Topic 1 Updated

College of Business OPM 340
Good Services and Operations Management
1
Learning Objectives
● Understand the basic concepts on operations management.
● Understand the roles of operations manager.
● Understand the concept of goods, services, customer benefic

package, and service encounter and why these are important in
managing operations.
● Understand the business processes and their roles in managing

business operations.
2
What is Operations Management?
● Operations management (OM) defined as:

 The science and art of ensuring that goods and services are
created and delivered successfully to customers.
● The principles of OM help to view a business enterprise as a total

system, in which all activities are coordinated not only vertically
throughout the organization, but also horizontally across multiple
functions.
● Through OM, managers directly affect the value provided to all

stakeholders.
3
What is Operations Management?
● Operations management (OM) defined as:

 The science and art of ensuring that goods and services are
created and delivered successfully to customers.
● The principles of OM help to view a business enterprise as a total

system, in which all activities are coordinated not only vertically
throughout the organization, but also horizontally across multiple
functions.
● Through OM, managers directly affect the value provided to all

stakeholders.
4
Porter’s Generic Value Chain and Five Forces on Competition
Source: Michael E. Porter Competitive Advantage and Sustaining Superior Performance, New York, Free
Press, 1985, Page 37
Relationship between OM & the firm
6
Understanding Goods and Services
● A good is a physical product that you can see, touch, or possibly

consume. Examples of goods include: oranges, flowers,
televisions, soap, airplanes, fish, furniture, coal, lumber, personal
computers, paper, and industrial machines.
● A durable good is a product that typically lasts at least three

years. Vehicles, dishwashers, and furniture are some examples of
durable goods
● A non-durable good is perishable and generally lasts for less than

three years. Examples are toothpaste, software, shoes, and fruit.
7
Service Encounter
● A service encounter defined as the interaction between the

customer and the service provider. It consists of one or more
moments of truth
● Moment of Truth: any episodes, transactions, or experiences in
which a customer comes into contact with any aspect of the
delivery system, however remote, and thereby has an
opportunity to form an impression.
● Service encounter concept is very important to employees that
interact directly with customers, e.g. nurses, bank tellers, …
● Service encounter also include interactions with the building (e.g.
building signs, parking lots, …)
8
Similarities Between Goods and Services
1. Goods and services provide value and satisfaction to customers

who purchase and use them.
2. They both can be standardized or customized to individual

wants and needs.
3. A process creates and delivers each good or service, and

therefore, OM is a critical skill.
9
Differences Between Goods and Services
1. Goods are tangible while services are intangible.

2. Customers participate in many service processes, activities, and
transactions.
3. The demand for services is more difficult to predict than the
demand for goods.
4. Services cannot be stored as physical inventory.
5. Service management skills are paramount to a successful service
encounter.
6. Service facilities typically need to be in close proximity to the
customer.
7. Patents do not protect services.
10
Examples of Goods and Services
● Some orgs are pure goods while others are pure services.
● Goods and services are bundled together, examples:
 A toothpaste is purchased with telephone support services.
 Psychiatric services are delivered with bills, books… as services.
11
OM in different industries
Operations management (OM) is the set of

activities that create value in the form of goods
and services by transforming inputs into
outputs 12
Why Study OM?
1. OM is one of three major functions of

any organization, we want to study how
people organize themselves for
productive enterprise
2. We want (and need) to know how goods
and services are produced
3. We want to understand what operations
managers do
4. OM is such a costly part of an
organization
Options for Increasing
Contribution
TABLE 1.1
FINANCE
MARKETING /ACCOUNTING
OPTION OPTION OM OPTION
INCREASE REDUCE REDUCE
SALES FINANCE PRODUCTION
CURRENT REVENUE 50% COSTS 50% COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of goods –80,000 –120,000 –80,000 –64,000
Gross margin 20,000 30,000 20,000 36,000
Finance costs –6,000 –6,000 –3,000 –6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% –3,500 –6,000 –4,200 –7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500
© 2014 Pearson Education 1 - 14

What Operations
Managers Do
Basic Management Functions
▶ Planning
▶ Organizing
▶ Staffing
▶ Leading
▶ Controlling
Customer Benefit Package (CBP)
● CBP is a clearly defined set of tangible (goods-content) and

intangible (service-content) features that the customer recognizes,
pays for, uses, or experiences.
● CBP provide value to customers and consists of a primary good or
service, coupled with peripheral goods and/or services.
 Primary goods: “core” offering that attracts customers, e.g. PDA
 Peripheral goods: not essential but enhance the primary good or
service, e.g. on-line access and bill payment.
 Variant: is a CBP attribute that departs from the standard CBP. It
adds unique goods or services, e.g. play ground at Dajin.
 Adding more information and services shift relationship from
‘just selling’ to developing ‘closer relationship’ with customers.
● Management of the CBP requires require a set of business
processes to create and deliver it to customers.
16
Operations Management and CBP 1/2
● Goods and services design must begin with understanding of customer

needs.
17
Operations Management and CBP 2/2
Example: Design Automobile
Defined by customers - Examples CBP defined by management to Defined by management –
wants and needs fulfill customers wants and needs processes to create/deliver
Primary wants- Physical Vehicle Engineering design processes with

transpiration from A to B customers, dealers and supplier
Primary wants- low cots/price Efficient vehicle design and Just-in-time value chain design and
manufacturing processes all processes
Primary wants- good vehicle sales Sales processes Hiring, training, recognition and
experience reward dealer processes
Primary wants- good vehicle repair Vehicle repair services Hiring, training, recognition, and
service and experience reward dealer repair processes
Peripheral wants- good financial Finance and lese package and Fast, accurate, customized, and fair
options options financing, lease and credit report
processes.
Peripheral wants- good coffee/tea Clean and high quality coffee and Purchasing, coffee replenishment
in customer areas tea service at dealership schedule, and cleaning processes
Peripheral wants- place for kids to Free childcare service on high Check in and out procedures,
be safe while parents shop demand days trained caregiver on duty, and
emergency processes
Peripheral wants- fun family time Fishing bond, vehicle test track, Entertainment director and
and on-site games at the associate processes for this auto
dealership mall.
18
Example - CBP
(a) Draw a customer benefit package (CBP) for purchasing a vehicle.
19
Processes 1/3
● Process:
 A sequence of activities that is intended to create a certain
result, such as physical good, a service, or information.
● Key processes in business typically include:

1. Value creation processes- e.g.
assembling a PC
2. Support processes - e.g. customer
support
3. General management Processes -
e.g. HR
20
Processes 2/3
● Viewing org in terms of process thinking differ than in terms of

functions.
● Op’s performed horizontally or cross-functionally not vertically or
hierarchally by function (see figure below).
● Processes typically cross traditional org boundaries.
● Example; think of a process to install a new DSL line by STC.
21
Processes 3/3
● Transformation process: involves the creating of value in terms of

time, place, possession, or form utility
● Objective of this process: building competitive advantage.
● Examples:
 Fabrication and assemble processes.
 Airline services.
22
Current OM Challenges
● Technology
● Globalization
● Consumer’s expectations
● Engaging the workforce
● Quality
● Innovation and AGility
23
Value 1/2
● The underlying purpose of every organization is to provide value

to its customer and stakeholders. So what is ‘value’?
● Value is:
‘the perception of the benefits associated with a good, service, or
bundle of goods and services (i.e., the customer benefit package)
in relation to what buyers are willing to pay for them’
● The decision to purchase a good or service or a customer benefit
package is based on an assessment by the customer of the
perceived benefits in relation to its price.
● The customer's cumulative judgment of the perceived benefits
leads to either satisfaction or dissatisfaction.
24
Value 2/2
● One of the simplest functional forms of value is:

𝑃𝑒𝑟𝑐𝑒𝑖𝑣𝑒𝑑 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠
Value=
𝑃𝑟𝑖𝑐𝑒 (𝑐𝑜𝑠𝑡) 𝑡𝑜 𝑡ℎ𝑒 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟
● If the value ratio is high, the good or service is perceived favorably

by customers, and the organization providing it is more likely to
be successful. To increase value, an organization must
a) increase perceived benefits while holding price or cost
constant,
b) increase perceived benefits while reducing price or cost, or
c) decrease price or cost while holding perceived benefits
constant.
25
Concept of Value into focus2/2
A person walking in the desert, a person who is dying of thirst.

Little consideration for the form of the water, the container, or who
will be providing it. Water has a unique value to that person.
When they find water, or they are offered some, money would be of little concern. What
is the point of this example?
First is that value is a subjective experience that is dependent on context. In the

context of a waiter clearing a table (no vale- negative value ). But for the man dying of
thirst, that same glass of water is extremely valuable.
Second, value occurs when needs are met through the provision of products, resources,
or services – usually during some form of transaction or exchange.
Finally, value is an experience, and it flows from the person(or institution) that is the
recipient of resources – it flows from the customer.
26
Value Chains 1/3
● A value chain is a network of facilities and processes that

describes the flow of goods, services, information, and financial
transactions from suppliers through the facilities and processes
that create goods and services and deliver them to customer.
27
The Supply Chain
▶ A global network of organizations and

activities that supply a firm with goods
and services
▶ Members of the supply chain collaborate
to achieve high levels of customer
satisfaction, efficiency and competitive
advantage. Figure 1.2
Farmer Syrup Bottler Distributor Retailer

producer
Value Chains 2/3
• The value chain begins with suppliers. Suppliers might be

distributors, employment agencies, dealers, financing and
leasing agents, information and Internet companies, field
maintenance and repair services, architectural and engineering
design firms, and contractors, as well as manufacturers of
materials and components.
• The inputs suppliers provide might be physical goods such as

 automobile engines or microprocessors provided to an
assembly plant;
 meat, fish, and vegetables provided to a restaurant;
 trained employees provided to organizations by universities
and technical schools; or
 information such as computer specifications or a medical
diagnosis.
29
Value Chains 3/3
● Inputs are transformed into value-added goods and services

through processes or networks of work activities, which are
supported by such resources as land, labor, money, and
information.
● The value chain outputs – goods and services – are delivered or

provided to customers and targeted market segments.
30
Examples of Goods-Producing and
Service-Providing Value Chains 1/2
31
INPUT – OUTPUT Value Chain Approach
32
Look at the organizations below and provide examples of their value chains using the
suggested framework.
This is a good exercise for students to learn to “think OM.”
Organization Supplier Inputs Transformati Outputs

on process
University
Dairy
Company
Mobile
phone
company
33
34
Pre- and Postservice View of the Value Chain
35
Pre- and Postservice View of the Value Chain
36
Pre- and Post-service Value Chain Example
● Ford Motor Company found that the total value of owning a Ford
vehicle, was allocated according to a customer survey as follows:
 the vehicle (i.e., product features and performance) itself
accounted for 52 percent of total value,
 the sales process for 21 percent, and
 the maintenance and repair service processes for 27 percent.
37
A Service View of a Business
● Nestle once defined its business from a service good viewpoint as

"selling coffee machines." Using service management thinking
they redefined their business from a service perspective where
the coffee machine is more of a peripheral good.
● They decided to lease coffee machines and provide daily
replenishment of the coffee and maintenance of the machine for
a contracted service fee. This "primary leasing service" was
offered to organizations that sold more than 50 cups of coffee per
day.
● The results were greatly increased Nestle coffee sales, new
revenue opportunities, and much stronger profits.
● Nestle's service vision of their business required a completely
new service and logistical value chain capability.
38
Outsourcing and Vertical
Chapter 2 Integration
Value Chains
● Vertical integration refers to the process of acquiring and consolidating

elements of a value chain to achieve more control.
● Outsourcing is the process of having suppliers provide goods and services that
were previously provided internally.
● Outsourcing is the opposite of vertical integration in the sense that the
organization is shedding (not acquiring) a part of its organization.
● Offshoring is the building, acquiring, or moving of process capabilities from a
domestic location to another country location while maintaining ownership
and control.
● Backward Integration refers to acquiring capabilities at the front-end of the
supply chain (for instance, suppliers), while forward integration refers to
acquiring capabilities toward the back-end of the supply chain (for instance,
distribution or even customers).
● Companies must decide whether to integrate backward (acquiring suppliers) or
forward (acquiring distributors), or both.
39
Sourcing Decisions – The Make or Buy
Decision (Continued)
Reasons for Buying or Outsourcing

– Cost advantage –
• Especially for components that are non-vital to the
organization’s operations, suppliers may have economies of
scale
– Insufficient capacity –
• A firm may be at or near capacity and subcontracting from a
supplier may make better sense
– Lack of expertise –
• Firm may not have the necessary technology and expertise
– Quality –
• Suppliers have better technology, process, skilled labor, and
the advantage of economy of scale
Reasons for Making

– Protect proprietary technology
– No competent supplier
– Better quality control
– Use existing idle capacity
– Control of lead-time transportation, and
warehousing cost
– Lower cost
The Make-or-Buy Break-Even Analysis

Costs Make Buy
Fixed $25,000 $500
Variable $5 $7
Annual Requirements 15,000

Costs Make Buy
Fixed $25,000 $500
Variable $5 $7
Annual Requirements 15,000
Find break-even point Q by setting the total cost of the two options equal to
one another and solving for Q:
Total Cost to Make = Total Cost to Buy
25,000 + 5Q = 500 + 7Q
7Q − 5Q = 25,000 − 500
2Q = 24,500
Q = 12,250 units = Break-even point

Total Cost for both options at the Break-even Point
TCBE = 25,000 + 5×12,250
Costs Make Buy = 86,250 dollars
Fixed $25,000 $500
Variable $5 $7 Total Cost for the Make Option at 15,000 units;
Annual Requirements 15,000 TCMake = 25,000 + 5×15,000
= 100,000 dollars
Total Cost for the Buy Option at 15,000 units;

TCBuy = 500 + 7×15,000
= 105,500 dollars
Cost Difference =TCBuy −TCMake

= 105,500 − 100,000
= 5,500 dollars
Exercise
● Mark and Sue decide to open a bagel shop. They need to decide
whether they should make bagels on-site or buy bagels from a
local bakery. If they buy from the local bakery they will need
airtight containers at a fixed cost of $1,000 annually. They can
buy the bagels for $0.40 each. If they make bagels in-house
they will need a small kitchen at a fixed cost of $15,000
annually. It will cost them $0.15 per bagel to make. They
believe they will sell 60,000 bagels.
45©
Example Solved
● Let Q be the quantity at indifference point (breakeven point)

● FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q)
● $1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q)
● Solve it for Q, we have
15,000  1,000 14,000

● So,Q  or buy?
make   56,000 bagels
0.4  0.15 0.25
46©
Value and Supply Chain Integration
● Value chain integration is the process of managing information,

physical goods, and services to ensure their availability at the
right place, at the right time, at the right cost, at the right
quantity, and with the highest attention to quality.
● Value chain integration in services – where value is in the form of
low prices, convenience, and access to special time-sensitive
deals and travel packages – takes many forms. Examples include:
• Third party integrators for the leisure and travel industry value chains
include Orbitz, Expedia, Priceline, and Travelocity.
• Many financial services use information networks provided by third party
information technology integrators such as AT&T, Sprint, IBM, and Verizon
to coordinate their value chains.
• Hospitals also use third party integrators for both their information and
physical goods such as managing patient billing and hospital inventories.
47
Value Chain in a Global Business Environment
● Complex global value chains are more difficult to manage than small
domestic value chains. Some issues faced by operations mangers are:
1. Design a value chain that meet the need of both slower growth of
industrialized countries and more rapid growth of emerging
economies.
2. Where to locale manufacturing and distribution facilities around the
globe to capitalize on value chain efficiencies and improve customer
value.
3. What performance metrics to use in making critical value chain
decisions
4. Whether partnership should be developed with competitors to
share engineering, manufacturing or distribution technology and
knowledge.
48
Managing Issues in Global Value Chains 1/2
Complex global value chains are more difficult to manage than

small domestic value chains. Some of the many issues include the
following:
1. Global supply chains face higher levels of risk and uncertainty,
requiring more inventory and day-to-day monitoring to prevent
product shortages. Workforce disruptions such as labor strikes and
government turmoil in foreign countries can create inventory
shortages and disrupting surges in orders.
2. Transportation is more complex in global value chains. For example,
tracing global shipments normally involves more than one mode of
transportation and foreign company.
3. The transportation infrastructure may vary considerably in foreign
countries. The coast of China, for example, enjoys much better
transportation, distribution, and retail infrastructures than the vast
interior of the country.
49
Managing Issues in Global Value Chains 2/2
4. Global purchasing can be a difficult process to manage when

sources of supply, regional economies, and even governments
change. Daily changes in international currencies necessitate
careful planning and in the case of commodities, consideration
of futures contracts.
5. International purchasing can lead to disputes and legal
challenges relating to such things as price fixing and quality
defects.
6. Privatizing companies and property is another form of major
changes in global trade and regulatory issues.
50
10 Decision Areas of OM
● Goods & service design

● Quality
● Process & capacity design
● Location selection
● Layout design
● Human resource and job design
● Supply-chain management
● Inventory
● Scheduling
● Maintenance
PowerPoint presentation to accompany

© 2001 by Prentice Hall, Inc., Upper Saddle River,
Operations Management, 6E (Heizer &
N.J. 07458 2-
Render)
51
Goods & Services and the 10 Operations
Management Decisions
Operations Goods Services
Decisions
Goods & Product is usually Product is usually
services tangible intangible
decisions
Quality Objective quality Subjective quality
standards standards
Process Customer not involved Customer may be directly

and in most of process involved in process.
capacity Capacity must match
design demand to avoid lost sales
Operations Management, 6E (Heizer & 2-52
N.J. 07458
Render)
Decisions
Location May need to be near raw Product is usually
Selection materials or labor force intangible
Layout Layout can enhance Subjective quality
Design production efficiency standards
Human Workforce focused on Customer may be directly
Resources technical skills. involved in process.
and Job Labor standards consistent. Capacity matches
Design Output-based wage system. demand to avoid lost
sales
N.J. 07458
Render)
Decisions
Supply chain Supply-chain Supply-chain relationships
management relationships critical to important, not necessarily
final product critical
Inventory Raw materials, work- Most services cannot be
in-process, and stored
finished goods
Scheduling Ability to convert Primarily concerned with
inventory may allow meeting the customer's
leveling of production immediate schedule
rates
N.J. 07458
Render)
Decisions
Maintenance Maintenance is often Maintenance is often
preventive and takes "repair" and takes place at
place at the production the customer's site
site

N.J. 07458
Render)

N.J. 07458
Render)
Value Chain and Local Culture
Example Cultural Differences that Impact Business
● Example Cultural Differences that Impact Business
57
Supply Chain Management Defined
A supply chain consists of the flow of products and services

from:
 Raw materials manufacturers
 Component and intermediate manufacturers
 Final product manufacturers
 Wholesalers and distributors and
 Retailers
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 58
With stages connected by transportation and storage

activities, and Integrated through information, planning, and
integration activities.
Within each company, the supply chain includes all functions

involved in fulfilling a customer request (product
development, marketing, operations, distribution, finance,
customer service)
 The basic purpose of a supply chain is to coordinate the flow of materials,
services, and information along the elements of the supply chain to
maximize customer value, e.g. sales, inventory, …
 Supply chain management (SCM): is the management of all activities that
facilitate the fulfillment of a customer order for a manufactured good to
achieve satisfied customers at a reasonable cost.
 Supply Chain Operations Reference (SCOR):
1. Plan: developing a strategy that balances resources with requirements.
2. Source: procuring goods and services to meet planned or actual demand.
3. Make: transforming goods and services to a finished state to meet demand.
4. Deliver: managing orders, transportation, and distribution to provide the
goods and services.
5. Return: customer returns, maintenance, dealing with excess goods.
61
Supply Chain illustration
Three Views of Value/Supply Chains 1/3
Input/Output View
• A curdle-to-grave model.
• Inputs can be ‘goods’, ‘Man power’ or ‘Information’.
• Process transfers inputs into value-added goods or services.
Example:
63
Example 1: Computer Supply Chain
S1
S1
S2 S1 M W R C
Metal casing
S1 Plastic casing
Hard disk
CDRW - DVD
S1 Power-supply
Mother-board
Peripheral boards
Cables
Miscellaneous
Monitor
2-
Example 1: Boeing Supply Chain
2-
Supply Chain - downstream
S1
S1
S2 S1 M W R C
S1
S1
Retailer network Customer network2-

Supply Chain - network
Wholesaler network Retailer network
S1
M
S1 M
S2 S1 M W R C
M
S1
M
S1
Customer network2-
Procter & Gamble’s Supply Chain Structure
● A model of a supply chain developed by Procter & Gamble. P&G’s “Ultimate

Supply System”, see below.
● The supply chain focus is on understanding the impact of tightly coupling
supply chain partners to integrate information, physical material and product
flow, and financial activities to increase sales, reduce costs, increase cash flow,
and provide the right product at the right time at the right price to customers.
68
Supply Chain Performance 1/3
• Understanding & Measuring

 Supply chain metrics: balance customer requirements and
internal supply chain efficiency.
 Delivery reliability: is measured by perfect order fulfillment.
 Responsiveness: is measured by order fulfillment lead time or
perfect delivery fulfillment.
 Customer-related: measures measure the level of customer
satisfaction.
69
● Bullwhip Effect:
 The bullwhip effect results from order amplification in the
supply chain; a phenomenon that occurs when each member of
a supply chain “orders up” to buffer its own inventory.
 Many firms counteract this phenomenon by modifying the
supply chain infrastructure and operational processes.
 The time lags associated with information and material flow
cause a mismatch between actual customer demand and the
supply chain’s ability to satisfy that demand as each component
of the supply chain seeks to manage its operations from its own
perspective.
70
71
Designing the Supply Chain
● Efficient supply chains: are designed for efficiency and low cost
by minimizing inventory and maximizing efficiencies in process
flow.
● Responsive supply chains: focus on flexibility and responsive
service and are able to react quickly to changing market demand
and requirements.
● A push system: produces goods in advance of customer demand
using a forecast of sales and moves them through supply chain to
points of sale where they are stored as finished goods inventory.
● A pull system: produces only what is needed at upstream stages
in the supply chain in response to customer demand signals from
downstream stages.
72
Supply Chain Push-Pull Systems and Boundaries
• Many supply chains are combination

of push and pull systems, separated
by push-pull boundary.
• For Dell: the boundary at early in SC,
where supplier stores inventory.
• For GE: the boundary at dealers; GE
push to dealer and customers pull
from dealers.
• For Bookstores: boundary at
warehouse; publishers push to
warehouse and students/instructors
pull from w
73
Designing the Supply Chain
● Postponement is the process of delaying product customization

until the product is closer to the customer at the end of the
supply chain. Example, dishwashers with customized doors.
● A contract manufacturer is a firm that specializes in certain types
of goods-producing activities, such as customized design,
manufacturing, assembly, and packaging, and works under
contract for end users.
● Multi-site management is the process of managing
geographically dispersed service-providing facilities. Example,
hotels, fast-food, retail stores,
74
Examples on Supply Chain Design
● An example for ‘Postponement’ is a manufacturer of dishwashers

that would manufacture the dishwasher without the door, and
maintain inventories of doors at the distribution centers. When
orders arrive, the doors can be quickly attached and the unit can
be shipped. This would reduce inventory requirements.
● Outsourcing to contract manufacturers can offer significant
competitive advantages, such as access to advanced
manufacturing technologies, faster product time-to-market,
customization of goods in regional markets, and lower total costs
resulting from economies of scale.
● Some of the major global contract manufacturers are Flextronics
International Ltd., Solectron, Jabil Circuit, Hon Hai Precision
Industrial, Celestica Inc., and Sanmina-SCI Corporation.
75
Manufacturer Storage with
Direct Shipping (Fig. 4.6)
Manufacturer
Retailer
Customers
Product Flow
Information Flow
In-Transit Merge Network (Fig. 4.7)
Factories
Retailer In-Transit Merge by

Carrier
Customers
Product Flow
Information Flow
Distributor Storage with
Carrier Delivery (Fig. 4.8)
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Product Flow
Information Flow
Distributor Storage with
Last Mile Delivery (Fig. 4.9)
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow
Information Flow
Manufacturer or Distributor Storage with
Customer Pickup (Fig. 4.10)
Factories
Retailer Cross Dock DC
Pickup Sites
Customers
Customer Flow
Product Flow
Information Flow
Comparative Performance of Delivery
Network Designs
Retail Storage Manufacturer Manufacturer Distributor Distributor Manufacturer
with Customer Storage with Direct Storage with In- Storage with storage with storage with
Pickup Shipping Transit Merge Package Carrier last mile pickup
Delivery delivery
Response Time 1 4 4 3 2 4
Product Variety
4 1 1 2 3 1
Product Availability 2 3
4 1 1 1
Customer 5 4 3 2 1 5
Experience
Order Visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility & Handling 6 1 2 3 4 5

Information 1 4 4 3 2 5
Linking Product Characteristics and Customer
Preferences to Network Design
Retail Manufacturer Manufacturer Distributor Storage Distributor storage Manufacturer
Storage with Storage with Storage with In- with Package Carrier with last mile storage with
Customer Direct Shipping Transit Merge Delivery delivery pickup
Pickup
High demand product

+2 -2 -1 0 +1 -1
Medium demand product
+1 -1 0 +1 0 0
Low demand product
-1 +1 0 +1 -1 +1
Very low demand product
-2 +2 +1 0 -2 +1
Many product sources
+1 -1 -1 +2 +1 0
High product value
-1 +2 +1 +1 0 -2
Quick desired response
+2 -2 -2 -1 +1 -2
High product variety
-1 +2 0 +1 0 +2
Low customer effort
-2 +1 +2 +2 +2 -1
Examples on Supply Chain Design
● An example for ‘Postponement’ is a manufacturer of dishwashers

that would manufacture the dishwasher without the door, and
maintain inventories of doors at the distribution centers. When
orders arrive, the doors can be quickly attached and the unit can
be shipped. This would reduce inventory requirements.
● Outsourcing to contract manufacturers can offer significant
competitive advantages, such as access to advanced
manufacturing technologies, faster product time-to-market,
customization of goods in regional markets, and lower total costs
resulting from economies of scale.
● Some of the major global contract manufacturers are Flextronics
International Ltd., Solectron, Jabil Circuit, Hon Hai Precision
Industrial, Celestica Inc., and Sanmina-SCI Corporation.
83
Location Decisions in Supply Chains
● Location decisions can have a profound effect on supply chain

performance and a firms’ competitive advantage.
● The type of facility and its location affects the supply chain structure.
● Location decisions in supply and value chains are based on both
● economic (facility costs, operating costs, and transportation costs) and
● non-economic (labor availability, legal and political factors, community
environment) factors.
● Four basic decisions:
 global (nation) location,
 regional location,
 district/community location,
 local site selection.
84
Location Analysis Techniques
• Location factor rating

• Center-of-gravity
• Load-distance
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Copyright 2011 John Wiley & Sons, Inc. m
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Location Factor Rating
• Identify important factors

• Weight factors (0.00 - 1.00)
• Subjectively score each factor (0 - 100)
• Sum weighted scores
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SCORES (0 TO 100)
LOCATION FACTOR WEIGHT Site 1 Site 2 Site 3
Labor pool and climate .30 80 65 90
Proximity to suppliers .20 100 91 75
Wage rates .15 60 95 72
Community environment .15 75 80 80
Proximity to customers .10 65 90 95
Shipping modes .05 85 92 65
Air service .05 50 65 90
Weighted Score for “Labor pool and climate” for

Site 1 = (0.30)(80) = 24
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WEIGHTED SCORES
Site 1 Site 2 Site 3
24.00 19.50 27.00
20.00 18.20 15.00
Site 3 has the
9.00 14.25 10.80
highest factor rating
11.25 12.00 12.00
6.50 9.00 9.50
4.25 4.60 3.25
2.50 3.25 4.50
77.50 80.80 82.05
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Location Factor Rating With Excel
Copyright 2011 John Wiley & Sons, Inc. Supplement 7-89

Location Factor Rating With OM
Tools

Center-of-Gravity
Technique
• Locate facility at center of movement in
geographic area
• Based on weight and distance traveled;
establishes grid-map of area
• Identify coordinates and weights shipped for
each location
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Grid-Map Coordinates
y n n
 xiWi  yiWi
2 (x2, y2), W2 i=1 i=1
y2 x= n y= n
 Wi  Wi
1 (x1, y1), W1 i=1 i=1
y1
where,
x, y = coordinates of new facility at
3 (x3, y3), W3 center of gravity
y3 xi, yi = coordinates of existing facility i
Wi = annual weight shipped from
facility i
x1 x2 x3 x
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Center-of-Gravity Technique
y
A B C D
700
C x 200 100 250 500
600 (135) y 200 500 600 300
B
W 75 105 135 60
500 (105)
Miles
400
D
300
A (60)
200 (75)
100
0 100 200 300 400 500 600 700 x

Miles
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n
 xW
i i
i=1 (200)(75) + (100)(105) + (250)(135) + (500)(60)
x= = = 238
n 75 + 105 + 135 + 60
 W
i
i=1
n
 yW
i i
i=1 (200)(75) + (500)(105) + (600)(135) + (300)(60)
y= = = 444
n 75 + 105 + 135 + 60
 W
i
i=1
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y
A B C D
700
C x 200 100 250 500
600 (135) y 200 500 600 300
B
W 75 105 135 60
500 (105)
Center of gravity (238, 444)
Miles
400
D
300
A (60)
200 (75)
100
0 100 200 300 400 500 600 700 x

Miles
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Center-of-Gravity With Excel
Formula for
x coordinate

Center-of-Gravity With OM Tools

Load-Distance Technique
● Compute (Load x Distance) for each site

● Choose site with lowest (Load x Distance)
● Distance can be actual or straight-line
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Load-Distance Calculations
n
LD =  ld i i
i=1
where,
LD = load-distance value
li = load expressed as a weight, number of trips or units
being shipped from proposed site and location i
di = distance between proposed site and location i
di = (xi - x)2 + (yi - y)2
where,
(x,y) = coordinates of proposed site
(xi , yi) = coordinates of existing facility
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Load-Distance
Potential Sites Suppliers

Site X Y A B C D
1 360 180 X 200 100 250 500
2 420 450 Y 200 500 600 300
3 250 400 Wt 75 105 135 60
Compute distance from each site to each supplier
Site 1 dA = (xA - x1)2 + (yA - y1)2 = (200-360)2 + (200-180)2 = 161.2
dB = (xB - x1)2 + (yB - y1)2 = (100-360)2 + (500-180)2 = 412.3
dC = 434.2 dD = 184.4
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Load-Distance
Site 2 dA = 333 dB = 323.9 dC = 226.7 dD = 170

Site 3 dA = 206.2 dB = 180.3 dC = 200 dD = 269.3
Compute load-distance
n
LD =  ld i i
i=1
Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063
Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,789
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*
* Choose site 3
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Load-Distance With Excel
=B7*C11+C7*C12+D7*C13+E7*C14

Load-Distance With OM Tools

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College of Business OPM 340

Good Services and Operations Management

● Understand the basic concepts on operations management.

● Understand the roles of operations manager.

● Understand the concept of goods, services, customer benefic

● Understand the business processes and their roles in managing

● Operations management (OM) defined as:

● The principles of OM help to view a business enterprise as a total

● Through OM, managers directly affect the value provided to all

● Operations management (OM) defined as:

● The principles of OM help to view a business enterprise as a total

● Through OM, managers directly affect the value provided to all

● A good is a physical product that you can see, touch, or possibly

● A durable good is a product that typically lasts at least three

● A non-durable good is perishable and generally lasts for less than

● A service encounter defined as the interaction between the

1. Goods and services provide value and satisfaction to customers

2. They both can be standardized or customized to individual

3. A process creates and delivers each good or service, and

1. Goods are tangible while services are intangible.

Operations management (OM) is the set of

1. OM is one of three major functions of

© 2014 Pearson Education 1 - 14

● CBP is a clearly defined set of tangible (goods-content) and

● Goods and services design must begin with understanding of customer

Primary wants- Physical Vehicle Engineering design processes with

● Key processes in business typically include:

● Viewing org in terms of process thinking differ than in terms of

● Transformation process: involves the creating of value in terms of

● Objective of this process: building competitive advantage.

● The underlying purpose of every organization is to provide value

● One of the simplest functional forms of value is:

● If the value ratio is high, the good or service is perceived favorably

A person walking in the desert, a person who is dying of thirst.

First is that value is a subjective experience that is dependent on context. In the

● A value chain is a network of facilities and processes that

▶ A global network of organizations and

Farmer Syrup Bottler Distributor Retailer

• The value chain begins with suppliers. Suppliers might be

• The inputs suppliers provide might be physical goods such as

● Inputs are transformed into value-added goods and services

● The value chain outputs – goods and services – are delivered or

Organization Supplier Inputs Transformati Outputs

● Nestle once defined its business from a service good viewpoint as

● Vertical integration refers to the process of acquiring and consolidating

Reasons for Buying or Outsourcing

Reasons for Making

The Make-or-Buy Break-Even Analysis

The Make-or-Buy Break-Even Analysis

Total Cost to Make = Total Cost to Buy

The Make-or-Buy Break-Even Analysis

Total Cost for the Buy Option at 15,000 units;

Cost Difference =TCBuy −TCMake

● Let Q be the quantity at indifference point (breakeven point)

15,000  1,000 14,000

● Value chain integration is the process of managing information,

Complex global value chains are more difficult to manage than

4. Global purchasing can be a difficult process to manage when

● Goods & service design

PowerPoint presentation to accompany

Process Customer not involved Customer may be directly

PowerPoint presentation to accompany

PowerPoint presentation to accompany