Operations as a

Competitive Weapon
So, what is management?
 Classic definition: Getting things
done through people.
 This assumes you are managing people.
 How about one person overseeing an
automated production line.
 There are no people to manage.
 An operations manager manages people,
resources and/or processes.
Production Management
 What is “Production?”
 The act of producing
 To bring into existence

 To create something having exchange

value
Definition of Operations Mgt.
 Previous Edition: The direction and control of the
processes that transform inputs into products and
services.
 Our Text: “The systematic design, direction, and
control of processes that transform inputs into services
and products for internal, as well as external
customers.”
 My Definition:“The systematic design, direction, and
control of processes that create or add value to services
and products for internal, as well as external customers

Transformation Processes
Inputs Outputs
(Adding value)
Operations Management versus
Production Management
 Production management was
traditionally associated with goods
production.
 Operations management was created for
the management of production of services.
 Operations Management is now used for
both goods and services production.
Exchange Value
Traditional View
Production
Management Goods
Exchange
Value
Operations
Services
Management

Current View

Operations Services Exchange

Management and Goods Value
Manufacturing
Inputs and Outputs

INPUTS OUTPUTS
• Raw Materials
• Consumer Goods
• Employees
• Materials for
purchase by other
• Plant
firms
• Equipment • Services
• Financing • Payments to
employees
University
Inputs and Outputs

INPUTS OUTPUTS
• Students • Educated citizens
• Faculty and Staff • Research
• Facilities • Public service
• Equipment and
Supplies
• Payments to
employees
• Financing
Grocery Store
Inputs and Outputs

INPUTS OUTPUTS
• Items for resale • Satisfied
• Customers Customers
• Employees • Service
• Facilities and • Payments to
Equipment employees
• Financing
FedEx
 Why are they successful?
 Fast
 On-time deliveries
 Relatively low cost
 Technology in shipment tracking
Operations as a
Management Function
Processes
 Processes should add value.
 Processes can be broken down into sub-
processes, which in turn can be broken
down further.
 Any process that is part of a larger process
is considered a “nested process.”
 Each process and each nested process has
inputs and outputs.
Examples of Processes
 Manufacturing something
 Warehousing of raw materials
 Processing insurance claims
 Teaching a class
 Getting a product to the customer
 Taking inventory
 The supply chain
 Staff scheduling
Nested Processes Example
Advertisement Design and Planning Process

Creative
Creative design
design process
process Media
Media planning
planning process
process
•• Receive
Receive work
work request
request •• Receive
Receive work
work request
request
•• Assemble
Assemble teamteam •• Prepare
Prepare several media
several media
•• Prepare
Prepare several designs
several designs plans
plans
•• Receive inputs from
Receive inputs from •• Receive
Receive inputs
inputs from
from
Account
Account Executive
Executive Account
Account Executive
Executive
•• Prepare
Prepare final concept
final concept •• Prepare
Prepare final plan
final plan
•• Revise
Revise concept
concept per
per •• Revise
Revise plan per client’s
plan per client’s
client’s inputs
client’s inputs inputs
inputs
Process View
of an Ad Agency

Accounting process

Advertisement Output interface

Inputs

Clients
design and process
planning process • Communicate with
• Create the ad to the client, get needs, and
needs of the client coordinate progress
and prepare a plan
for media exposure

Production process
• Prepare ad for publication
and deliver to media
outlets
 External Vs. Internal Customers
 External Customers are those who
purchase the goods and services
 Internal Customers are those who receive
the output of others within the firm. They
are part of the transformation process.

Inputs from Outputs

other
Transformation Processes toExternal
processes (Adding value) or Internal
customers
External Vs. Internal Suppliers
 External Suppliers: The businesses or individuals
who provide the resources, services, products, and
materials for the firm’s short-term and long-term
needs.
 Internal Suppliers: The employees or processes
that supply important information or materials to a
firm’s processes.

Outputs to
External &
Internal
Transformation Process inside or
(Adding value) to outside
Suppliers
customers
Service Processes Versus
Manufacturing Processes
Manufacturing processes change materials
in one or more of the following dimensions:
 Physical properties
 Shape
 Fixed dimensions
 Surface finish
 Joining parts and materials
If a process isn’t doing at least one of these, then it is
a service process (non-manufacturing) .
Manufacturing
and Service
Goods Production
 Tangible
 Can be inventoried
 Low customer contact
 Longer response time
 Capital Intensive
 Quality easily
measured
 Goods can be shipped
Most firms provide both goods and services.
Service Production
 Intangible
 Can’t be inventoried
 High customer contact
 Shorter response time
 Labor Intensive
 Quality hard to
measure
 Locate near customers
Shared Problems by
Manufacturing & Service
 Both have to match capacity with
demand.
 Harder to do for service providers

 Both have to worry about quality.

 Easier to change a service than a
product.

 Both have to deal with internal and

external customers
Value Chains
 Value chains are an interrelated series
of processes that produce a service or
product to the satisfaction of
customers.
 Any process / value chain does two
things.
 Produces or adds value
 Consumes resources
Core Processes and Support
Processes
 Value chains may have core
processes, support processes, or
both.
 Core processes deliver value to
external customers.
 Support processes provide vital
inputs for the core processes
4 Core Processes
1. Customer relationship processes
 Identify, attract, and build relationships with external
customers and facilitates the placement of orders.
1. New service/product development processes
 Designing and developing new services or products from
inputs received from external customer specifications.
1. Order fulfillment processes
 The activities required to produce and deliver the service
or product to the external customers.
1. Supplier relationship processes
 Selecting suppliers of services, materials and information
and facilitates the timely and efficient flow of these items
into the firm.
Productivity
Production is the process of creating something having
Exchange value.

 Productivity is the value of outputs

(services and products) produced,
divided by the value of input resources
(wages, costs of equipment, etc.)

Value of Outputs
Productivity =
Value of Inputs
Measuring Productivity
 Single Factor methods
 EG: Time or cost to produce a widget
 Multi-Factor methods
 Combines two or more single-factor methods
 EG: Cost per hour to produce widgets.
 Multiple methods
 Several separate single-factor and/or multi-factor
methods
 Best way to measure productivity
 Productivity Calculation
A team of workers make 400 units of a product, valued
by its standard cost of $10 each (before markups for
other expenses and profit). The accounting department
reports that the actual costs are $400 for labor, $1,000
for materials, and $300 for overhead. Calculate the
productivity. (value of output / value of input)

Quality at standard cost

Multifactor productivity =
Labor cost + Material Cost + Overhead cost

(400 units) ($10/unit) $4,000

= = = 2.35
$400 + $1000 + $300 1,700
These figures must be compared with performance levels in prior
periods and with future goals.
 How We Improve
Productivity

Inputs Transformation Outputs

 Decrease inputs relative to outputs
 Speed up the through-put
 Increase output relative to input
 Improve Quality
History of U.S.
Productivity

 1950s 2.8% annual growth

 1960s 2.8% annual growth
 1970s 2.0% annual growth
 1980s 1.4% annual growth
 1990s 1.9% annual growth
(Growth is mostly from manufacturing productivity increases)
 Determinates of
National Productivity

 LABOR16%

 CAPITAL20%

 MANAGEMENT64%
 Service Sector

Accounts for approximately 80% of US

jobs (non-farm)

Three approximately equal sectors:

1. Government Sector
2. Wholesale & Retail Sales
3. Other Services
 Sector Productivity
in the 90s
 Productivity in the 80% service sector had
less than 1% annual growth.

 Productivity in the smaller manufacturing

sector increased roughly 3.6% per year.

 Thus the lion’s share of the nation’s overall

productivity gain has been from
Manufacturing.
 Why Low
Service Productivity?

 Hard to automate services

 Often brain work rather than machine
work
 Tend to be more labor intensive
 Hard to measure service productivity
 Operations as a
competitive weapon
 Companies use operations to compete in
various ways:
 High quality
 Consistent quality
 Quick delivery
 Fast development
 High technological efficiency
 Low cost efficiency
 Global Competition
 Businesses must accept the fact that, to prosper, they must
view customers, suppliers, facility locations, and competitors
in global terms.
 Most products today are composites of materials and services
from all over the world.
 Forces that created increased global competition:
 Improved transportation and communication technologies
 Loosened regulations on financial institutions
 Increased demand for imported services and goods
 Reduced import quotas and other trade barriers
 Comparative cost advantages
 Global Competition
Disadvantages
 May have to relinquish proprietary
technology.
 Political risks
 Alienate U.S. customers by sending jobs
overseas.
 Lower skill levels in some areas
 Difficulty with cross-functional coordination
 Harder to produce products and services
that can compete.
Other Challenges in Operations
Management

 Rapid Technological Change

 Ethical issues
 Increasing diversity of the
workforce
 Environmental impact issues
Historic Development

Adam Smith
Economist and Philosopher
1723 - 1790
"An Inquiry into the Nature &
Causes of the Wealth of Nations,"
Covered such concepts as the
role of self-interest, the division of
labor, the function of markets, and
the international implications of a
laissez-faire economy.
Historic Development

Eli Whitney
Born Dec 8 1765 - Died Jan 8 1825
He translated the concept of
interchangeable parts into a
manufacturing system, giving
birth to the American mass-
production concept.
 Historic Development

Frederick Winslow Taylor

March 20, 1856 - March 21, 1915

• Develop a "science" for every job…

• Carefully select workers with the right
abilities for the job.
• Carefully train these workers to do the
job, and give them proper incentives
• Support these workers by planning
their work and by smoothing the way
as they go about their jobs.
Historic Development

Henry Ford
1863-1947
Using a constantly-moving
assembly line, subdivision of
labor, and careful coordination
of operations, Ford realized
huge gains in productivity.
 Importance of Operations

“The two major functions

of business are
production and selling. All
other functions are
secondary to these.”
-- Peter
Drucker
 Addressing the Challenges in
Operations Management
Managing Value Chains

Managing Processes
Using Operations Supply Chain Strategy
to Compete

Process Strategy Location

Operations As a
Competitive Weapon Inventory Management
Process Analysis

Operations Strategy Process Performance Forecasting

& Quality

Constraint Management Sales & Operations

Project Management Planning

Process Layout
Resource Planning

Lean Systems Scheduling

THANK YOU