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Chapter One

Introduction to operations management

Learning outcomes
After reading this chapter you will be able to: Define what is meant by operations management Understand the nature of operations within an organization Explain what an operations manager does and the role he/she plays in an organization Discuss the similarities and differences between the manufacturing and service sectors of the economy Explain the similarities and differences between customer processing operations, materials processing operations, and information processing operations


AgustaWestlandgetting into operations

Stuart is 23 years old and has three years of operations management experience. Whilst studying for a business management degree, he undertook a professional training placement for a year. It was spent working for AgustaWestland (AW), the aerospace engineering company that manufactures helicopters in Somerset. On graduating, Stuart returned to work in operations for themas a graduate management trainee. As their graduate employment brochure explains, AW takes on a number of graduates each year. As well as the two-year graduate programme, there are a number of other training and development opportunities, including the AW personal development programme Leading Edge, and the Finmeccanica Learning Induction Programme (FLIP) which encourages interaction with graduates across the Finmeccanica Group (AWs parent company). With over 230 trainees, from apprentices to graduates, the company also creates a social network through regular organized events to integrate newcomers.
line managed by the Training Department and then seconded to production departments for a period of time. During my year out, I had six months in two very different areas. The first of these was in the production of aircraft and the second was in a process improvement team in customer support. The first role involved long-term production planning and scheduling of different sections of the aircraft. During the second six months I looked at a variety of support processes and was involved in facilitating process improvement events. The graduate scheme I am now on is made up of working in four or five specific areas over a two-year period. This is designed to deliberately develop expertise and skills within a host directorate. In my case this is Customer Support. In this directorate there are three main areastechnical services (which coordinates responses and resolutions to aircraft failures or breakdowns, as well as issuing technical communications), materials services (which deals with materials and logistics of spares, repairs, and overhauls), and aircraft services (which maintains aircraft for those clients that have outsourced this back to us). During my two years on the scheme I worked in materials services. Hence I have had four different roles relating to process development and improvement, standardization across aircraft platforms, capacity planning, and developing reporting structures in relation to supplier performance, and analysing these. Every working day is interesting and challenging. This is partly because graduate trainees are given different projects to do and partly because of the dynamic nature of this business. The environment is
AgustaWestland, the aerospace engineering company, takes on a number of graduates each year. Copyright AgustaWestland NV.

ever changing because technology is changing all the time. So it is a very innovative sector. It is also very international as support has to be provided to clients across the globe.

Here Stuart talks about his operations management experience:

Ive always been interested in working in operations because I have always found anything a bit of a puzzle interesting. I found a placement with AgustaWestland through the Placement Office. I was attracted to the opportunity to work in aviation as I had been an air cadet. The firm organizes placements by having trainees

Source: authors primary research

1. What appears to be the key roles an operations manager might play in an organization? 2. What might be the major operations-based issues that face AgustaWestland?

Understanding operations management

What is operations management (OM)? You may not have thought about it before but actually you are surrounded by the outcomes of this activity. Everything you see that is not in nature has been designed and produced by someone. Everything buildings, aeroplanes, clothes, furniture, cosmetics, jewellery, and even the food we eatis produced by people engaged in operations. So operations management actually underpins most of human activity and shapes the society in which we live. A simple denition of operations management is the planning and organizing of the production of manufactured goods and delivery of services. It is one of the core functions within an organizationthe others typically being marketing, human resources, and nance and accounting. As a discipline, operations management has evolved over the years. Originally it was referred to as production management. This reected the focus on how best to manage manufacturing in factories, which in the 1900s was the predominant form of large-scale economic activity. This was the era when goods such as motor cars, aeroplanes, refrigerators, and radios were being mass-produced for the rst time. Production management tended to focus on the internal activities of the rm and was preoccupied with how best to organize equipment, employees, and work within the factory setting. But over time, it became clear that an organizations performance did not simply depend on what happened within the factory, but also on how its suppliers performed and how well it distributed its products to customers. This widened the focus to include the supply chainupstream from the manufacturerand onwards distributiondownstream from the factory. This coincided with the growth of large-scale service rms, such as hotel chains, banks, and retailers, who did not have factories anyway. As a result this led to the adoption of the term operations management. So OM can be dened as the management of processes that convert inputs (such as materials, labour, and energy) into outputs (in the form of goods and services). Or to put it another way, its all about how things get built or made and how services get delivered. In many respects operations management is a sleeping giant. That is to say many people have not recognized the importance of this function, nor indeed have even realized that they may work within this function. In some organizations, some management job titles clearly identify managers with an operations rolesuch as operations director, production manager, and customer services manager. But there are many roles where this is less obvioussuch as bank manager, reservations manager, and quality manager. In recent years, the value and importance of operations have begun to be recognized. For instance, the original success of Japanese companies in sectors such as car manufacturing and electronic goods was seen to be based on their ability to manage their operations more eciently and reliably than European or American competitors. Likewise, reform of the National Health Service in the UK is also partly based around reviewing and revising clinical practices and procedures. This is not surprising because operations in most organizations are by far the most signicant part of what the organization does. Generally most of the employees are engaged in operations, most of the revenue generated and costs incurred derive from operations, and most of the organizations assets, such as its buildings, plant, and machinery, are used for operational purposes. In other words, the success, or failure, of most organizations depends upon the management of their operations. So let us begin by looking at how rms are organized and the role that operations play within the organization.
Introduction to operations management 5
Operations management the management of processes that convert inputs (such as materials, labour, and energy) into outputs (in the form of goods and services)

What is the nature of operations in an organization?

In this section we start by considering what an organization is like before going on to look at dierent types of organization. We then look at how operations management ts into such organizations and how the operations function itself is organized.

What is an organization?
Even one person working on their own needs to be organized to ensure that the activity is done well. So when two or more people come together in order to perform an activity there has to be some form of organization. This is especially the case when an organization is made up of many thousands of managers and employees. There are four basic issues that need to be addressed in relation to organizational design:
The nature of the hierarchy The degree of centralization The extent of formalization The level of complexity.

The hierarchy of the organization determines the basic shape of an organizationhow many layers there are between the chief executive ocer (CEO) that leads the organization, and those working on the shop oor. A so-called tall organization has many layers, whereas a at organization is one where there are few layers of management between the CEO and the workforce. Tall organizations also tend to have narrow spans of control, that is to say a small number of employees reporting to the manager above them. This tended to be the shape of early industrial organizations because they were modelled on the only form of organization that existed at that timethe military. Over time, the trend has been for commercial organizations to reduce the number of levels and widen the spans of control of managers in order to atten the organization. The degree of centralization in an organization is all about how power is distributed within an organization. In highly centralized organizations, power is held at the centre, with all decisions about policy and procedure made by the CEO or senior managers at head oce. In decentralized organizations, relatively low-level managers have delegated authority to make decisions and take action. The third issue in organizational design is formalization. This refers to how work is organized and how explicit and rigid this is. Formal organizations have a large number of policies, procedures, and rules that are typically written down in standards of performance manuals or some other form of documentation. Finally, complexity refers to the number of subunits within the organization and the degree of dierence between them. Some organizations have a high degree of standardization because they make a single product or deliver a simple service, hence they are not complex. Other organizations may make a wide range of products and deliver services to many dierent customers in many dierent locations. As a result of these four issues, organizations can take a number of dierent forms. This is discussed in the next section.

Understanding operations management

Organizational forms
There are ve basic organizational formssimple, functional, divisional (or product), conglomerate, and hybrid (or matrix). The simple form of organization is typically how most small and medium-sized enterprises (SMEs) are organized. In such organizations the original founder or entrepreneur is typically in charge of all aspects of the business. Functional organizations are divided into dierent areas of management activity, typically Operations, Sales and Marketing, Human Resources, and Accounting and Finance. When organizations become larger, the owner or CEO cannot do everything, so employs specialists in these functional areas to manage those aspects of the business. Divisional organizations are either organized around product categories, customer markets, or regions of the world. Then each division will have its own resources and functional organization. For instance, GSK (previously GlaxoSmithKline) is a UK-based pharmaceutical company employing 99,000 people in 100 countries. In 2010, it was organized into four major regional divisions for North America, Europe, Asia Pacic/ Japan, and Emerging Markets. Conglomerate organizations are made up of a variety of dierent businesses, which may or may not have similarities between them. A typical conglomerate is General Electric, which is, according to Interbrand (2010), the worlds fth best brand. Originally a manufacturer of electrical appliances it moved into nancial services and the media business in the 1980s. In 2008, GEs divisions included GE Capital (including GE Commercial Finance, GE Money, and GE Consumer Finance), GE Technology Infrastructure (including GE Aviation, the former Smiths Aerospace, and GE Healthcare), GE Energy Infrastructure, and NBC Universal, the television and lm company. Hybrid organizations, sometimes referred to as matrix structures, are organizations that deliberately mix the four organizational forms just described. In the 1990s some of the major petrol companies such as BP adopted this form. Hence there may be both regional divisions and functional departments. The relationship between the issues of organization and organizational form is illustrated in Figure 1.1. This shows that as organizations become more complex the degree of centralization decreases. With regard to formalization it tends to be the divisionally organized rm that has the highest level, reecting the fact that it typically has narrow

Design issues

Organizational form
Functional e.g. operations, marketing, finance Divisional e.g. product, region Conglomerate i.e. different businesses Many Narrow High Wide Hybrid i.e. mixed forms N/a N/a Low Low High

No. of levels Width of span Formalization Centralization Complexity

Few Wide Low High Low

FIGURE 1.1 Relationship between organizational design issues and organizational forms.

Introduction to operations management 7

spans of control. Conglomerates tend to have more levels than other rms, but this is mostly due to these being the larger organizations. The importance of this from an operations perspective is that managers of individual operations, whether they be a factory, shop, or medical practice, may have very dierent responsibilities and freedom to act, depending on the degree of organizational centralization and formalization. It should be noted that organizational form and structures are not xedthey change over time. Operations insight 1.1 illustrates how Starbucks in the USA decided to change its structure and identies some of the operations issues that arise from such reorganization.


Starbucksmega corp. or local store?

In 2008, Starbucks in the USA conducted an organizational review that had implications for how its operations were managed and for its 170,000 employees. Clearly the decision to reorganize was a difficult one, as the Starbucks CEO stated that he was struggling with the issue and was aware that it could be painful for some employees. This was because the reorganization removed 600 positions and hence staff were made redundant. The purpose of this was clearly to cut costs and make the organization more efficient. It was hoped that it would strengthen Starbucks focus on the customer in its outlets, by consolidating many of the support functions at head office and in regional offices. Hence it was decided to have four operations divisionsWestern/Pacific, Northwest/Mountain, Southeast/Plains, and Northeast/Atlanticinstead of just two. The idea behind this was to enable regional managers and support teams to work more closely with the managers and employees in each Starbucks outlet. It was also hoped that the approach adopted by the new regional leaders would be more customer-centric, that is to say, listen more carefully to consumer feedback and respond appropriately. Each of these new divisions was to be led by a senior vice president, who would report directly to the US president of Starbucks. Within each division, managers responsible for Store Development, Marketing, Partner (i.e. Human) Resources, and Finance report directly to their respective executive managers at head office, while being responsible for results at the divisional level. Starbucks also reorganized support functions which up to this point had consisted of:
US Store Development US Licensed Stores US Finance Partner Resources Marketing In-Store Experience Global Supply Chain Global Communications Partner & Asset Protection.

Starbucks organizational review aimed to strengthen its customer focus. istock/john shepherd.

Understanding operations management

OPERATIONS INSIGHT 1.1 CONTINUED Most of these were merged to create fewer departments and improve coordination across the organization. As a result, Starbucks shifted some of the operational responsibility down from head office to the regional offices and reduced the number of levels between the CEO and the outlet managers. Source: based on a press release issued by Starbucks CEO Howard Schulze in Seattle on 21 February 2008


1. What form of organization structure has Starbucks adopted? 2. How centralized and formalized will Starbucks be after the reorganization?

As well as the long-standing forms of organization already described, newer socalled post-bureaucratic forms have emerged, such as team organizations, networks, and even virtual rms. Team structures tend to be based around projects within organizations that cut across conventional functional boundaries within organizations. Well-known organizations that have partially adopted this approach include Xerox, Motorola, and Chrysler. Such manufacturers have done so in order to achieve better coordination between sections of their manufacturing process that might previously not have communicated with each other. Network organizations are ones that have signicantly reduced their workforce and outsourced or contracted out the work to other organizations, who may be able to do this better or more cheaply than could be done within the organization. This is the case with some rms that used to manufacture their own goods, but now have completely outsourced the making of products to other companies, as seen in the clothing industry in the UK. Finally there are some organizations that are virtual, being based almost entirely on the Internet. An example of this might be Linux, which is a community of software developers from around the world that have developed the Linux operating system and related software applications. Another example is Salon Consulting, which is made up of many independent consultants who collaborate together on projects as and when necessary, depending on the size and complexity of the work and the expertise required for its successful completion.

How is the operations function organized?

Having identied in the introduction that most organizations have operations, and that operations managers are often responsible for most of the assets, people, and money, we now turn to how the operations function itself is organized. The same issues identied earlierhierarchy, centralization, formalization, complexitywhich aect the whole organization also aect operations. We can see how these factors inuence the organization of operations if we look at a single industry, such as the motor manufacturing sector. Firms in this sector vary from global companies such as VW and Toyota with a wide range of cars, to relatively small rms producing specialized vehicles, such as
Introduction to operations management 9

(a) District hospital

District hospital

Finance and accounting

Operations function

Human resources

Director of support services

Director of nursing

Director of medical services

(b) Budget hotel chain

Head office

Human resources

Finance and accounting

Operations director

Brand marketing director

Regional director (North)

Regional director (South)

Area manager (North East) Area manager (North West) Area manager (North Central)

(c) Manufacturer
Head office

Human resources

Finance and accounting

Operations director

Sales and marketing

Production manager

Process development manager

Quality manager

Maintenance manager

Supply chain manager

FIGURE 1.2 Organization charts for the OM function in three different organizations.


Understanding operations management

Lotus. Toyota manufactures over 22,000 cars a day; Lotus has made 29,300 Lotus Elise cars in 16 years, roughly ve per day. Toyota has a product range of 40 cars; Lotus has four models of sports car. Toyota has hundreds of suppliers of parts for its cars; Lotus manufactures some of its own components and buys the rest from a small number of suppliers (such as complete engines from Toyota). Toyota has 53 manufacturing facilities outside Japan; Lotus has a facility in Norfolk. Toyota employs over 300,000 workers; Lotus employs nearly 1300. As a result, Toyota has a divisional approach to its operations function, with operations managers responsible for dierent factories in dierent countries, other managers in charge of aspects of operations (procurement, research and development, quality management), and other managers responsible for certain product categories (saloon cars, sports cars, SUVs). Lotus, on the other hand, has a relatively simple and at structure. But both Toyota and Lotus are at the leading edge of automotive engineering. Dierences between how the operations management function is organized are even more marked when we compare organizations in dierent sectors. This is illustrated in Figure 1.2. In all three organizations, operations are clearly separate from the other functional areas of marketing, nance, and human resources. But the operations function itself is subdivided on dierent criteria. In the hospital it is broken down into three dierent groups of employees with dierent sets of expertisedoctors, nurses, and support sta. In the budget hotel chain, operations is organized geographically. This is because each hotel is very similar but they are located throughout the UK. Finally the manufacturer has organized operations into ve areas each of which is related to dierent aspects of the manufacturing processsupply chain, production, maintenance, quality, and development. Figure 1.2 seems to suggest that the distinction between what is operations and what is some other function is very clear. In reality this is not always the case. This can be explained by understanding systems behaviour (Wilson, 1990). A system can be dened as a clearly identiable, regularly interacting or interrelating groups of activities, as discussed in more detail later in this chapter. A feature of systems theory is the concept of a boundary around the system. The boundary determines what is in the system and what is not. The reason that it is sometimes dicult to be clear about boundaries is that often outputs of one system are the inputs of another. This leads to another systems conceptnamely simultaneous multiple containment (SMC). Many systems are interrelated and are made up of subsystems and are themselves subsystems of a larger system. Moreover many systems exist as subsystems of more than just one system. If SMC sounds confusingit can be. In Figure 1.2a we look at a simple example of how the operations management function might be organized in a hospital. In medicine, hospital doctors tend to specialize in one specic area. There are two main areas of expertisesurgical and medical. Surgeons engage in operative treatment and may become specialists in specic types of operation such as heart or brain surgery. Medical doctors treat patients non-surgically, usually with drugs. They, too, can specializein either dierent parts of the body (for instance, cardiologists are heart specialists and dermatologists are skin specialists) or dierent types of patient (paediatricians treat children and geriatricians treat the elderly). So hospitals are organized in this way in terms of teams of doctors and wards in which to care for patients. But patients do not necessarily t easily into this system. For example, an elderly person with heart problems may be taking drugs for their condition and need surgery. Which ward do they go to and which doctor cares for them? It is clear in this case that the boundaries created by the hospital, based on its subsystems of sta and wards, need to be exible enough to cope with the patients it cares for.
Introduction to operations management 11

System clearly identifiable, regularly interacting or interrelating groups of activities Simultaneous multiple containment describes how a process may have subprocesses and how these subprocesses may also be part of a different process

This idea that boundaries may be blurred, or exible, is of major concern when it comes to understanding the relationship between operations and the other management functions. The line between operations and marketing is particularly blurred. As we shall shortly see, in service operations there are many implications of having the customer in the operation itself. But one specic issue is that as well as serving the customer there is direct marketing going on as well. The customer might be reading promotional material, whilst the server may be making recommendations or giving advice. This overlap is even more pronounced if you consider one of the key foundations of marketing, namely the marketing mix or so-called 4Ps of product, price, place, and promotion. Quite clearly the operations function has a key role with respect to the rst three of these. It is operations that actually make the product, its ability to do so hugely inuences the price that has to be charged, and operations ensures that the product is distributed (place) eectively and eciently. Likewise, if most of the employees in an organization work in operations, then this function has a huge responsibility for human resources. So despite organization charts showing these functions as separate entities, a key aspect of any organization is its ability to ensure collaboration across the dierent functional areas, as illustrated by the earlier hospital example.

TABLE 1.1 Responsibilities of operations managers System features Developing and maintaining the systems infrastructure Managing the system inputs and distribution of outputs Key responsibilities Selection of a location for the operation Organizing the physical plant Maintaining and assuring the security of the plant equipment and other assets Deciding on whether to make in-house or buy from suppliers Selecting suppliers Managing the supply chain Distributing goods and services to customers Determining stock levels Organizing materials flow Organizing customer flow (queuing etc.) Managing self-service technologies Responding to breakdowns in service Forecasting demand Scheduling work and employee time Adapting demand Setting standards Manage quality processes Monitor output quality Monitoring productivity of employees and efficiency of technology Adapting work systems to improve performance Chapter 4

Controlling material inputs within the system Managing customer inputs within the system (i.e. as co-workers) Managing the rate of flow through the system

Assuring the quality of system outputs

Developing and enhancing the systems processes Designing and developing human work systems Developing new outputs (i.e. products and services)


Implementing principles of work design Managing employees, teams, and organizational culture Developing new concepts Assessing feasibility of new concepts Turning concepts into reality




Understanding operations management

What does an operations manager do?

Having identied the operations function within organizations, we now consider what the managers in this function are responsible for. There are key issues in relation to the system that they plan, organize, and control, as illustrated in Table 1.1. The table also shows in which chapter each of these issues is discussed and explained.

Managing the short term and long term

Another key aspect of operations management is time. Operations managers are responsible for the very short termoperational activity within the factory, shop, or whatever on a minute-by-minute basisbut also the very long termthe development and investment in processes that will lead to the organizations future success. Table 1.2

TABLE 1.2 Managing operations in the short term and long term Short-term examples Developing and maintaining the systems infrastructure Adding, replacing, or reorganizing equipment Setting up maintenance schedules Long-term examples Selecting a site for a new operation and constructing the facility Major investment decisions on new technology Tendering contracts for new suppliers Outsourcing decisions Adopting new approaches to materials flow such as manufacturing resource planning (MRP II) or just-in-time Redesigning the servicescape Selecting and siting new SSTs Improving service performance Forecasting for months or years ahead Planning manpower needs Planning scale of production and width of product range Benchmarking standards against competitors Adapting and improving processes Planning new systems to improve productivity and efficiency

Managing the system inputs and distribution of outputs Controlling material inputs within the system

Ordering stock Managing warehousing and logistics Setting stock levels Scheduling speed of production

Managing customer inputs within the system (i.e. as co-workers) Managing the rate of flow through the system

Monitoring queues Overseeing self-service technologies (SSTs) Dealing with service failures and recovery Forecasting for days or weeks ahead Devising work rotas Taking orders for goods or reservations for services Checking output against standards Monitoring quality performance

Assuring the quality of system outputs

Developing and enhancing the systems processes

Monitoring system performance productivity of employees and efficiency of technology Monitoring hourly or daily workforce performance Reviewing ergonomics of equipment or work stations Modifying and extending existing products and services

Designing and developing human work systems

Redesigning tasks, jobs, and teams Evaluating and adopting new human/ technology interfaces

Developing new outputs (i.e. products and services)

Adding new and original products and services to the range

Introduction to operations management 13


Hayes, R.H. and Wheelwright, S.C. (1984) Restoring Our Competitive Edge, John Wiley: New York, pp. 2445
Hayes and Wheelwright are two of the founding fathers of operations management. Their ideas and concepts have significantly influenced thinking in this field. In this ground-breaking book, they discuss the emergence of manufacturing strategy. In Chapter 2 of their book, they suggest a four-stage model of how operations could increasingly improve operational capability and hence simultaneously increase its strategic impact. These four stages are: 1. Internal neutralitysimply corrects the worst problem areas 2. External neutralityidentifies and adopts best practices 3. Internally supportivelinks operations with strategy 4. Externally supportivedelivers competitive advantage through operations. This model also demonstrates a shift from a focus on the short term, towards a long-term view of operations. Although the article was written in the mid-1980s, much of what they have to say is relevant today. Most especially it identifies that firms can succeed, i.e. achieve competitive advantage over their competitors, by organizing their operations in the right way. In the final four chapters of this book we look at this concept of operations strategy and three specific examples of such strategieslean manufacturing, continuous improvement, and globalization.

takes the nine systems features of Table 1.1 and gives some examples of what an operations manager may be concerned with in the short term and the long term.

Processesthe heart of operations management

We have briey described operations as a system, with inputs, processes, and outputs. So central to what an operations manager does is the management of process. One way or the other, all the activities identied in Table 1.2 are about this. Just as a mechanic can look under the bonnet of a car and tell if the engine is working smoothly, an operations manager has to be able to look at any process, big or small, and identify if it is running well or not. One way for a manager to be able to undertake such a diagnosis is to understand an operations four Vsvolume, variety, variation, and variability.
Volume relates to size or scale of the output, for instance, how many items are manufactured or customers served in a specied time period. Variety relates to the size of product range or number of services oered. For instance, Virgin Atlantic only ies long haul to selected destinations, whereas British Airways has both short-haul and long-haul ights to over 100 destinations.
14 Understanding operations management

Volume the size or scale of the output, i.e. how many items are manufactured or customers served in a specified time period Variety the size of product range or number of services offered

Fine dining restaurant

Low Volume

Fast food restaurant











Go online

FIGURE 1.3 The four Vs in the restaurant sector.

Variation describes how the level of demand changes over time and thereby aects the volume of outputs. This may be short term (hourly or daily)such as lunchtime in a restaurant, as well as seasonalsuch as the demand for umbrellas or tickets for outdoor events. Variability refers to the extent to which each product or service may be customized or not. For instance, in a restaurant the French fries will be standardized, but the steak might be grilled rare, medium, or well done.

Variability the extent to which each product or service may be customized or not

The impact these have on an operation is illustrated in Figure 1.3 which compares two dierent kinds of operation in the restaurant sector. A typical fast food restaurant in a busy high street location may serve up to 30,000 customers a week (high volume), whereas a ne dining restaurant such as those operated by Gordon Ramsey may serve around 700 customers a week. The fast food menu has relatively few choices, many based around the same concept such as hamburgers, chicken, or sh (limited variety), whereas Ramseys restaurant will have a menu with a wide choice of dierent dishes and this menu may be dierent from one day to the next. In the fast food sector demand for meals varies on a daily basis, with peaks in demand at lunch and dinner times and is inuenced by factors such as the weathermore shoppers using the restaurant if it is raining (high variation). The ne dining restaurant may only be open at certain times and only take diners who reserve a table, so that it is always full. Finally, the fast food restaurant uses standard ingredients and standard recipes to try to ensure that every item sold is consistent (no variability), whereas diners in the ne dining experience may be asked how they like their food and it is then cooked to their specication.

Variation how the level of demand changes over time and thereby affects the volume of outputs. This may be short term (hourly or daily), as well as seasonal

Services versus manufacturing

For the last 30 years there has been a debate as to whether service industries are fundamentally dierent from manufacturing. This is important because if they are dierent, then operations managers have to manage service operations dierently from the way in which manufacturing operations are managed.
Introduction to operations management 15

The distinguishing features of services

In 1978 a group of Harvard professors published their ground-breaking book The Management of Service Operations. Sasser et al. (1978) argued that there were four features of services that made then fundamentally dierent from manufacturing goodsnamely intangibility, heterogeneity, perishability, and simultaneity (sometimes referred to as inseparability). Each of these will now be briey discussed and debated.

Intangibility the lack of tangible characteristics of a service operation

This refers to the concept that services do not physically exist but are directly experienced by consumers. Moreover once a service has been purchased and experienced there is no physical evidence of it ever being consumed. The classic example of this is an overnight stay in a hotel. The guest arrives, stays in the hotel, pays, and leaves and has no evidence of having purchased anythingexcept for their bill. The operations management implication of intangibility is that it is extremely dicult to ensure services are delivered in the correct way, because it is extremely dicult to measure these intangibilities. For instance, the hotel guest buys a good nights sleep. But are services really intangible? Or perhaps, to put it another way, are products really tangible? It is dicult to think of anything that is more tangible than a motor car. A car is a large, signicant artefact for which a huge amount of tangible data can be collectedsuch as how much it weighs, how fast it goes, and how much fuel it consumes. But there is evidence to show that many cars are purchased not on the tangible evidence of their performance but on their intangible aspectstheir aesthetics. People buy cars because they like the colour, or the shape, or the comfort of the seatusing their subjective opinion rather than objective facts. So clearly products have many intangible features. It can then be argued that services have tangible features, just like products. These often relate to the environment in which the service is delivered and how functional it issuch as how queues are designed, and how the technology works. Service companies routinely put a great deal of eort into how they design their operations to make the customer experience eective and ecient (this is discussed in more detail in Chapters 4, 7, and 10).

Heterogeneity the variety of responses consumers may have to a service experience

This refers to the idea that consumers have unique experiences of services that are not shared with, or are the same as, other consumers. This follows on from intangibility. If there is no tangible product, then it is easy for each customer to interpret their experience in dierent ways. Using the hotel example, the same hotel room may be used by hundreds of guests but each of them could have dierent experiences and dierent levels of satisfaction with that experience. For operations managers, heterogeneity means that managing the customer experience is very challenging. Even if services are delivered to a precise standard, dierent consumers will react to these in dierent ways. Indeed, the same customer using the same service on dierent occasions may have dierent reactions each time. Hence measuring consumer satisfaction is a challenge.
16 Understanding operations management

The case against heterogeneity distinguishing services from products is very simple consumers opinions about products are just as heterogeneous as they are for services. If cars are purchased not for their features but because they look nice, then there can be a huge variation in consumers opinions as to what nice is.

It is argued that services cannot be inventoried or put into stock. An airline seat available today, if not sold, is therefore a sale that is lost foreverit cannot be sold twice the following day. The operations imperative that follows from perishability is that it is essential to ensure services are used to their maximum. The capacity of the operation has to be eectively managedas discussed in Chapter 8. This is why hotels are happy to sell rooms at a discount on or near the date requested, as it is better to have some revenue to cover costs than have a half-empty hotel. Products, on the other hand, tend to be non-perishablealthough some products such as foodstus (meat, vegetables, dairy products) have relatively short shelf lives. But very few products have an indenite shelf life. Consumers generally want to buy the latest model. So even if a mobile telephone manufactured a year ago works perfectly, customers may be reluctant to purchase it as it does not have the latest features (functional or aesthetic). In terms of services, they also have a shelf lifeit is all the time that leads up to the specic occasion when the service needs to be sold (such as in a hotel or on an aeroplane). For instance, airlines and hotels started taking bookings for the London Olympics in 2012 from 6 July 2005 onwardsthe day it was announced that London was the venue. Thats a shelf life of seven years, which is considerably longer than most manufactured goods.
Perishability the inability of service providers to inventory their services

Simultaneity (or inseparability)

Services are produced at the same time (or place) as they are consumed, unlike a product which can be purchased and used whenever (and often wherever) it is needed. Therefore a service depends on direct interaction between the consumer and the service provider. Although simultaneity and inseparability tend to be used interchangeably to describe this concept, they in fact refer to two dierent things. Simultaneity refers to the idea that service is provided at the same time as it is requested; whereas inseparability refers to providing service in the same place as the consumer. In high street retailing, the customer only experiences the shops services if in the outlet itself. The operations management issue that results from simultaneity is that service provision has to be matched closely to consumer demandbut it may be dicult to predict this demand. So a shop may know that it is busy on Saturdays and have extra sta on duty to deal with this. But the shop does not know if shoppers will arrive in a steady stream over an extended period, in which case they can be served without delay, or whether 30 or 40 will arrive within ten minutes of each other, so that queues build up and some customers have to queue to be served. Clearly, not matching supply to demand means that often the quality of the service suers, leading to low levels of customer satisfaction. Given these proposed dierences between services and manufacturing, are service rms and their operations managed dierently? As Research insight 1.2 shows, some would argue strongly that they are.
Introduction to operations management 17
Simultaneity the co-production and delivery of a service in the consumers presence


Heskett, J.L., Jones, T.O., Loveman, G.W., Sasser, W.E., and Schlesinger, L.A. (1994) Putting the service-profit chain to work, Harvard Business Review, Mar/Apr, 72(2), 16470
A number of Harvard professors have been researching and writing about services for many years. In this article they collaborate to discuss what they call the service-profit chain. This model argues that the most successful service companies, so-called breakthrough firms, focus on their employees and customers. They suggest that in this new service paradigm, successful service managers heed the factors that drive profitabilityinvestment in people, technology that supports front-of-house workers, redesigned recruiting and training practices, and pay linked to performance. As a result the service-profit chain suggests relationships between profitability and customer loyalty, as well as employee satisfaction, loyalty, and productivity.

Whilst Heskett et al. (1994) make a convincing case for the service-prot chain, this does not mean that service is dierent from manufacturing. Investing in people, adopting the right technology, recruiting and training employees, and performancerelated pay are probably also important and essential in manufacturing. So, in this book we argue that the single key dierence between these two main types of operation is simultaneity/inseparability. In services, having the customer in the factory means that service employees cannot make mistakes and have to respond in quite sophisticated ways to the emotions, feelings, and behaviours of the customers.

Processing materials, customers, and information

So far we have identied that operations management is all about processes and that there may be some dierence between services and manufacturing, notably that customers are involved in the creation and production of services. Given that the concept of a process is that of a ow through a system, it is now time to consider what ows through. The answer is that it can only be three thingsmaterials, customers, or information (or a combination of these). Therefore Johnston and Morris (1994) suggest there are basically three types of operation:
Materials processing operation (MPO)more commonly referred to as manufacturing Customer processing operation (CPO)typically described as a service Information processing operation (IPO)mostly considered as services.

But in many cases, an operation is not uniquely an MPO, CPO, or IPOit is a combination of all three. For instance, during the customer experience in a restaurant materials are processed (food and drink prepared for consumption, transported to the customers),
18 Understanding operations management

information is processed (customer selects from menu, order taken, bill prepared), and customer processing occurs (customers requests are responded to, social interaction takes place). This is further illustrated in Operations insight 1.2 on motor repair services. The reason why these three basic types of operations are important is that materials, customers, and information each behave in very dierent ways. Materials are physical and come in all kinds of shapes and sizes. When not being handled they remain inert, interacting with their environment very littlealthough food may deteriorate and iron may rust if left for too long. However, when being handled, each kind of material has specic properties. Some materials are liquid, such as petrol and wine. Many materials are solids, such as wood and metal, although these two materials behave in very dierent ways when shaped and heated. Other materials may be both liquid and solidglass for instance is liquid when being heated to shape into objects, but a solid, albeit a fragile one, when cooled. Because of these physical and chemical properties the behaviour of each material can be precisely understood and managed in any given state. Hence processing materials should be entirely predictable. It might be thought that managing customers is also relatively straightforward. Although customers come in all shapes and sizes, they are all fundamentally made of the same materialesh and blood. This homogeneity should therefore mean that all customers will react and behave in the same way in any given situation. But as we all know this is not the case! People have minds of their own. Moreover, unlike passive materials, they can physically transport themselves from one place to another. This can be an advantage if they choose to move in the way the operation expects them to (for instance, by joining the end of a queue) but a disadvantage in that some customers may not choose to cooperate. Disney Paris discovered this when they rst opened their theme park. Although highly experienced operators, they were used to visitors following instructions and following certain queuing rules. They found that their French visitors were unaware of, or chose to ignore, such conventions. In order to avoid delays and queues these early visitors would access rides using exits, push into queues, and take other inappropriate action. Finally there is information. This is clearly neither material nor human. At its simplest, information is a collection of facts or data. This of itself is not much use, so in terms of operations when we talk about information processing operations we are actually talking about the movement or communication of information from one place to another. Just as materials processing has been transformed over the centuries through various revolutionsthe agricultural revolution, the industrial revolution, and the Internet revolutionso information has developedfrom the spoken word, to writing and then printing, and the digital revolution. This now means that information systems can do what previously was dicult for humans to do, such as handle large amounts of information, perform complex calculations, and control many processes at the same time. Processing information is now so important that many organizations have not only a CEO and chief nancial ocer (CFO), but also a chief information ocer (CIO). And there are some sectors of commerce and the public sector which predominantly deal with information, such as nancial services, education, and mental health care.

Introduction to operations management 19


SMC Renault Minuteservicing cars and serving people

SMC Renault Minute in Woking, Surrey is a subsidiary of a main Renault car dealership, SMC Renault, which was established in 1986. Working as a wholly owned subsidiary, SMC Renault Minute was set up a short distance from the main dealership in 2005. It occupies premises of some 10,000 square feet and has four service bays. It specializes in fast-fit services, from exhausts, batteries, and tyres to brake pads and shock absorbers, but also carries out full repair services and MOT testing. There is a small car parking area where cars are held awaiting service, a small reception area, and a viewing area for customers to see their car during MOT testing. Primarily set up to handle Renault vehicles it now services most makes of car. There are ten members of staff including four fulltime motor technicians. There are two additional motor technicians who work at SMC branches locally who can be called upon to cover for sickness, holidays, or a large influx of work. There are two modes of operation. Firstly the most usual option is through appointments. Each job has a standard time associated with it and the experienced service administration staff estimate the amount of time that the job will take and can advise the customer of the likely cost. This helps to maximize the use of the companys valuable resources and it also allows time for any spare parts required to be ordered and made available before the car enters the service bay. The second mode of operation is a While-U-Wait option in which customers can arrive without an appointment and then wait until a service bay becomes available. Demand for this service is obviously unpredictable but it offers an opportunity for SMC to make use of otherwise unused service bay capacity. In common with many small and medium-sized enterprises it uses a mixture of manual and computerized systems to help plan and organize its operations. The process is illustrated in Figure 1.4 which shows the flow of the customer, information, and materials through the operation of a typical service repair. Bookings are made via a manual diary system but when the vehicle arrives it is given a computerized job number. Information about the make and model of car are included in a job sheet together with the work to be carried out, which then builds up a job history. This allows the company to keep in contact with their customers by providing a reminder service for upcoming service or MOT testing. If an unforeseen problem comes to light that will require additional expenditure then the service administration staff will contact the customer to seek approval for the work to be carried out. After the job is finished the motor technician completes the job sheet and signs it to say that the work has been carried out in accordance with the required specification. A computerized invoice is then provided for the customer, who pays for the service, receives the keys, and retrieves the car from the parking area. In this operation the flow of the customer, information, and materials can clearly be identified. Figure 1.4 illustrates the role that information has in managing an operation, namely it links the flow of the customer and the flow of materials through the system.


Understanding operations management


Customer books service

Garage takes reservation


Customer delivers own car

Car is designated work number

Car is parked awaiting service

Customer uses courtesy car

Customer assigned courtesy car

Car is tested

Customer returns courtesy car

Courtesy car checked

Required parts are assembled

Customer pays for service

Service invoice prepared

Car is serviced

Customer collects car

FIGURE 1.4 Motor repair servicemix of operations.

Car is parked awaiting owner

Go online


1. What are the advantages to the company of having an appointments system? 2. Can you think of any other ways of organizing this operation to make best use of their resources?

Operations as systems
So far we have identied that operations take inputs and process these to produce outputs, and we mentioned that this can be thought of as a system. This is often shown as illustrated in Figure 1.5a. However, this diagram simplies operations too much, because there is another kind of input that we have not yet discussed, namely the resources that a rm needs in order to conduct its business. These resource inputs are called transformational inputs, whereas the inputs that ow through the operation, such as materials, customers of information, are transformed inputs. The transformational inputs are of two kindsthe physical assets of the rm, such as its buildings, machinery, and equipment, and the human assets, its employees. Moreover these transformational inputs can be back of house, that is to say unseen or unused by customers, or front of house, so that customers enter the operation and use the services provided. Figure 1.5b illustrates

Introduction to operations management 21






Transformational inputs

Materials & information

Back-ofhouse processes

Front-ofhouse processes


Customers & information

FIGURE 1.5 a) Simple systems diagram of operations. b) Developed systems diagram

of operations.

this. Most manufacturing operations have no front of house, because they do not process customers. All service businesses have a front of house, and probably have a back of house too (as we have seen in Operations insight 1.2 about Renault).

The servuction system

Servuction system a model of an operation that identifies the relationship between equipment and employees, and back of house and front of house

Another way of thinking about the relationship between customers, information and transformational inputs is the so-called servuction system, originally conceived by Langeard et al. (1981). This is illustrated in Figure 1.6. The concept of servuction is a blend of the words service and production. It recognizes that operations which process customers can do so in two waysthrough their physical infrastructure, such as buildings, plant, and equipment, and/or through their sta. Of course in most cases they use both. This system model adds another dimension to understanding operations, namely that the customer experience is not simply aected by what the operation provides but also by other customers using that operation, i.e. the so-called co-consumers. In other words the experience of customer A is aected by the service they get from the infrastructure and sta and by their interaction with customer B. For instance, your enjoyment of an evening out at a restaurant, club, or cinema can be spoilt by other customers behaving in ways that you nd annoying or oensive. The model is also extremely helpful in demonstrating and explaining some of the ways in which customer processing operations have been changing over the years. First,
22 Understanding operations management

Back of house/ back office

Front of house/front office

Customer A Plant equipment and environment Service A


Service B Customer B

Invisible to the customer Mainly MPO

Visible to the customer

Go online

Mainly CPO

FIGURE 1.6 The servuction model. Based on Langeard et al. (1981).

the extent to which service is provided by infrastructure or by sta has changed. The customer has increasingly taken responsibility for their own service and in eect become a co-worker through using self-service technologies. This has led to the idea that service encounters can be either high-tech or high-touch. High-tech services have little or no sta input, customers usually interact just with technology, such as when they use a cash machine outside a bank. High-touch on the other hand has high levels of personal service, as you would expect from a hairdresser or doctor. Second, the barrier between back oce and front oce has been shifted or taken down altogether. The fast food sector was one of the rst to do this. In the traditional restaurant setting, the kitchen was back of house and the dining area was front of house, and customers could neither see nor enter the kitchen. In fast food there is no wall between the service area and the production area, the back of house is open for all to see. This was done for two reasons. First it helped fast food employees to see front of house to gauge how busy the restaurant is, thereby enabling them to speed up or reduce the scale of production. Second it reassured the customer that low-cost food was safe to eat because they could see for themselves how clean and well operated the kitchen was. Operations insight 1.3 looks at how the servuction system has changed in the banking industry.


Financial servicesfrom counters to couches

Over the last 30 years, the financial service sector has been transformed, fundamentally changing the nature of the relationships between the bank and its customers. There have been two major driving forces of this changederegulation and technology. Deregulation

was of three kindsa reduction of restrictions on competition, an enabling of banking, insurance, and securities services to be combined, and the harmonization of regulations across

Introduction to operations management 23

OPERATIONS INSIGHT 1.3 CONTINUED Europe. In simple terms, banks (who largely focused on offering current and deposit accounts) were able to merge with building societies (who focused on mortgage lending). As a result, organizations merged in order to provide the full range of financial services, as well as to take advantage of economies of scale. At the same time, information technology and then the Internet enabled nearly all of the paperwork associated with financial services to be digitized. As well as speeding up transactions, this also enabled customers to directly interface with the technology and serve themselves, either through automatic teller machines (ATMs) or, more recently, Internet banking. Both of these trends have led to the design and layout of banks changing. In the old-style bank, where the majority of transactions related to withdrawing or depositing cash, a bank comprised a long counter and glass screen, behind which tellers sat to serve customers. The paramount concern was security, so access from the front office area to the back office was kept very secure. If a customer needed to speak with their bank manager, they normally had to make an appointment, and then met with the manager in a private office. But in modern banks, the type of financial services on offer varies more widely, so transaction times vary. Moreover, bank employees are now expected not just to deal with customers but to sell financial products to them. So banks have become more like open-plan offices. There still is a tellers counter for security reasons, but there will also be open desks, comfortable seating, and display areas. At the same time, the exterior or lobby area has been redesigned to incorporate ATMs.
A contemporary bank interiorvery different from how banks used to look. istock/gerenme.

Financial service companies have therefore adopted both high-tech and high-touch approaches to service. This concepthigh-tech/high-touchwas first used by John Naisbitt in 1982 in his book Megatrends. He argued that as business, and society in general, introduced more and more technology, it needed to be balanced by human ballast, i.e. social contact. Technology is particularly good at doing some things (complex data manipulation and transfer) but very poor at doing others (responding to human emotions). So bank customers who wish to engage in fast simple transactions have high-tech facilities to enable this, whilst other bank customers, who need questions answered and alternatives discussed, are provided with comfortable and relaxing surroundings in which to do this on a face-to-face basis with a bank employee.

1. How has the back office/front office interface changed in retail banks over the last 20 years? (Use the servuction model in Figure 1.6 to illustrate this.) 2. How has the role of technology and the role of employees changed over the same time? (Use the servuction model in Figure 1.6 to illustrate this.)

24 Understanding operations management

This introductory chapter has been designed to set the scene. It began by highlighting the importance of operations management, before going on to discuss dierent ways in which organizations can be structured. The same issues that emerge from organizational designhierarchy, centralization, formalization, and complexityalso aect the way in which the operations management function is organized. The role of the operations manager was then discussed, both in terms of their short-term responsibilities and their longer-term, strategic responsibilities. The rest of the chapter was then devoted to ways in which operations may or may not be dierent from each other. In this book we propose that there is less dierence between manufacturing and services than might be supposed. The key issue is that in some operations the customer is present and this has implications for how the operation is designed and operated. We also saw how operations may have very dierent combinations of volume, variety, variation, and variability. Finally, the role of technology and employees, either back of house or front of house, was discussed. This chapter demonstrates that the scope of operations management is huge. It ranges from very big issues such as the long-term success of major corporations, right through very specic issues such as to the nature of a single service encounter and a customers satisfaction with that experience. It also ranges across every single activity that humankind engages in. In the rst few minutes of every day, the average person will have interacted with the outputs of hundreds of dierent manufacturers or service providers when they clean their teeth, listen to the radio, get dressed, make breakfast, catch the bus, and continue on through their daily routine. How are operations managers able to make so many dierent things? And provide so many dierent services to make our lives as comfortable as they are? That is what the rest of this book is devoted to explaining.


Dominos Pizza UKusing operations to drive success

On 15 February 2011, Dominos Pizza UK & IRL plc released its latest results for the trading year 2010. System sales had increased by 19.3% up to 485.3 million. Operating margins were 20.2%, up from 19.4% the year before. Profit before tax was increased by 27.3% to 38.0 million. And like-for-like sales were up by 11.9%. Not surprisingly, earnings per share for shareholders were also up by 25.7% and total dividend increased by 31.6%. These were outstanding results by any standards, but especially good in the context of the UKs flat economy and in a sector where margins are traditionally tight. However, 2010 was not an exceptional year for the company. Dominos had had double-digit growth every year for the last five years and had plans to continue this through for the next five years, so that by 2015 its turnover would be in the region of 1 billion. In 2005, the CEO had identified a number of initiatives that would drive the business forward over the following five years. These were agreed by the board and called Vision 2010. Each of these had contributed to driving sales, or reducing costs, or both. These initiatives included improving customer service, especially in relation to delivery time; product quality; new product development; supply chain efficiency; and the development of online ordering systems.

Introduction to operations management 25


Pizza topping was one of the processes reviewed. Copyright Dominos Pizza Group Limited. All rights reserved.

Heatwave bags keep the pizzas hot during transit. Copyright Dominos Pizza Group Limited. All rights reserved.

A key feature that attracts customers in the home delivery market is delivery timethe time it takes for the food to arrive at the customers door after the order has been placed. The industry standard for this, and what most customers expect, is 30 minutes. In 50 years of trading, Dominos had always been very aware of this and had striven to design systems that would enable this performance standard to be met. Delivery time has two main componentsout-thedoor time (OTD), i.e. the time it takes to process the order in store; and transportation time, the time it takes to get from the store to the customer. In terms of transportation time, Dominos have limited control over this. It is a function of how far away the customer is from the store and the prevailing traffic conditions. Stores are located so that their delivery area is nominally no more than eight minutes away, which is roughly two miles. But the majority of orders are placed by customers less than a mile away. So if delivery time is to be systematically improved, the focus has to be on OTD, as reducing this will affect the speed of delivery for all customers. In 2006, OTD was identified as being 17 minutes on average. Hence the decision was made to try to reduce this

by at least 3 minutes. This would have the effect of improving performance to the point where 98% of customers would get their pizza within 30 minutes of ordering it. However, reducing OTD was hugely challenging. So a detailed review was begun of all the processes that made up this time. These were order taking, pizza dough preparation, pizza topping, oven cooking, boxing, and dispatch. To drive this review an in-store display panel was installed that showed managers and workers what that stores OTD performance was in real time. Data was updated every 30 seconds. Moreover, this panel also displayed the average OTD times of other stores in the region, as well as for the whole system, so that each store could benchmark its OTD performance as it happened. This led to stores competing against each other to get better times, by making lots of small incremental changes that helped speed up OTD, such as layout of workbenches, number of staff on duty, ensuring production lines were stocked, and so forth. Dominos regards itself as fanatical about product quality. It had not compromised on this, even though there was pressure on commodity prices and maintaining margins was a challenge. Unlike some of its


Understanding operations management

END OF CHAPTER CASE CONTINUED competitors, it did not use frozen dough balls, but chilled dough, which has to be constantly held at 13 degrees throughout its movement along the supply chain. It also used 100% mozzarella cheese and fresh tomato paste (not concentrate). And to maintain product quality from store to customer, Dominos introduced the first heated delivery bags, called Heatwave, to keep the pizzas hot during transit. Quality is also managed through unannounced operations audits, which take place three times a year. These audits measure in detail every aspect of the store operations, but especially OTD and hygiene. In 2010, stores averaged a score of 4.4 out of 5, demonstrating a high level of quality performance. Regular high scores on the audits results in the franchisee being rated as approved to expand, that is to say they will be offered any new store openings in their region, and they are able to buy franchises from other franchisees who are exiting the business. If a store scores below 2, another audit is scheduled within 30 days. If that is failed, another audit is conducted within 7 days. Three failed audits result in a franchisee being given 60 days to sell their franchise (usually to another franchisee) at the going market rate. There is a dedicated new product development (NPD) team at Dominos head office. All products are systematically tested and trialled before being rolled out across the chain. This team developed a spicy pizza called Meltdown the Revenge creating a challenge amongst its customers to try this spicy pizza, and in 2010 introduced a new pizza base called the Basil Burst Base. Occasionally franchisees, sometimes influenced by customers, come up with product ideas. This was how the Reggae Reggae pizza was developed. But all product ideas go through the same NPD process. The company has also trialled other formats and service times. In 2009, Dominos launched its first mobile unit in the UK. It also started to target the lunchtime crowds and launched a specific lunchtime menu in July 2010. Later in 2010, the first 24-hour store opened in Manchester, offering breakfast, as well as lunch menus. Despite the development of specific products for these day parts, experience suggests that customers continue to order a pizza and a soft drink at any time of the day and night. This is especially the case where sections of the local population may be employed in shift work. Dominos Pizza has chosen to have tight control over its supply chain, hence it has three commissaries or distribution centres, two in the UK and one in Ireland, from which goods are supplied to stores, and its own fleet of trucks to deliver these. Stores typically receive stock three times a week to ensure that it is fresh. So that delivery does not interfere with store operations, deliveries are made at night. Each driver has keys and access codes that enable entry onto store premises. This means that not only are the goods delivered, but they are properly placed on the correct shelving in each store. This ensures tight inventory control, but also contributes to maintaining proper in-store hygiene and food safety standards. In order to stand out, Dominos has an innovative approach to e-commerce. It was the first pizza delivery company that offered online and interactive TV ordering. The company also offers a pizza tracker which was designed for the customer to follow their order. In September 2009 the company launched its iPhone app which achieved sales over 1 million by December. The company plans to also be the first to develop an app for android smartphones and for the iPad. In 2010, e-commerce sales in the UK and Ireland totalled 128 million compared to 78.5 million in 2009. The success of Dominos e-commerce initiatives can also be illustrated by its website usage, as it consistently drove higher rates of visitation than its three major competitors. Another recent development is a Dominos Pizza Facebook page, which in March 2011 had over 160,000 fans. This allows Dominos to publicize its products and promotions and network with its customer base. In many cases, customers use the page as an opportunity to complain, either about the service or the product. Dominos has a team of eight people constantly monitoring this and other sites, and replying to every single

Introduction to operations management 27

END OF CHAPTER CASE CONTINUED issue of concern as quickly as possible after it has been posted. The policy is not to remove complaints, but show that the company is listening and trying to put things right. In some cases, postings are removed because they are offensive. Facebook has also been used to run competitions, such as one called Superfans. With a very small head office, geographically dispersed stores, and a workforce employed by many different franchisees, Dominos Pizza UKs CEO believes that Dominos strong culture is the glue that holds the organization together. This culture originated in the USA with the companys founder Tom Monaghan. It is based around being informal, proud of being whacky, goal-oriented, and fearless. Organizational commitment is reinforced in stores throughout the world by the company chant. This goes:
Leader: Who are we? Employees: Dominos Pizza! Leader: What are we? Employees: Number 1! Leader: What do we do? Employees: Sell more pizza, have more fun! Sell

more pizza, have more fun! In 2010, nearly every Vision 2010 target had been exceeded. In particular, financial performance was better than plannedaverage weekly unit sales of mature stores were 400 more than target, and for new stores more than 1000 higher. Total annual sales were 10 million higher than forecast and the firms market capitalization was almost double the target set in 2005.

1. Describe how Dominos processes materials, information, and customers. 2. Identify what Dominos servuction system looks like. 3. What short-term actions (refer to Table 1.2) are Dominos operations managers taking? 4. What long-term actions (refer to Table 1.2) are Dominos operations managers taking?

Chapter summary
To consolidate your learning, the key points from this chapter are summarized as follows: Define what is meant by operations management OM can be defined as the management of processes that convert inputs (such as materials, labour, and energy) into outputs (in the form of goods and services). Understand the nature of operations within an organization Operations management is one of the core functions within an organizationthe others typically being marketing, human resources, and finance and accounting. Explain what an operations manager does and the role he/she plays in an organization An operations manager has responsibility for developing and maintaining the systems infrastructure, managing the system inputs, controlling material inputs within the system, managing customer inputs within the system (i.e. as co-workers), managing the rate of flow through the system, assuring the quality of system outputs, developing and

28 Understanding operations management

enhancing the systems processes, designing and developing human work systems, and developing new outputs (i.e. products and services). Discuss the similarities and differences between the manufacturing and service sectors of the economy Services have four features which are supposed to differentiate them from manufacturingintangibility, heterogeneity, perishability, and simultaneity (sometimes referred to as inseparability). Intangibility proposes that services do not physically exist but are directly experienced by consumers. Heterogeneity refers to the idea that consumers have unique experiences of services that are not shared with, or are the same as, other consumers. Perishability argues that services cannot be inventoried or put into stock. Simultaneity and inseparability identify that services are produced at the same time, and in the same place, as they are consumed. It is argued that it is mainly simultaneity/inseparability that differentiate services from manufacturing. Explain the similarities and differences between customer processing operations, materials processing operations, and information processing operations Materials are inert until they are handled, whereupon they behave in specific ways derived from their physical and chemical structure. Customers are people and as such are able to transport themselves from one place to another and to interact with their environment. Information is the communication of facts or data, often in very large quantities and in ways not visible to the human eye. Discuss the relationship between the two Research insights in this chapter. Research insight 1.1 by Hayes, R.H. and Wheelwright, S.C. (1984) introduced the idea that firms, predominantly in the manufacturing sector, could achieve competitive advantage through their operations. Research insight by 1.2 Heskett et al. (1994) discusses how service breakthrough firms, those achieving competitive advantage in their service business sectors, seem to be doing thisthrough the so-called service-profit chain.

Review questions
1. What is the difference between production management and operations management? 2. Why is operations management important in most organizations? 3. What are the four key features that explain an organization? 4. What key issues emerge from organizational design and what types of organization are there? 5. What are the four Vs? 6. How are services and manufacturing supposed to be different? 7. Consider a professional football club. What operational decisions have to be made in the short term? What are the long-term operational issues? 8. What is the servuction system? How has it changed over the years?

Introduction to operations management 29

9. What ethical issues might an operations manager have responsibility for? 10. In what way might operations management have implications for sustainability?

Discussion questions
1. If most of the employees in an organization work in operations, what aspects of human resource management should be the responsibility of the OM function and what aspects should be the responsibility of the human resource function? 2. How unique (or heterogeneous) are customers perceptions and behaviours? Later in this book (in Chapter 7) we identify that customers tend to behave in very similar ways, which is why they queue for services. In everyday life, in what ways do people behave differently from each other, and how do they behave similarly? 3. If a service provider does not take reservations, does this make their service more or less perishable? Or neither? Why? 4. Can you think of any operation that only processes materials, or only information, or only customers? 5. Visit a local service operation. Draw its servuction system identifying the kinds of technology that are being used, the number and types of staff, whether this is back of house or front of house, and the nature of interaction between customers. How might the servuction system be changed in order to make it more high-touch?

Further learning guide

There are very large numbers of textbooks, journals, and associations in the field of operations management. The two key research journals are the Journal of Operations Management (JOM) and the International Journal of Productions and Operations Management (IJOPM). In addition there are more specialist journals focusing on specific aspects of operations, such as the Journal of Purchasing and Supply Management. With regard to operations management associations, some focus on industry professionalssuch as the Institute of Operations Management ( and Institute of Logistics and Transport ( whereas others tend to be mainly academic associationssuch as the European Operations Management Association ( All of these can give you insight into the field of operations management.

Interbrand (2010) Best Global Brands 2010, Interbrand Report Langeard, E., Bateson, J., Lovelock, C., and Eiglier, P. (1981) Marketing of Services: New Insights from Consumers and Managers, Report No. 81104, Marketing Sciences Institute, Cambridge Naisbitt, J. (1987) Megatrends: Ten New Directions Transforming Our Lives, Warner Books: New York Sasser, W.E., Wyckoff, D.D., and Olsen, M. (1978) The Management of Service Operations, Free Press: Boston, MA Wilson, B. (1990) Systems: concepts, methodologies, and applications (2nd ed.), John Wiley: New York


Understanding operations management