hand –fitted , and made by individual person- craft production still exists)individual person- craft production still exists)

Division of laborDivision of labor dividing a job into a series of small tasks each dividing a job into a series of small tasks each

performed by a different workerperformed by a different worker( specialization of worker on ( specialization of worker on limited, repetitive tasks, make him specialized in these tasks) limited, repetitive tasks, make him specialized in these tasks)

Interchangeable partsInterchangeable parts standardization of parts initially as replacement parts; standardization of parts initially as replacement parts;

enabled mass productionenabled mass production( e.g. watch, clock, sewing M/C- ( e.g. watch, clock, sewing M/C- resulting in volume production of standardized parts, resulting in volume production of standardized parts, requiring a standard method of production with inspection/ requiring a standard method of production with inspection/ measurement system).measurement system).


Scientific management Scientific management ( approaching management of work as ( approaching management of work as science through measurement/ analysis- applied by Henry Ford for reducing time for car science through measurement/ analysis- applied by Henry Ford for reducing time for car assembly) assembly) systematic analysis of work methods ( systematic analysis of work methods ( identification identification

of the best method of performing and of the best method of performing and standardizing this for each workmanstandardizing this for each workman))Mass ProductionMass Production

high-volume production of a standardized product for a high-volume production of a standardized product for a mass market mass market ( can not adapt well to demand changes( can not adapt well to demand changes))

Lean production Lean production ( developed in Japan using concept like JIT)( developed in Japan using concept like JIT) adaptation of mass production that prizes quality adaptation of mass production that prizes quality (rather (rather

than quantity) , than quantity) , and flexibilityand flexibility (rather than efficiency) (rather than efficiency) - - ( this ( this reducing/ eliminating all kind of wastes) reducing/ eliminating all kind of wastes)

Evolution of Operations Evolution of Operations Management (cont.)Management (cont.)


Historical Events in Historical Events in Operations ManagementOperations Management

Era Events/Concepts Dates Originator

Industrial

Revolution

Steam engine 1769 James Watt

Division of labor 1776 Adam Smith

Interchangeable parts 1790 Eli Whitney

Scientific Management

Principles of scientific

management1911 Frederick W. Taylor

Time and motion studies 1911Frank and Lillian Gilbreth

Activity scheduling chart 1912 Henry Gantt

Moving assembly line( conveyor belt assembly concept)

1913 Henry Ford


Historical Events in Historical Events in Operations Management Operations Management (cont.)(cont.)


Human Relations

Hawthorne studies (worker motivation & technical aspect of job affect productivity)

1930 Elton Mayo

Motivation theories

1940s Abraham Maslow

1950sFrederick Herzberg

1960s Douglas McGregor

Operations Research

Linear programming( model of linear relationship between firm’s objective and resources & constraint)

1947 George Dantzig

Digital computer 1951 Remington RandSimulation, waiting

line theory, decision

theory, PERT/CPM

1950sOperations research groups

MRP, EDI, EFT, CIM 1960s, 1970s

Joseph Orlicky, IBM, and others

MRP : Materials requirement planning.EDI : Electronic data interchange between computers.

EFT : Earliest Finish timeCIM : Computer integrated manufacturing




Quality

Revolution

JIT (just-in-time) 1970s Taiichi Ohno (Toyota)TQM (total quality

management)1980s

W. Edwards Deming,

Joseph JuranStrategy and

operations1990s

Wickham Skinner,

Robert HayesBusiness process

reengineering1990s

Michael Hammer,

James Champy



Era Events/Concepts Dates OriginatorGlobalization WTO, European Union,

and other trade agreements

1990s

2000s

Numerous countries

and companies

Internet Revolution

Internet, WWW, ERP, supply chain management

1990s ARPANET, Tim

Berners-Lee SAP,

i2 Technologies,

ORACLE,

PeopleSoftE-commerce 2000s Amazon, Yahoo,

eBay, and others

ERP : Enterprise resource planning – software integrating components ( including supply chain) of a company by sharing and organizing information & data


Continuum from Goods to Continuum from Goods to Services Services ( Operations Management- equally applicable to ( Operations Management- equally applicable to service sector- here profit, intangible, and having enhanced customer service sector- here profit, intangible, and having enhanced customer contact in taking operating decisions )contact in taking operating decisions )

Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff, Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.

Product manufacturing/Service : Distinction , not very clear; many businesses bundle goods with service- PC/ internet


Operations Management Operations Management and E-Businessand E-Business

Categories of E-Commerce

Bu

sin

ess

Bu

sin

ess

Co

nsu

mer

Co

nsu

mer

BusinessBusiness ConsumerConsumer

B2B Commerceone.com

B2CAmazon.com

C2BPriceline.com

C2CeBay.com

B2B : Business to supplier ; B2C : Business to customer/ consumer ; C2 B : Consumer to Business- like requirement, price reduction, feedback, bidding on airline tickets.; C2C : Consumer to consumer auction.

Value chain : the set of activities that create and deliver products to the customers.


An Integrated Value ChainAn Integrated Value Chain

Value chain: Value chain: set of activities that create and deliver set of activities that create and deliver products to customerproducts to customer

Manufacturer SupplierCustomer

Flow of information (customer order)Flow of information (customer order)

Manufacturer SupplierCustomer

Flow of information (customer order)Flow of information (customer order)

Flow of product (order fulfillment)Flow of product (order fulfillment)


Impact of E-Business on Impact of E-Business on Operations ManagementOperations Management

Comparison shopping by customers

Direct contact with customers

Business processes conducted online

Customer expectations escalate; quality must be maintained and costs lowered

No more guessing about demand is necessary; inventory costs go down; product and service design improves; build to-order products and services is made possible

Transaction costs are lower; customer support costs decrease; e-procurement saves big bucks

Benefits of E-Business Impact on Operations


Impact of E-Business on Impact of E-Business on Operations Management (cont.)Operations Management (cont.)

Access to customers worldwide

Middlemen are eliminated

Access to suppliers worldwide

Demand increases; order fulfillment and logistics become major issues; production moves overseas

Logistics change from delivering to a store or distribution center to delivering to individual homes; consumer demand is more erratic and unpredictable than business demand

Outsourcing increases; more alliances and partnerships among firms are formed; supply is less certain; global supply chain issues arise




Online auctions and e-marketplaces

Better and faster decision making

Competitive bidding lowers cost of materials; supply needs can be found in one location

More timely information is available with immediate access by all stakeholders in decision-making process; customer orders and product designs can be clarified electronically; electronic meetings can be held; collaborative planning is facilitated




IT synergy

Expanded supply chains

Productivity increases as information can be shared more efficiently internally and between trading partners

Order fulfillment, logistics, warehousing, transportation and delivery become focus of operations management; risk is spread out; trade barriers fall


After the World Trade Center attack on Sept 11, 2001, US border was closed, and air travel shut down. With the help of internet and world-wide supplier network, Dell Computer could identify where production would be disrupted due to supply constraints- it quickly ramped up production in European & Asian plants and prioritizes orders to fill the most important customers first. Compaq, however, unable to ship $ 300 million worth of orders due to supply chain disruptions


Globalization and Globalization and CompetitivenessCompetitiveness

Favorable costFavorable cost Access to international Access to international

marketsmarkets Response to changes in Response to changes in

demanddemand Reliable sources of supplyReliable sources of supply 14 major trade agreements in 14 major trade agreements in

1990s 1990s ( WTO, NAFTA, SAFTA, TA ( WTO, NAFTA, SAFTA, TA between ASEAN- Thailand, Japan, between ASEAN- Thailand, Japan, Indonesia)Indonesia)

Peak: 26% in 2000Peak: 26% in 2000 2/ 3 of businesses operate 2/ 3 of businesses operate

globally.globally.World Trade Compared to World GDPSource: “Real GDP and Trade Growth of OECD Countries, 2001–03,” International Trade Statistics 2003, World Trade Organization, www.wto.org


Globalization and Globalization and Competitiveness (cont.)Competitiveness (cont.)

Hourly Wage Rates for Selected CountriesSource: “International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing,” Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003.

Germany: $26.18Germany: $26.18

USA: $21.33USA: $21.33

Taiwan: $5.41Taiwan: $5.41

Mexico: $2.38Mexico: $2.38

China: $0.50China: $0.50

Labor Wage Rate vs year


Globalization and Globalization and Competitiveness (cont.)Competitiveness (cont.)

Trade with China: Percent of each country‘s trade Trade with China: Percent of each country‘s trade Source: Source: “Share of China in Exports and Imports of Major Traders, 2000 and 2002,” “Share of China in Exports and Imports of Major Traders, 2000 and 2002,”

International Trade Statistics 2003, World Trade Organization, www.wto.orgInternational Trade Statistics 2003, World Trade Organization, www.wto.org

China : Low labor cost, enormous consumer markets, its needs are machinery & basic materials, is a hub for manufacturing low –tech goods.When companies move to China, their supplier & suppliers’ suppliers also move there.Globalization of service : India excels in service- Overseas companies outsourcing to India


Risks of GlobalizationRisks of Globalization

Cultural differences Cultural differences Supply chain logisticsSupply chain logistics Safety, security, and Safety, security, and

stabilitystability Quality problemsQuality problems Corporate image Corporate image Loss of capabilitiesLoss of capabilities


Competitiveness and Competitiveness and ProductivityProductivity

CompetitivenessCompetitiveness degree to which a nation can produce goods and degree to which a nation can produce goods and

services that meet the test of international services that meet the test of international marketsmarkets

ProductivityProductivity ratio of output to inputratio of output to input

OutputOutput sales made, products produced, customers sales made, products produced, customers

served, meals delivered, or calls answeredserved, meals delivered, or calls answered InputInput

labor hours, investment in equipment, material labor hours, investment in equipment, material usage, or square footageusage, or square footage


Measures of Productivity

Competitiveness and Competitiveness and Productivity (cont.)Productivity (cont.)


Changes in Productivity Changes in Productivity for Select Countriesfor Select Countries

Internet-enabled productivityInternet-enabled productivity

- Dot com bust- 9/11 terrorist attacks- Dot com bust- 9/11 terrorist attacks

Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor Statistics, U.S. Department of Labor, September 2003. U.S. figures for 2002–2003 from “Major Sector Productivity and Costs Index,” Bureau of Labor Statistics, U.S. Department of Labor, March 2004

The productivity is expressed in relative change basis – month to month, yr to yr etc.; labor hrs, mostly used for calculating productivity


Become efficientBecome efficient output increases with little or no increase in inputoutput increases with little or no increase in input

ExpandExpand both output and input grow with output growing both output and input grow with output growing

more rapidlymore rapidly Achieve breakthroughsAchieve breakthroughs

output increases while input decreasesoutput increases while input decreases DownsizeDownsize

output remains the same and input is reducedoutput remains the same and input is reduced RetrenchRetrench

both output and input decrease, with input both output and input decrease, with input decreasing at a faster ratedecreasing at a faster rate

Productivity IncreaseProductivity Increase


Competitiveness and Competitiveness and ProductivityProductivity

Productivity as a Function of Inputs and Outputs, 2001–2002Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor Statistics, U.S. Department of Labor, September 2003

Breakthrough Performance( Sweden)

Breakthrough Performance( Sweden)

More Efficient ( Taiwan)More Efficient ( Taiwan)

Retrench( US, Japan & Germany – Labor inputs reducing due to global

outsourcing and improved

technology)

Retrench( US, Japan & Germany – Labor inputs reducing due to global

outsourcing and improved

technology)


Global Competitiveness Global Competitiveness RankingRanking

1.1. FinlandFinland2.2. United StatesUnited States3.3. SwedenSweden4.4. DenmarkDenmark5.5. TaiwanTaiwan6.6. SingaporeSingapore7.7. SwitzerlandSwitzerland8.8. IcelandIceland9.9. NorwayNorway10.10. AustraliaAustralia

Source: Global Competitiveness Report 2003–2004, World Economic Forum, January 2004, www.weforum.org

Countries’ competitiveness depending on the ability of their companies compete in global market- which depending on business environment they workThis ranking considered factors like company’s availability of highly skilled people, better information, more efficient government processes, improved infrastructure, better suppliers, more advance research information, and more intense competitive pressure.Raking based on two measuresi) The sophistication of a company’s operationsii) The quality of the national business environment Competitiveness within industries: More intense when the firms are equal in size , resources, products and services are standardized , and industry growth is either slow ( so that one company grows at the expense of other) or exponential( so gaining a foot hold in the market is a strategic imperative

US : Strong in technology but less effective in its public institutions.Most competitive industries are commercial banking, food & drug stores and electronics.


Economies of Scale Economies of Scale (with increasing no of units (with increasing no of units produced, the unit cost decreases) produced, the unit cost decreases)

Capital Investment Capital Investment ( large initial investment ( large initial investment required for facilities, equipment, and training for required for facilities, equipment, and training for becoming a player in some industries) becoming a player in some industries) Access to Access to Supply and Distribution Channels Supply and Distribution Channels (existing (existing firm within an industry having established supply and firm within an industry having established supply and distribution channels, difficult for new firms to replicate )distribution channels, difficult for new firms to replicate )

Learning CurveLearning Curve( rate at which performances ( rate at which performances improving with repetition) improving with repetition)

Operations–oriented Barriers to Operations–oriented Barriers to EntryEntry( factors that make it difficult for new firms to enter an ( factors that make it difficult for new firms to enter an industry) industry)


Primary Topics in Operations Primary Topics in Operations ManagementManagement( Many issues, concepts, and techniques ( Many issues, concepts, and techniques associated with the field of OM-Fig. showing the primary-decisions associated with the field of OM-Fig. showing the primary-decisions making areas in OM and how they relate to each other- the diagram, making areas in OM and how they relate to each other- the diagram, divided in 2 sections-designing & operating the system.)divided in 2 sections-designing & operating the system.)

Figure showing primary decision making areas in OM and how they relate to each other in road map.

This figure is showing decisions required to design a productive system. Operations Strategy, drives product/service design


Primary Topics in Operations Primary Topics in Operations Management (cont.)Management (cont.)

This section : concerned with operating the system designed in section 1

The series of decision involved in operating the supply chain, forecasting demand, inventory management , production planning, resource allocation, and production scheduling are incorporated in supply chain management.

Companies : can achieve competitiveness when both design and operating decisions are driven by quality in the context of a global business environment


Operations StrategyOperations Strategy

Strategy: Chapter 2Strategy: Chapter 2 Maintaining an operations strategy to support firm’s Maintaining an operations strategy to support firm’s

competitive advantagecompetitive advantage Quality: Chapters 3 and 4Quality: Chapters 3 and 4

Focusing on quality in operational decision makingFocusing on quality in operational decision making Product and Services: Chapter 5Product and Services: Chapter 5

Designing quality products and servicesDesigning quality products and services Processes, Technologies, and Capacity: Chapter 6Processes, Technologies, and Capacity: Chapter 6

Setting up process so that it works smoothly and Setting up process so that it works smoothly and efficientlyefficiently


Facilities: Chapter 7Facilities: Chapter 7 Setting up facility so that it works Setting up facility so that it works

smoothly and efficientlysmoothly and efficiently Human Resources: Chapter 8Human Resources: Chapter 8

Designing jobs and work to produce Designing jobs and work to produce quality productsquality products

Project Management: Chapter 9Project Management: Chapter 9 Managing complex projects Managing complex projects ( breaking down ( breaking down

complex processes, scheduled activities, and ensuring complex processes, scheduled activities, and ensuring project completion on time and budget)project completion on time and budget)

Operations Strategy Operations Strategy (cont.)(cont.)


Supply Chain Supply Chain ManagementManagement

Supply Chain: Chapter 10Supply Chain: Chapter 10 Managing supply chainManaging supply chain

Forecasting: Chapter 11Forecasting: Chapter 11 Predicting customer demandPredicting customer demand

Aggregate Planning: Chapter 12Aggregate Planning: Chapter 12 How much to produce and when to How much to produce and when to

produce it produce it Inventory Management: Chapter 13Inventory Management: Chapter 13

How much to order and when to orderHow much to order and when to order


Supply Chain Supply Chain Management (cont.)Management (cont.)

Resource Planning: Chapter 14Resource Planning: Chapter 14 Planning capacity and other resourcesPlanning capacity and other resources

Lean Production: Chapter 15Lean Production: Chapter 15 Designing efficient production linesDesigning efficient production lines( without fat)( without fat)

Scheduling: Chapter 16Scheduling: Chapter 16 Job and task assignmentsJob and task assignments

Waiting Lines: Chapter 17Waiting Lines: Chapter 17 Minimizing waiting time of customers and Minimizing waiting time of customers and

productsproducts


Learning Objectives of Learning Objectives of this Coursethis Course

Gain an appreciation of strategic importance of Gain an appreciation of strategic importance of operations in a global business environmentoperations in a global business environment

Understand how operations relates to other Understand how operations relates to other business functionsbusiness functions

Develop a working knowledge of concepts and Develop a working knowledge of concepts and methods related to designing and managing methods related to designing and managing operationsoperations

Develop a skill set for quality and process Develop a skill set for quality and process improvementimprovement


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