Chapter 1: Operations 1.

Marketing: generates the

demand, or at least takes the
and Productivity order for a product or service
(nothing happens until there is a
 Production: creation of goods sale)
and services 2. Productions or Operations:
 Operations Management creates, produces, and delivers
(OM): activities that relate to the product
the creation or production of 3. Finance or Accounting: tracks
goods and services through the how well the organization is
transformation of inputs to doing, pays the bills, and
outputs collects the money
creates value in the form of These creates the value for a
goods and services by customer
transforming inputs into outputs
The Supply Chain
Systematic design, operation In general, starts with the provider
and improvement of the of basic raw materials and
processes that create and continues all the way to the final
deliver a company’s primary customer at the retail store
product and service
 Supply Chain: a global network
Managing the transformation of organizations and activities
process, converting them into that supplies a firm with goods
valuable outputs that customer and services
wants
the expertise that comes with
Focuses on three areas: specialization exists up and
1. Efficiency: doing things down the supply chain, adding
right and minimizing value at each step
wastes
2. Effectiveness: doing the Why Study OM?
right things to meet 1. One of the three major
customer needs functions of any organization,
3. Quality and it is integrally related to
all the other business
Organizing to Produce Goods functions (how people
and Services organize themselves for
To create goods and services, all productive enterprise)
organizations perform 3 functions. 2. How goods and services are
These functions are the necessary produced
ingredients not only for production 3. Understand what operations
but also for an organization’s managers do
survival 4. OM provides a major
opportunity for an
 organization to improve its 3. Process and capacity
profitability and enhance its strategy: determines how a
service to society (it is such a good or service is produced (the
costly part of an process of production) and
organization) commits management to
specific technology, quality,
What Operations Managers Do human resources, and capital
All good managers perform the investments that determine
basic functions of the management much of the firm’s basic cost
process. The management process structure
consists of:
Planning Facility design, capacity, how
Organizing much automation
Staffing
Leading 4. Location strategy: requires
Controlling judgements regarding nearness
to customers, suppliers, and
10 Strategic OM Decisions (OM talent, while considering costs,
Jobs) infrastructure, logistics, and
1. Design of goods and services government
/ Product: defines much of
what is required of operations in Near supplier or near customer
each of the other OM decisions
5. Layout strategy: requires
For instance, product design integrating capacity needs,
usually determines the lower personnel levels, technology,
limits of cost and the upper and inventory requirements to
limits of quality, as well as major determine the efficient flow of
implications for sustainability materials, people, and
and the human resources information
required
Work cells or assembly line
Customized or standardized;
sustainability 6. Human resources and job
design: determines how to
2. Managing quality: determines recruit, motivate, and retain
the customer’s quality personnel with the required
expectation and establishes talent and skills.
policies and procedures to
identify and achieve that quality People are an integral and
expensive part of the total
Define customer quality system design
expectations and how to
achieve them Specialized or enriched jobs
7. Supply chain management: Eli Whitney (1800): credited for
decides how to integrate the the early popularization of
supply chain into the firm’s interchangeable parts, which was
strategy, including decisions achieved through standardization
that determine what is to be and quality control
purchased, from whom, and
under what conditions Frederick W. Taylor (1881):
known as the father of scientific
Single or multiple suppliers management, contributed to
personnel selection, planning and
8. Inventory management: scheduling, motion study, and the
considers inventory ordering now popular field of ergonomics.
and holding decisions and how
to optimize them as customer
satisfaction, supplier capability,
and production schedules are Contributions:
considered  The belief that management
should be much more
When to reorder; how much to resourceful and aggressive
keep on hand in the improvement of work
methods
9. Scheduling: determines and
implements intermediate- and Taylor and his colleagues Henry
short-term schedules that L. Gantt and Lillian Gilbreth,
effectively and efficiently utilize were among the first to
both personnel and facilities systematically seek the best
while meeting customer way to produce
demands
 Belief that management
Stable or fluctuating production should assume more
rate responsibility for:
1. Matching employees to
10. Maintenance: requires the right job
decisions that consider facility 2. Providing the proper
capacity, production demands, training
and personnel necessary to 3. Providing proper work
maintain a reliable and stable methods and tools
process 4. Establishing legitimate
incentives for work to be
Repair as required or preventive accomplished
maintenance
Henry Ford and Charles
Sorensen (1913): combined what
The Heritage of Operations they knew about standardized
Management parts with the quasi-assembly lines
of the meatpacking and mail-order
industries and added the  Physical Sciences (Biology,
revolutionary concept of the Anatomy, Chemistry,
assembly line, where men stood Physics): include new
still and material moved adhesives, faster integrated
circuits, gamma rays to sanitize
Walter Shewhart (1924): food products, and specialized
combined his knowledge of glass for iPhones and plasma
statistics with the need for quality TVs.
control and provided the
foundations for statistical sampling Innovation in products and
in quality control processes often depends on
advances in the physical
W. Edwards Deming (1950): sciences
believed, as did Taylor, that
management must do more to  Information Technology:
improve the work environment and defined as the systematic
processes so that quality can be processing of data to yield
improved information

With wireless links, internet, and

Disciplines that contributed to e-commerce reduces costs and
OM: accelerating communications
 Industrial-engineering
 Statistics
 Management
 Economics

Cost Focus Quality Focus Customization Globalization

Focus Focus
Early Concepts Lean Mass Globalization
1776 – 1880 Production Customization Era
 Labor Era Era 2005 – 2020
specialization 1980 – 1995 1995 – 2005  Global Supply
(Smith,  Just-in-Time  Internet / E- Chains
Babbage) (JIT) Commerce  Growth of
 Standardized  Computer-  Enterprise Transnational
Parts (Whitney) Aided Design Resource Organizations
(CAD) Planning  Instant
Scientific  Electronic  International Communicatio
Management Data Quality ns
Era Interchange Standards  Sustainability
1880 – 1910 (EDI) (ISO)  Ethics in a
 Gantt Charts  Total Quality  Finite Global
(Gantt) Management Scheduling Workforce
 Motion & Time (TQM)  Supply Chain  Logistics
Studies  Baldrige Management
(Gilbreth) Award  Mass
 Process  Empowerme Customizatio
Analysis nt n
(Taylor)  Kanbans  Build-to-
 Queuing Order
Theory (Erlang)  Radio.
Mass Production Frequency
Era Identification
1910 – 1980 (RFID)
 Moving
Assembly Line
(Ford/Sorensen
)
 Statistical
Sampling
(Shewhart)
 Economic
Order Quantity
(Harris)
 Linear
Programming
PERT/CPM
(DuPont)
 Material
Requirements
Planning (MRP)

Operations for Goods and

Services
 Services: economic activities
that typically produce an
intangible product (such as Similarities:
education, entertainment,  Quality Standards
lodging, government, financial,  Designed and produced on a
and health services) schedule that meets customer
demand
Including repair and  Made in a facility where people
maintenance, government, food are employed
and lodging, transportation,
insurance, trade, financial, real Note: Very few services are pure,
estate, education, legal, meaning they have no tangible
medical, entertainment, and component. Counseling may be
other professional occupations one of the exceptions

Differences:
Characteristics of Services Characteristics of Goods
Intangible: ride in an airline seat Tangible: the seat itself
Produced and consumed Product can usually be kept in
simultaneously: beauty salon inventory: beauty care products
produces a haircut that is consumed
as it is produced
Unique: your investments and Similar products produced
medical care are unique (iPods)
Higher customer interaction: Limited customer involvement in
often what the customer is paying production
for (consulting, education)
Inconsistent product definition: Product standardized (iPhone)
Auto insurance changes with age
and type of car
Often knowledge based: legal, Standard tangible product tends
education, and medical services are to make automation feasible
hard to automate
Services dispersed: service may Product typically produced at a
occur at retail store, local office, fixed facility
house call, or via internet
Quality may be hard to Many aspects of quality for
evaluate: consulting, education, tangible products are easy to
and medical services evaluate (strength of a bolt)
Reselling is unusual: musical Product often has some residual
concert or medical care value

Growth of Services
Services constitute the largest service industries do indeed pay
economic sector in postindustrial below the all-private industry
societies average.

1900: most Americans were Of these, retail trade, which pays

employed in agriculture only 61% of the national private
industry average, is large. But even
Increased agricultural productivity considering the retail sector, the
allowed people to leave the farm average wage of all service
and seek employment in the city. workers is about 96% of the
Similarly, manufacturing average of all private industries
employment had decreased for the
past 60 years.
The Productivity Challenge
Although the number of people  Productivity: the ratio of
employed in manufacturing has outputs (goods and services)
decreased since 1950, each person divided by one or more inputs
is now producing almost 20 times (such as labor, capital, or
more than in 1950. management)

Services became the dominant Productivity is important

employer in the early 1920s, with because it determines our
manufacturing employment standard of living.
peaking at about 32% in 1950.
The more productive we are, the
The huge productivity increases in more value is added to the good
agriculture and manufacturing or service provided
have allowed more of our economic
resources to be devoted to The operations manager’s job is
services. to enhance (improve) this ratio
of outputs to inputs,
 Service Sector: the segment of improving productivity
the economy that include trade, means improving efficiency
financial, lodging, education,
legal, medical, and other Measure of the effective use
professional occupations of resources, usually
expressed as the ratio of
Service Pay output to input
About 42% of all service workers
receive wages above the national This improvement can be
average. achieved in two ways:
a) Reducing inputs while
However, the service-sector keeping output constant
average is driven down because 14 b) Increasing output while
of the US Department of keeping inputs constant
Commerce categories of the 33
In an economic sense, inputs are Measurement of productivity is an
labor, capital, and excellent way to evaluate a
management, which are country’s ability to provide an
integrated into a production improving standard of living for its
system. Management creates this people.
production system, which provides
the conversion of inputs to outputs. Only through increases in
productivity can the standard of
Outputs are goods and living improve.
services, including such diverse
items as guns, butter, education, Moreover, only through increases
improved judicial systems, and ski in productivity can labor,
resorts. capital, and management
receive additional payments.
Every productivity
improvement directly impacts If returns to labor, capital, or
profitability management are increased
without increased productivity,
Production is the making of goods prices rise,
and services
On the other hand, downward
High production may imply only pressure is placed on prices
that more people are working and when productivity increases
that employment levels are high, because more is being produced
but it does not imply high with the same resources.
productivity

_____________________________________________________________________________
Although labor-hours is a common
measure of input, other measures
such as capital (dollars
invested), materials (tons of
ore), or energy (kilowatts or
electricity) can be used

 Single-factor Productivity:
indicates the ratio of goods and
services produced (outputs) to
Productivity Measurement one resource (input)
The measurement of productivity
can be quite direct. Such is the units produced
Productivity =
case when productivity is input used
measured by labor-hours per ton of
a specific type of steel.
 Multifactor Productivity:
indicates the ratio of goods and
 services produced (outputs) to Productivity measurement is
many or all resources particularly difficult in the service
(inputs: capital, labor, sector, where the end product can
material, energy) be hard to define

Also known as total factor Productivity Variables

productivity  Productivity Variables: the
three factors critical to
productivity improvement –
Multifactor Productivity = labor, capital, and the art and
output science of management.
Labor+ Material+ Energy+Capital + Miscellaneous

Multifactor productivity is usually 1. Labor (contributes about

better, but more complicated. 10% of the annual
Labor productivity is the more increase)
popular measure. Improvement in the
contribution of labor to
The multifactor-productivity productivity is the result of a
measures provide better healthier, better-educated,
information about the trade-offs and better-nourished labor
among factors, but substantial force
measurement problems remain.
Some of these measurement Three key variables for
problems are: improved labor productivity:
1. Quality may change while a) Basic education
the quantity of inputs and appropriate for an
outputs remains constant effective labor force
2. External elements may b) Diet of the labor force
cause an increase or a c) Social overhead that
decrease in productivity for makes labor available,
which the system under such as transportation and
study may not be directly sanitation
responsible
3. Precise units of measure Illiteracy and poor diets are a
may be lacking major impediment to
productivity, costing
 countries up to 20% of their investment for a given risk
productivity. has been reduced

In developed nations. The 3. Management (contributes

challenge becomes about 52% of the annual
maintaining and enhancing increase)
the skills of labor in the midst Management is a factor of
of rapidly expanding production and an economic
technology and knowledge resource

2. Capital (contributes about Responsible for ensuring that

38% of the annual labor and capital are
increase) effectively used to increase
Human beings are tool-using productivity
animals. Capital investment
provides those tools. Management accounts for
over half of the annual
Inflation and taxes increase in productivity. This
increase the cost of increase includes
capital, making capital improvements made through
investment increasingly the use of knowledge and the
expensive. application of technology

When the capital invested Using knowledge and

per employee drops, we can technology is critical in
expect a drop in productivity. postindustrial societies.
Using labor rather than
capital may reduce
unemployment in the short-
run, but it also makes  Knowledge Society: or post-
economies less productive industrial societies, is a society
and therefore lowers wages in which much of the labor force
in the long run. has migrated from manual work
to work based on knowledge (or
Capital investment is often. technical and information-
Necessary, but seldom a processing tasks requiring
sufficient, ingredient in ongoing education).
increasing productivity
The required education and
The higher the cost of capital training are important high-cost
or perceived risk, the more items that are the responsibility
projects requiring capital are of operations managers as they
“squeezed out”: they are not build organizations and
pursued because the workforces
potential return on
 More effective use of capital Rapid decline in the cost of
also contributes to productivity. communication and transportation
It falls to the operations has made markets global
manager, as a productivity
catalyst, to select the best new Similarly, resources in the form of
capital investments as well as to capital, materials, talent, and labor
improve the productivity of are also now global
existing investments
Operations managers are rapidly
seeking creative designs, efficient
Productivity and the Service production, and high-quality goods
Sector via international collaboration
Productivity of the service sector
has proven difficult to improve Supply-chain partnering
because service-sector work is: Shorter product life cycles,
demanding customers, and fast
1. Typically labor intensive (e.g. changes in technology, materials,
counselling, teaching) and processes require supply-chain
2. Frequently focused on unique partners to be in tune with the
individual attributes or desires needs of end users.
(e.g., investment advice)
3. Often an intellectual task Because suppliers may be able to
performed by professionals contribute unique expertise,
(e.g., medical diagnosis) operations managers are
4. Often difficult to mechanize and outsourcing and building long-term
automate (e.g., a haircut) partnerships with critical players in
5. Often difficult to evaluate for the supply chain.
quality (e.g., performance of a
law firm).

The more intellectual and personal

the task, the more difficult it is to
achieve increases in productivity Sustainability
Operations managers’ continuing
Low-productivity improvement in battle to improve productivity is
the service sector is also concerned with designing products
attributable to the growth of low- and processes that are ecologically
productivity activities (include sustainable.
activities not previously part of the
measured economy) in the service This means designing green
sector products and packaging that
minimize resource use, can be
Current Challenges in recycled or reused, and are
Operations Management generally environmentally friendly.
Globalization
Rapid product development
Technology combined with rapid efficient, where management
international communication of creates enriched jobs that help
news, entertainment, and lifestyles employees engage in continuous
is dramatically chopping away at improvement, and where goods
the life span of products and services are produced and
delivered when and where the
OM is answering with new customer desires them.
management structures, enhanced
collaboration, digital technology, These ideas are also captured in
and creative alliances that are the phrase lean
more responsive and effective.

Mass customization
Once managers recognize the
world as the marketplace, the
cultural and individual differences
become quite obvious

OM must rapidly respond with

product designs and flexible
production processes that cater to
the individual whims of consumers.

The goal is to produce customized

products, whenever and wherever
needed.

Lean operations Ethics, Social Responsibility,

Lean is the management model and Sustainability
sweeping the world and providing  Stakeholders: those with a
the standard against which vested interest in an
operations managers must organization, including
compete. customers, distributors,
suppliers, owners, lenders,
Lean can be thought of as the employees, and community
driving force in a well-run members
operation, where the customer is
satisfied, employees are respected, As well as government agencies
and waste does not exist at various levels, require
constant monitoring and
The theme of this text is to build thoughtful responses.
organizations that are more
Identifying ethical and socially
responsible responses while
developing sustainable processes
that are also effective and efficient
productive systems is not easy.
Managers are also challenged to:
1. Develop and produce
safe, high-quality green
products
2. Train, retain, and
motivate employees in a
safe workplace
3. Honor stakeholder
commitments

If operations managers have a

moral awareness and focus on
increasing productivity in this
system, then many of the ethical
challenges will be successfully
addressed.

The organization will use fewer

resources, the employees will be
committed, the market will be
satisfied, and the ethical climate
will be enhanced.

Chapter 2: Operations
Strategy in a Global
Environment

A Global View of Operations

and Supply Chains
Since the early 1990s, nearly 3
billion people in developing
countries have overcome the
cultural, religious, ethnic, and
political barriers that constrain
productivity.

And now they are all players on the

global economic stage. As these
barriers disappear, simultaneous Shifting low-skilled jobs to
advances are being made in another country has several
technology, reliable shipping, and potential advantages:
inexpensive communication. a) The firm may reduce costs
b) Moving the lower-skilled
6 Reasons Domestic Business jobs to a lower cost
Operations Change to location frees higher-cost
International Operation workers for more valuable
1. Improve the supply chain tasks
Can be improved by locating c) Reducing wage costs
facilities in countries where allows the savings to be
unique resources are invested in improved
available products and facilities
(and the retraining of
These resources may be human existing workers, if
resource expertise, low-cost necessary) at the home
labor, or raw material. location
d) Having facilities in
Shopping at different markets to countries with different
get the best ingredient for your currencies can allow firms
favorite recipes to finesse currency risk
(and related costs) as
Where can we get the best economic conditions
inputs (material, labor, dictate
technology or knowledge) for
our operations Having the same quality but
with cheaper price
2. Reduce costs and exchange
rate risk Switch suppliers based on which
Many international operations currency gives the best deal
seek to reduce risks associated
with changing currency values  Maquiladoras: Mexican
(exchange rates) as well as take factories located along the US –
advantage of the tangible Mexico border that receive
opportunities to reduce their preferential tariff treatment
direct costs.
Allow manufacturer to cut their
Less stringent government costs by paying only for the
regulations on a wide variety of value added by Mexican workers
operations practices (e.g.,
environmental control, health Trade agreements help reduce
and safety) can also reduce tariffs and thereby reduce the
indirect costs. cost of operating facilities in
foreign countries
 World Trade Organization
(WTO): an international 4. Understand markets
organization that promotes Because international
world trade by lowering barriers operations require interaction
to the free flow of goods across with foreign customers,
borders suppliers, and other competitive
Helped reduce tariffs from 40% businesses, international firms
in 1940 to less than 3% today. inevitably learn about
opportunities for new products
 North American Free Trade and services.
Agreement (NAFTA): a free
trade agreement between Knowledge of markets not only
Canada, Mexico, and the United helps firms understand where
States the market is going but also
helps firms diversify their
Seeks to phase out all trade and customer base, add production
tariff barriers among Canada, flexibility, and smooth the
Mexico, and the US business cycle.

 European Union (EU): a Another reason to go into

European trade group that has foreign markets is the
28-member states opportunity to expand the
life cycle of an existing
Reduced trade barriers among product.
the participating European
nations through standardization Knowing your customer wants,
and a common currency, the study the local market
euro.
Operating locally gives deep
3. Improve operations real insight
Operations learn from better
understanding of management They only learned about the
innovations in different preferences of the customers by
countries. actually operating in this market

Reduce response time to meet

customers’ changing product
and service requirements.

Learning cooking techniques

from different cultures to 5. Improve products
improve your own cooking skills Learning does not take place
in isolation
Each market teaches them
something that improves Firms serve themselves and
operations worldwide their customers well when they
 remain open to the free flow of 1. Local expertise: native
ideas employees understand their
markets better
Through international operation, 2. Cultural authenticity:
companies can enhance their products feel genuine and
products by incorporating global not foreign
innovations, technologies, and 3. Career opportunities:
adapting to diverse consumer talented people join because
needs they can work on global
brands
The more cousins you’re 4. Knowledge sharing: great
exposed to, the more creative ideas from one country get
and delicious your own cooking adopted globally
becomes.
Having local guides in every
By operating internationally, country that you visit.
companies didn’t just adopt
their existing products, but they Achieving a competitive advantage
created entirely new and better in our shrinking world means
product categories maximizing all the possible
opportunities, from tangible to
6. Attract and retain global intangible, that international
talent operations can offer.
Global organizations can attract
and retain better employees by
offering more employment Cultural and Ethical Issues
opportunities. While there are great forces driving
firms toward globalization, many
They need people in all challenges remain:
functional areas and areas of 1. Reconciling differences in
expertise worldwide. social and cultural behavior

Global firms can recruit and With issues ranging from

retain good employees because bribery, to child labor, to the
they provide greater growth environment, managers
opportunities and insulation sometimes do not know how
against unemployment during to respond when operating in
times of economic downturn (a a different culture.
global firm has the means to
relocate unneeded personnel to What one country’s culture
more prosperous locations) deems acceptable may be
considered unacceptable or
Can pick the best people illegal in another
____________________________________
Why this works:
Developing Missions and
Strategies Once an organization’s mission
Getting an education and has been decided each
managing an organization both functional area (major
require a mission and strategy disciplines required by the firm,
such as marketing,
In a global business environment, finance/accounting, and
operations and supply chain must production/operations) within
align with the organization’s the firm determines its
overall mission and strategy supporting mission.
across different countries
Missions for each function are
 Global Alignment: Operations developed to support the firm’s
and supply chains must align overall mission. Then within that
with the organization’s overall function lower-level supporting
mission and strategy across missions are established for the
different countries and regions OM functions.

This matter because without  Strategy: how an organization

alignment you get chaos, expects to achieve its
different countries doing missions and goals (game
different things that don’t plan)
support the company’s main
purpose An organization’s action plan to
achieve its mission
An effective operations
management effort must have a With the mission established,
mission so it knows where it is strategy and its implementation
going and a strategy so it knows can begin
how to get there.
Each functional area has a
 Mission: the purpose (life strategy for achieving its
purpose; what it will mission and for helping the
contribute to society) or organization reach the overall
rationale for an mission.
organization’s existence
These strategies exploit
Economic success, indeed opportunities and strengths,
survival, is the result of neutralize threats, and avoid
identifying missions to satisfy a weaknesses
customer’s needs and wants.
Firms achieve missions in 3
Missions statements provide conceptual ways: pick one
boundaries and focus for and doing it excellently
organizations and the concept 1) Differentiation
around which the firm can rally. 2) Cost leadership
 3) Response in a way that the customer
perceives as adding value
This means operations
managers are called on to Concerned with providing
deliver goods and services that uniqueness.
are:
1) better, or at least different Uniqueness is not located within
2) cheaper a particular function or activity
3) more responsive but can arise in virtually
everything the firm does
Operations managers translate
these strategic concepts into Going beyond both physical
tangible tasks to be characteristics and service
accomplished. attributes to encompass
everything about the product or
Any one or combination of these service that influences the value
three strategic concepts can that the customers derive from
generate a system that has a it
unique advantage over
competitors In the service sector, one option
for extending product
Achieving Competitive differentiation is through an
Advantage Through Operations experience
 Competitive Advantage: the
creation of a unique advantage Involves setting up
over competitors specialized manufacturing
facilities in countries known
Implies the creation of a system for particular expertise or
that has a unique advantage quality (they go where the
over competitors. experts are)

The idea is to create customer The company must be

value in an efficient and different or better
sustainable way.
 Experience Differentiation:
Pure forms of these strategies engaging a customer with a
may exist, but operations product through imaginative use
managers will more likely be of the 5 senses, so the customer
called on to implement some “experiences” the product
combination of them (become immersed or become
an active participant in the
Competing on product)
DIFFERENTIATION (better)
 Differentiation: distinguishing Differentiation by experience in
the offerings of an organization services is a manifestation of
 the growing “experience
economy” Including the entire range of
values related to timely product
Competing on COST (cheaper) development and delivery, as
Effectively matched capacity to well as reliable scheduling and
demand and effectively utilized this flexible performance.
capacity.
Flexible response may be
One driver of a low-cost strategy is thought of as the ability to
a facility that is effectively utilized. match changes in a marketplace
where design innovations and
Use financial resources effectively. volumes fluctuate substantially –
building a sustainable
Identifying the optimum size (and competitive advantage
investment) allows firms to spread
overhead costs, providing a cost Reliability of scheduling:
advantage. having meaningful schedule and
perform to these schedules.
Locating operations in regions Moreover, the results of these
with lower labor costs or better schedules are communicated to
access to raw materials the customer, and the customer
(economical way to make quality can, in turn, rely on them
products)
Quickness: speed in product
Be cheaper, offer the lowest development, speed in
prices while maintaining production, and speed in
accessible quality delivery

 Low-cost leadership: Might require positioning

achieving maximum value, as distribution centers
perceived by the customer strategically around the world to
ensure quick delivery to different
It requires examining each of markets (be close to their
the 10 OM decisions in a customers so they can serve as
relentless effort to drive down much as faster as possible)
costs while meeting customer
expectations of value. You have to be faster and more
flexible. Quick to response to
A low-cost strategy does not customer needs and market
imply low value or low quality changes

Competing on RESPONSE In practice, differentiation,

(faster) low cost, and response can
 Response: a set of values increase productivity and
related to rapid, flexible, and generate a sustainable
reliable performance competitive advantage. Proper
 implementation of the ten Porter also suggest analysis of
decisions by operations competitors via what he calls his
managers will allow advantages five forces model
to be achieved.

Issues in Operations Strategy

Prior to establishing and
attempting to implement a
strategy, some alternate
perspectives may be helpful

 Resources View: a method

managers use to evaluate the
resources at their disposal and
manage or alter them to achieve
competitive advantage.
 Five Forces Model: a method
This means thinking in terms of of analyzing the five forces in
the financial, physical, human, the competitive environment
and technological resources a) Immediate rivals
available and ensuring that the b) Potential entrants
potential strategy is compatible c) Customers
with those resources d) Suppliers
e) Substitute products
 Value-chain Analysis
(Porter): a way to identify The firm itself is also undergoing
those elements in the constant change. Everything from
product/service chain that resources, to technology, to
uniquely add value product life cycles is in flux.

Used to identify activities that Consider the significant changes

represent strengths, or potential required within the firm as its
strengths, and may be products move from introduction,
opportunities for developing to growth, to maturity, and to
competitive advantage. decline.

These are areas where the firm The more thorough the (1)
adds its unique value through analysis and understanding of
product research, design, both the external and internal
human resources, supply-chain factors, the more likely that a firm
management, process can find the optimum use of its
innovation, or quality resources.
management.
Once a firm understand itself and
the environment, a (2) SWOT
analysis, is
in order

Introduction Growth Maturity Decline

Best period to Practical to Poor time to Cost control
increase change price change image, critical
market share or quality price, or
Company image quality
Strategy / R&D
Issues engineering is Strengthen Competitive
critical niche costs become
critical

Defend
market
position
Product design Forecasting Standardizatio Little
and critical n product
development differentiatio
critical Product and Fewer rapid n
process product
Frequent reliability changes, more Cost
product and minor changes minimization
process design Competitive
changes product Optimum Overcapacity
OM Strategy / improvements capacity in the
Issues Short and options industry
production Increasing
runs Increase stability of Prune line to
capacity process eliminate
High items not
production Shift toward Long returning
costs product focus production good margin
runs
Limited models Enhance Reduce
distribution Product capacity
Attention to improvement
quality and cost
cutting
Strategy Development and 3. Form a Strategy
Implementation Build a competitive
 SWOT Analysis: a method of advantage, such as low price,
determining internal strengths design or volume flexibility,
and weaknesses and external quality, quick delivery,
opportunities and threats; dependability, after-sale
provides an excellent model for services, or broad product
evaluating a strategy lines

Key Success Factors and Core

competencies
 Key Success Factors (KSFs):
The idea is to maximize activities or factors that are key
opportunities and minimize to achieving competitive
threats in the environment while advantage and the firm’s goals
maximizing the advantages of
the organization’s strengths and Significant that a firm must get
minimizing the weaknesses. them right to survive

Any preconceived ideas about Often necessary, but not

mission are then reevaluated to sufficient for competitive
ensure they are consistent with advantage
the SWOT analysis.  Core Competencies: a set of
unique skills, talents, and
Subsequently, a strategy for capabilities in which a firm is
achieving the mission is particularly strong.
developed. This strategy is
continually evaluated against Allows a firm to set itself apart
the value provided customers and develop a competitive
and competitive realities advantage

Strategy Development The idea is to build KSFs and core

Process competencies that provide a
1. Analyze the Environment competitive advantage and support
 Identify SWOT a successful strategy and mission.
 Understand the
environment, A core competency may be the
customers, industry, ability to perform the KSFs or a
and competitors combination of KSFs

2. Determine Corporate Only by identifying and

Mission strengthening key success factors
State the reason for the and core competencies can an
firm’s existence and identify organization achieve sustainable
the value it wishes to create competitive advantage
Integrating OM with Other Implementing the 10 Strategic
Activities OM Decisions
Whatever the KSFs and core The implementation of the 10
competencies, they must be strategic OM decisions is influenced
supported by the related activities. by a variety of issues – from
missions and strategy to key
One approach to identifying the success factors and core
activities is an activity map competencies – while addressing
such issues as product mix,
 Activity Map: a graphical link product life cycle, and competitive
of competitive advantage, KSFs, environment.
and supporting activities
Strategic Planning, Core
The better the activities are Competencies, and Outsourcing
integrated and reinforce each As organizations develop missions,
other, the more sustainable the goals, and strategies, they identify
competitive advantage. their strengths – what they do as
well as or better than their
competitors – as their core
competencies.

By contrast, non-core activities,

which can be a sizable portion of
Building and Staffing the an organization’s total business,
Organization are good candidates for
Once a strategy, KSFs, and the outsourcing
necessary integration have been  Outsourcing: transferring a
identified, the second step is (2) firm’s activities that have
group the necessary activities traditionally been internal to
into an organizational structure external suppliers

Then, managers must staff the Enables organizations to focus

organization with personal who will on their core competencies,
get the job done. reduce costs, and enhance
operational efficiency
The manager works with
subordinate managers to build Instead of doing everything
plans, budgets, and programs that yourself, you hire other
will successfully implement companies to do the same or
strategies that achieve missions some work for you

The operations manager’s job is to Adds complexity and risk to the

implement an OM strategy, provide supply chain. Because of its
competitive advantage, and potential, outsourcing continues
increase productivity to expand.
 Why do they outsource?
1) Focus on Core The Theory of Comparative
Competencies: do what Advantage
you do best and let others  Theory of Comparative
do the rest Advantage: a theory which
2) Reduce Costs: often states that countries benefit
cheaper to hire specialists from specializing in (and
than do it in house exporting) goods and services in
which they have relative
The expansion is advantage, and they benefit
accelerating due to three from importing goods and
global trends: services in which they have a
1) Increased technological relative disadvantage
expertise
2) More reliable and cheaper If an external provider,
transportation regardless of its geographic
3) The rapid development location, can perform activities
and deployment of more productively than the
advancements in purchasing firm, then the
telecommunications and external provider should do the
computers work.

This rich combination of economic This allows the purchasing firm

advances is contributing to both to focus on what it does best –
lower cost and more specialization. its core competencies.
As a result more firms are
candidates for outsourcing of non- Risks of Outsourcing
core activities. Risk management starts with a
realistic analysis of uncertainty and
Outsourcing implies agreement results in a strategy that minimizes
(typically a legally binding the impact of these uncertainties.
contract) with an external
organization Outsourcing is risks because:
1) Inadequate planning and
The classic make-or-buy decision, analysis
concerning which products to make 2) Major issues in timely
and which to buy, is the basis of delivery, quality standards,
outsourcing. and underestimating
increases in inventory and
Outsourcing manufacturing is logistics costs
an extension of the long-standing
practice of subcontracting Advantages Disadvantages
production activities, which when Cost savings Increased logistics
done on a continuing basis is and inventory
known as contract costs
manufacturing. Gaining outside Loss of control
 expertise that (quality, delivery, Managers can find substantial
comes with etc.) efficiencies in outsourcing non-core
specialization activities, but they must be
Improving Potential creation cautious in outsourcing those
operations and of future elements of the product or service
services competition that provide a competitive
Maintaining a Negative impact advantage.
focus on core on employees
competencies Rating Outsource Providers
Accessing outside Risks may not Common reason for the failure of
technology manifest outsourcing agreements is that the
themselves for decisions are made without
years sufficient analysis.

The factor-rating method

Outsourcing is overseas provides an objective way to
including additional issues: evaluate outsource providers.
1) Financial attractiveness
2) People skills and availability We assign points for each factor to
3) General business each provider and then importance
environment weights to each of the factors
4) Political backlash that results
from moving jobs to foreign Global Operations Strategy
countries Options
 International Business: a firm
The perceived loss of jobs engages in cross-border
has fueled anti-outsourcing transactions, or international
rhetoric. This rhetoric is trade or investment
contributing to a process
known as reshoring, the  Multinational Corporation
return of business activity (MNC): a firm that has
to the originating country extensive involvement in
international business, owning
Other issues managers must or controlling facilities in more
deal with other issues that than one country
outsourcing brings:
1) Reduced employment levels MNCs buy resources, create
2) Changes in facility goods or services, and sell
requirements goods or services in a variety of
3) Potential adjustments to countries
quality control systems and
manufacturing processes The term multinational
4) Expanded logistics issues corporation applies to most of
(including insurance, tariffs, the world’s large, well-known
customs, and timing) businesses
Four Strategies Advantage: Maximizing a
Vertical Axis competitive response for the
Cost Reduction local market; high local
resposiveness
Horizontal Axis
Local Responsiveness: quick Disadvantage: Little or no
response and/or the differentiation cost advantage
necessary for the local market
“We were successful in the
 International Strategy: a home market; let’s export the
strategy in which global markets management talent and
are penetrated using exports processes, not necessarily the
and licenses product, to accommodate
another market”
Import/export or license
existing product  Global Strategy: a strategy in
which operating decisions are
Lease advantageous, with little centralized and headquarters
local responsiveness and coordinates the standardization
little cost advantage (low and learning between facilities
cost reduction)
o Standardized product
Easiest as exports can require o Economies of scale
little change in existing o Cross-cultural learning
operations, and licensing
agreements often leave much of Appropriate when the strategic
the risk to the licensee focus is cost reduction but
has little to recommend it
 Multidomestic Strategy: a when the demand for local
strategy in which operating responsiveness is high (low
decisions are decentralized to local responsiveness)
each country to enhance local
responsiveness End products are similar
throughout the world
Use existing domestic model
globally  Transnational Strategy: a
strategy that combines the
Decentralized authority with benefits of global-scale
substantial autonomy at each efficiencies with the benefits of
business local responsiveness

These are typically o Move material, people,

subsidiaries, franchises, or or ideas across
joint ventures with substantial national boundaries
independence o Economies of scale
 o Cross-cultural learning
Chapter 3: Project
Exploits the economies of scale
and learning, as well as pressure
Management
for responsiveness, by
recognizing that core Importance of Project
competence does not reside in Management
just the “home” country but can Each new product/service
exist anywhere in the introduction is a unique event – a
organization project. In addition, projects are a
common part of our everyday life.
Transnational describes a We may be planning a wedding or
condition in which material, a surprise birthday party,
people, and ideas cross – or remodeling a house, or preparing a
transgress – national semester-long class project.
boundaries.
Scheduling projects can be a
These firms (or can be thought difficult challenge for operations
of as “world companies” – managers. The stakes in project
whose country identity is not as management are high. Cost
important as their overruns and unnecessary delays
interdependent network of occur due to poor scheduling and
worldwide operations) have the poor controls
potential to pursue all three
operations strategies Projects that take months or years
(differentiation, low cost, and to complete are usually developed
response)

Has high cost reduction and

high local responsiveness
outside the normal production
system

Project organizations within the

firm may be set up to handle such
jobs and are often disbanded when
the project is complete. On other
occasions, managers find projects
just a part of their job

The management of projects

involves three (3) phases:
1) Planning: This phase
includes goal setting,
 defining the project, and Developed to make sure
team organization existing programs continue
to run smoothly on a day-to-
day basis while new projects
are successfully completed

For companies with multiple

large projects, project
organization is an effective
way of assigning the people
and physical resources
needed.

It is a temporary organization
structure designed to achieve
2) Scheduling: This phase
results by using specialists from
relates people, money, and
throughout the firm
supplies to specific activities
and relates activities to each
The project organization may
other
be most helpful when:
1) Work tasks can be defined
with a specific goal and
deadline
2) The job is unique or
somewhat unfamiliar to the
existing organization
3) The work contains complex
3) Controlling: Here the firm
interrelated tasks requiring a
monitors resources, costs,
specialized skill
quality, and budgets. It also
4) The project is temporary but
revises or changes plans and
critical to the organization
shifts resources to meet time
5) The project cuts across
and cost demands
organizational lines

Project Manager
Project Planning
The manager heading the project
 Projects: series of related tasks
coordinates activities with other
directed toward a major output
departments and reports directly to
top management
 Project Organization: an
organization formed to ensure
Project managers receive high
that programs (projects) receive
visibility in a firm and are
the proper management and
responsible for making sure that:
attention
1) All necessary activities are
finished in proper
sequence and on time
 2) The project comes in
within budget The work breakdown structure
3) The project meets its typically decreases in size from
quality goals top to bottom and is indented
4) The people assigned to like this
the project receive
motivation, direction, and Level
information needed to do 1. Project
their jobs 2. Major tasks in the
project
They are good coaches and 3. Subtasks in major
communicators, and be able to tasks
organize activities from a variety of 4. Activities (work
disciplines packages) to be
completed
Project Managers often deal
with: Project Scheduling
1) Offers of gifts from Involves sequencing and
contractors allotting time to all project
2) Pressure to alter status activities.
reports to mask the reality
of delays At this stage, mangers decide
3) False reports for charges how long each activity will take
of time and expense and compute the resources
4) Pressure to compromise needed at each stage of
quality to meet bonuses or production
avoid penalties related to
schedules Managers may also chart separate
schedules for personnel needs by
 Work Breakdown Structure: type of skills (management,
a hierarchical description of a engineering, or pouring concrete)
project into more and more and material needs
detailed components
 Gantt Charts: planning charts
Defines the project by dividing it used to schedule resources and
into its major subcomponents allocate time
(or tasks), which are then
subdivided into more detailed Low-cost means of helping
components, and finally into a managers make sure that:
set of activities and their related 1) Activities are planned
costs 2) Order of performance is
documented
Gross requirements for people, 3) Activity time estimates
supplies, and equipment are are recorded
also estimated in this planning 4) Overall project time is
phase developed
 Controlling projects can be difficult
On simple projects, scheduling
charts such as these permit The stakes are high; cost overruns
managers to observe the progress and unnecessary delays can occur
of each activity and to spot and due to poor planning, scheduling,
tackle problem areas. and controls

Gantt charts, though, do not Projects typically only becomes

adequately illustrate the well-defined after detailed
interrelationships between the extensive initial planning and
activities and resources careful definition of required
inputs, resources, processes, and
PERT and CPM, do have the ability outputs.
to consider precedence
relationships and interdependency Well-defined projects are assumed
of activities. to have changes small enough to
be managed without substantially
revising plans.

Purpose: They use what is called a

1. It shows the relationship of waterfall approach, where the
each activity to others and to project progresses smoothly, in a
the whole project step-by-step manner, through each
2. It identifies the precedence phase to completion.
relationships among But many projects, such as
activities software development and new
3. It encourages the setting of technology are ill-defined.
realistic time and cost
estimates for each activity These projects require what is
4. It helps make better use of known as an agile style of
people, money, and material management with collaboration
resources by identifying and constant feedback to adjust to
critical bottlenecks in the the many unknowns of the evolving
project technology and project
specifications
Project Controlling
Involves close monitoring of
resources, costs, quality, and Project Management
budgets. Techniques: PERT and CPM
Techniques
Control also means using a  Program Evaluation and
feedback loop to revise the project Review Technique (PERT): A
plan and having the ability to shift project management technique
resources to where they are that employs three time
needed most estimates for each activity
 Critical Path Method (CPM):
A project management The major difference is that PERT
technique that uses only one- employs three times estimates for
time factor per activity each activity. These time estimates
are used to compute expected
PERT and CPM were both values and standard deviations for
developed in the 1950s to help the activity.
managers schedule, monitor, and
control large and complex projects CPM makes the assumption that
activity times are known with
CPM arrived first, as a tool certainty and hence requires only
developed to assist in the building one time factor for each activity
and maintenance of chemical
plants at duPont. Independently, PERT and CPM are important
PERT was developed in 1958 for because they can help answer
the US Navy questions such as the following
about projects with thousands
The Framework of PERT and of activities:
CPM 1. When will the entire project be
1. Define the project and prepare completed?
the work breakdown structure 2. What are the critical activities or
2. Develop the relationships tasks in the project – that is,
among the activities. Decide which activities will delay the
which activities must precede entire project if they are late?
and which must follow others 3. Which are the noncritical
3. Draw the network connecting all activities – the ones that can run
the activities late without delaying the whole
4. Assign time and/or cost project’s completion?
estimates to each activity 4. What is the probability that the
5. Compute the longest time path project will be completed by a
through the network. This is specific date?
called the critical path (major 5. At any particular date, is the
part of controlling a project) project on schedule, behind
schedule, or ahead of schedule?
 Critical Path: the computed 6. On any given date, is the money
longest time path(s) through a spent equal to, less than, or
network greater than the budgeted
amount?
The activities on the critical path 7. Are there enough resources
represent tasks that will delay available to finish the project on
the entire project if they are not time?
completed on time 8. If the project is to be finished in
a shorter amount of time, what
6. Use the network to help plan, is the best way to accomplish
schedule, monitor, and control this goal at the least cost?
the project
Network Diagrams and Approaches assuming all predecessors have
The first step in a PERT or CPM been completed
network is to divide the entire
project into significant activities in Earliest Finish (EF): earliest time
accordance with the work at which an activity can be finished
breakdown structure.
Latest Start (LS): latest time at
 Activity-on-node (AON): a which an activity can start so as to
network diagram in which not delay the completion time of
nodes designate activities the entire project
(ex. Microsoft Project)
Latest Finish (LF): latest time by
The lines, or arrows, represent which an activity has to finish so as
the precedence relationships to not delay the completion time of
between the activities the entire project

 Activity-on-arrow (AOA): a We use a two-pass process,

network diagram in which consisting of a forward pass and a
arrows designate activities backward pass, to determine these
time schedules for each activity.
The basic difference between AON
and AOA is that the nodes in an The early start and finish times (ES
AON diagram represent activities. and EF) are determined during the
forward pass. The late start and
In an AOA network, the nodes finish times (LS and LF) are
represent the starting and determined during the backward
finishing times of activity and pass
are also called events. So nodes in
AOA consume neither time nor
resources.
Determining Project Schedule
 Critical Path Analysis: a
process that helps determine a
project schedule  Forward Pass: a process that
identifies all the early times
The critical path is the longest
time path through the network. Forward Pass
To find the critical path, we
calculate two distinct starting
and ending times for each
activity. There are defined as
follows:

Earliest Start (ES): earliest time

at which an activity can start,
Earliest Start Time Rule | before an activity can start, all its
Before an activity can start, all its immediate predecessors must be
immediate predecessors must be finished:
finished:  If an activity is an immediate
 If an activity has only a single predecessor for just a single
immediate predecessor, its activity, its LF equals the LS of
ES equals the EF of the the activity that immediately
predecessor follows it.
 If an activity has multiple  If an activity is an immediate
immediate predecessors, its predecessor to more than one
ES is the maximum of all EF activity, its LF is the minimum of
values of its predecessors. all LS values of all activities that
That is: immediately follow it. That is:

ES = Max {EF of all LF = Min {LS of all

immediate immediate
predecessors} following activities}

Earliest Finish Time Rule | The Latest Start Time Rule | The
earliest finish time (EF) of an latest start time (LS) of an activity
activity is the sum of its earliest is the difference of its latest finish
start time (ES) and its activity time (LF) and its activity time. That
time. That is: is:

EF = ES + Activity Time LS = LF – Activity Time

 Slack Time and Critical Path

 Advantages and Limitations
of PERT and CPM Techniques

Backward Pass
 Backward Pass: an activity
that finds all the late start and
late finish times

Begins with the last activity in

the project.

For each activity, we first

determine its LF value, followed by
its LS value. The following two rules
are used in this process

Latest Finish Time Rule | This

rule is again based on the fact that