CHAPTER 1
OPERATION MANAGEMENT
AND VALUE CHAINS
Learning objectives
•Explain the concept and •Explain the difference between
importance of operations value chains and supply chains,
management. and identify three general types
of processes in business.
•Describes what operations
managers do. •Contrast the three different
frameworks for describing value
•Explains the differences between chains.
goods and services.
•Summarize the historical
•Define the concept of value and development of operation
explain how the value of goods management.
and services can be enhanced.
•Describe key challenges facing
•Describe the customer benefit operation management.
package.
Operation management
- Creating and delivering goods and services to
customers depends on an effective system of
linked facilities and processes, and the ability to
manage them effectively around the world.
Reporter: May Ann Mondero
Importance of OM
In 1887, William Cooper Procter, grandson of the founder of
Procter & Gamble, told his employees. The first job we have is to
turn out quality merchandise. that consumers will buy and keep on
buying. If we produce it efficiently and economically. we will earn a
profit, in which you will share." Procter's statement-which is still as
relevant today as it was over 100 years ago-addresses three issues
that are at the core of operations management, efficiency, cost, and
quality. Efficiency (a measure of how well resources are used in
creating outputs), the cost of operations, and the quality of the
goods and services that create customer satisfaction all contribute
to profitability and ultimately the long-run success of a company. A
company cannot be successful without people who understand
how these concepts relate to each other, which is the essence of
OM, and who can apply OM principles effectively in making
decisions.
Reporter: May Ann Mondero
WHAT OPERATION MANAGERS DO?
• Forecasting: predict the future demand for raw materials, finished goods, and
services.
• Supply chain management: manage the flow of material, information, people,
and money from suppliers to customers.
• Facility layout and design: determine the best configuration of machines,
storage, offices, and departments to provide the highest levels of efficiency and
customer satisfaction.
• Technology selection: use technology to improve productivity and respond
faster to customers.
• Quality management: ensure that goods, services, and processes will meet
customer expectations and requirements.
• Purchasing: coordinate the acquisition of materials, supplies, and services.
Reporter: May Ann Mondero
WHAT OPERATIONS MANAGERS DO?
• Resource and capacity management: Ensure that the right amount of
resources (labor, equipment, materials, and Information) is available when
needed.
• Process design: Select the right equipment, information, and work methods to
produce high-quality goods and services efficiently.
• Job design: decide the best way to assign people to work tasks and job
responsibilities.
• Service encounter design: determine the best types of interactions between
service providers and customers, and how to recover from service upsets.
• Scheduling: determine when resources such as employees and equipment
should be assigned to work.
• Sustainability: Decide the best way to manage the risks associated with
products and operations to preserve resources for future generations.
Reporter: May Ann Mondero
D i f f e r e n c e b e t w e e n
G o o d s a n d S e r v i c e s
GOODS
• is a physical product that you can see, touch,
or possibly Gconsume.
DURABLE GOOD NON DURABLE GOOD
• is one that does not • is one that is no longer
quickly wear out and useful once it’s used, or
typically lasts at least lasts for less than than
three years. three years.
Reporter: May Ann Mondero
D i f f e r e n c e b e t w e e n
G o o d s a n d S e r v i c e s
SERVICES
• is any primary or complementary activity does not
directly produce a physical product.
Reporter: May Ann Mondero
GOODS AND SERVICES
1. Goods are tangible, whereas Service are intangible.
2. Customers participate in many service process,
activities, and transaction.
3. The demand for services is more difficult to predict
than demand for goods.
4. Services cannot be stored as physical inventory.
5. Services management skills are paramount to a
successful service encounter.
6. Services facilities typically need to be in close
proximity to customers.
7. Patents do not protect services.
Reporter: May Ann Mondero
How Goods and Services affect Operations Management Activities
OM Activity Goods Services
Forecasting Forecast involve longer-term Forecast horizons generally are
time horizons. Goods producing shortr, and forecasts are more
firms can use physical inventory variable and time-dependent.
as a buffer to mitigate forecast Forecasting mast often be done
errors. Forecasts can on a daily or hourly basis, or
aggregated over larger time sometimes even more
frames (eg, months of weeks). frequently.
Facility Goods-producing facilities ca be Service facilities must be
Location located close to raw materials located close to
,suppliers, labor, or customers/markets for
customer/markets. convenience and speed of
services.
Facility Factories and warehouses can The facility must be designed
Layout and be designed for efficiency for good customer interacton
Design because few, if any, customers and movement through the
are present facility and its processes.
Reporter: May Ann Mondero
How Goods and Services affect Operations Management Activities
OM Activity Goods Services
Technology Goods-producing facility use Services facility tent to rely more
various types of automation to on information-based hardware
produce, package, and ship and software.
physical goods.
Quality Goods-producing firms can Quality measurements must
define clear, physical,and account for customers
measurable quality standards perception of service quality and
and capture measurements often must be gathered through
using various physical devices. surveys or personal contact.
Inventory/ Good-producing firms use Service capacity such as
Capacity physical inventory such as raw equipment or employees is the
material and finished goods as substitute for physical inventory.
a buffer for fluctuations in
demand.
Reporter: May Ann Mondero
How Goods and Services affect Operations Management Activities
OM Activity Goods Services
Process Because customers have no Customers usually participate
Design participation or involvement in extensively in service creation
goods-producing processes, and delivery (sometimes called
the processes can be more coproduction),requiring more
mechanistic and controllable flexibility and adaptation to
special circumstances.
Job/Service Goods producing employees Services employees need more
Encounter require strong technical and behavioral and service
Design production skills. management skills.
Scheduling Scheduling revolves around the Scheduling focuses on when to
movement and location of assign employees and equipment
materials, parts, and (i.e,. service capacity) to
subassemblies and when to accomplish the work most
assign resources (i.e,.
employees, equipment) to efficiently without the benefit of
accomplish the work most physical inventory
efficiently .
Reporter: May Ann Mondero
How Goods and Services affect Operations Management Activities
OM Activity Goods Services
Supply Chain Goods-producing firms Service-providing firms
Mnagement focus mainly on the focus mainly on the flow of
physical flow of goods, peolpe, information, and
often in a global network, services, often in a global
with the goal of maximizing network, with the goal of
customer satisfaction and maximizing customer
profit, and minimizing satisfaction and profit, and
delivery time, costs, and minimizing delivery time,
environmental impact. costs, and environmental
impact.
Reporter: May Ann Mondero
The Concept of Value
Value
• is the perception of the benefits associated with a good, service or
bundle of goods and services 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. One of the simplest
functional forms of value is:
Reporter: Pauline dela Cruz
The Concept of Value
The focus on value has forced many traditional goods-
producing companies to add services and, increasingly digital
content to complement their physical goods. A goods-producing
company can no longer be viewed as simple a factory that churns
out physical goods, because customer perceptions of goods are
influenced highly by such facilitating services as financing and
leasing shipping and installation, maintenance and repair, and
technical support and consulting. Today we see digital content such
as apps, streaming videos, and social networks becoming vital to
create customer value. Coordinating the operational capability to
design and deliver an integrated package of physical and digital
goods and services is the essence of operations management.
Reporter: Pauline dela Cruz
The Concept of Value
To increase value, an organization must
• increase perceived benefits while holding price or cost constant;
• increase perceived benefits while reducing price or cost; or
• decrease price or cost while holding perceived benefits constant.
Reporter: Pauline dela Cruz
Customer Benefit Packages
• A customer benefit package (CBP) is a clearly defined set of
tangible (good content) and intangible (service-content) features
that the customer wagnizes, pays for, uses, or experiences.
• The CBP is a way to conceptualize and visualize goods and
services by thinking broadly about how goods and services are
bundled and configured together.
Reporter: Pauline dela Cruz
A CBP Example for Purchasing a Vehicle
Fishing Variant
Peripheral Free
Pond
Wash
goods Anytime
Free
Credit High Speed
Internet
Reports Primary Good
Vehicle
Free
Replacement
Gourmet
Parts
Coffee & Tea
Financing
And Peripheral
Leasing
services
Reporter: Pauline dela Cruz
Examples of Goods and Service Content
Reporter: Pauline dela Cruz
Difference between value chains
and supply chains
Value chain Supply chain
• is a network of facilities • is the portion of the value
and processes that chain that focuses primarily
describes the flow of on the physical movement
materials, finished goods, of goods and materials,
services, information, and and supporting flows of
financial transactions from information and financial
suppliers, through the transactions through the
facilities and processes supply production, and
that create goods and distribution processes.
services, and those that
deliver them to the
customer.
Reporter: Pauline dela Cruz
Processes
A process is a sequence of activities that is
intended to create a certain result, such as a
physical good, a service, or information. A
practical definition, according to AT&T, is that a
process is how work creates value for
customers." Processes are the means by
which goods and services are produced and
delivered.
Reporter: Pauline dela Cruz
Processes
Key processes in business typically include:
1. Core processes
2. Support processes
3. General management processes
Reporter: Pauline dela Cruz
1-7
Value Chain Frameworks
Value Chains: An Input-Output Framework
Value Chains: An Input-Output Framework
• A value chain can depicted as a “cradle-to-grave” input-output model of
the operations function.
• The value chain begins with suppliers who provide inputs to a goods- or
service-providing process or network of processes.
• The inputs they provide might be physical goods.
• Inputs are transformed into value-added goods and services through
processes that are supported by such resources as equipment and
facilities, labor, money, and information.
• Value Chain processes include 3 types: Core Processes, Support
Processes, and General Management Processes.
• The value chain outputs---goods and services---are delivered or
provided to customers and targeted market strategies.
Examples of Goods and Service-Providing Value Chains
Value Chains: Pre- and Postproduction
Services Framework
Value Chains: Pre- and Postproduction
Services Framework
• Pre- and postproduction services complete the
ownership cycle for the good or service.
• The preproduction focus is on “gaining a
customer.”
• The postproduction focus is on “keeping the
customer.”
• This view of the value chain emphasizes the
notion that service is a critical component of
traditional manufacturing processes.
The Value Chain at Amazon
Value Chains: Hierarchical Supply Chain
Framework
Value Chains: Hierarchical Supply Chain
Framework
• Supply chains are the foundation of most value
chains.
• The basic purpose of a supply chain is to
coordinate the flow of materials, services, and
information among the elements of the supply
chain to maximize customer value.
• A goods-producing supply chain generally
consists of suppliers, manufacturers,
distributors, retailers, and customers arranged in
a hierarchical structure. (Exhibit 1.9)
Value Chains: Hierarchical Supply Chain
Framework
• Distribution centers (DCs) are warehouses
that act as intermediaries between factories and
customers, shipping directly to customers or to
retail stores where products are made available
to customers.
• Inventory refers to raw materials, work-in-
process, or finished goods that are maintained
to support production or satisfy customer
demand.
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OM: A History of Change
and Challenge
Seven Major Eras of OM
A Focus on
Efficiency
During the Industrial Revolution, many
Inventions came into being that allowed goods to
be manufactured with greater case and speed and
led to the development of modern factories. In the
1940s, Toyota developed new ways of creating
manufacturing efficiencies. The development of
computers and other forms of technology during
the last 50 years has revolutionized operations.
The Quality
Revolution
After World War II, Japanese companies embarked
on a massive effort to train the workforce, using statistical tools
developed at Western Electric and other innovative management
tools to identify causes of quality problems and fix them. By the
mid-1970s, the world discovered that Japanese goods had fewer
defects, were more reliable, and better met consumer needs than
American goods. As a result, Japanese firms captured major
shares of world markets in many different industries such as
automobiles and electronics. Thereafter, quality became an
obsession with top managers of nearly every major company and
continues to be so today. In 1987, the U.S. government
established the Malcolm Baldrige Award to focus national
attention on quality.
Customization and Design
As the goals of low cost and high product
quality became "givens," companies began to emphasize
innovative designs and product features to gain a competitive
edge. Inflexible mass-production methods that produced high
volumes of standardized goods and services using unskilled or
semiskilled workers and expensive, single-purpose equipment,
though very efficient and cost-effective, were inadequate for
the new goals of increased goods and service variety and
continual product improvement. New types of operating
systems emerged that enabled companies to manufacture
goods and services better, cheaper, and faster than their
competitors while facilitating innovation and increasing variety.
Time-Based
Competition
As information technology matured,
time became an important source of competitive
advantage. Quick response is achieved by
continually improving and reengineering processes
and fundamentally rethinking and redesigning
processes to achieve dramatic improvements in
cost, quality, speed, and service. That task includes
developing products faster than competitors,
speeding up ordering and delivering processes,
rapidly responding to changes in customers 'needs,
and improving the flow of paperwork.
The Service
Revolution
In 1955, about 50 percent of the U.S. workforce
was employed in goods-producing industries and 50 percent in
service-providing industries. Today, about four of every five
U.S. jobs are in services. In addition, estimates are that at least
50 percent of the jobs in goods-producing industries are
service- and information-related, such as human resources
management, accounting, financial, legal, advertising,
purchasing, engineering, and so on. Thus, today, about 90
percent of the jobs in the U.S. economy are in service-providing
processes. This means that if you are employed in the United
States, you will most likely work in a service- or information-
related field.
Sustainability
Sustainability refers to an
organization's ability to strategically address
current business needs and successfully develop a
long-term strategy that embraces opportunities
and manages risk for all products, systems, supply
chains, and processes to preserve resources for
future generations.
Sustainability can be viewed from three perspectives:
environmental, social, and economic.
1 2
Environmental
sustainability Social sustainability
- is an organization's commitment to - is an organization's commitment to maintaining healthy
the long-term quality of our communities and a society that improves the quality of life. Social
environment. Environmental sustainability is important because every organization must protect
sustainability is important because the health and well-being of all stakeholders and their respective
communities, treat all stakeholders fairly, and provide them with
environmental concerns are placing
essential services.
increased pressure on all goods-
producing and service-providing 3 Economic
organizations across the globe. -sustainability
is an organization's commitment to address current business needs
and economic vitality, and to have the agility and strategic
management to prepare successfully for future business, markets,
and operating environments. Economic sustainability is important
because staying in business for the long term, expanding markets,
and providing jobs are vital to national economies.
Examples of Sustainability Practices
1 Environmental
sustainability 2 Social sustainability
• Waste management • Product safety
• Energy optimization • Workforce health and safety
• Transportation optimization • Ethics and governance
• Air quality • Community
• Sustainable product design
3 Economic
•sustainability
Performance excellence
• Financial management
• Resource management
• Emergency preparedness
Data and
Analytics
Today, all organizations have access to an enormous
amount of data and information. In OM, data are used to evaluate
operations performance, quality, order accuracy, customer
satisfaction, delivery, cost, environmental compliance, and many
other areas of the business. Leveraging such data is fast becoming a
necessity in creating a competitive advantage. A new discipline has
emerged in recent years called business analytics. Business analytics
is a process of transforming data into actions through analysis and
insights in the context of organizational decision-making and
problem-solving. Business analytics is used to understand past and
current performance (descriptive analytics), predict the future by
detecting patterns and relationships in data (pre-predictive analytics),
and identify the best decisions (prescriptive analytics).
1-9
Key Challenges facing
OM
Key Challenges
• Customers
• Technology
• Workforce
• Globalization
• Sustainability
• Optimizing supply chains
Customers
Consumers demand an
increasing variety of high-quality goods
with new and improved features that are
delivered faster than ever-along with
outstanding service and support. Being
first to market means more now than ever
before, and OM plays a vital role.
Technology
Technology continues to evolve at
a rapid pace. Applications in design and
manufacturing as well as the use of
information technology in services have
provided the ability to develop innovative
products and more effectively manage and
control extremely complex operations. OM
needs to continue to leverage and exploit
technology advances such as 3-D printing and
nanotechnology.
Workforce
Today's workforce requires
new skills, continual learning, more
diversity, and better management. These
tasks often fall on the shoulders of
operations managers. Organizations will
need to become more flexible with how
and where their workforces operate in
global value chains.
Globalization
Globalization no longer means just an
opportunity for organizations to enter new markets.
We now live in an era of the "borderless
marketplace." Today, firms have to contend with a
growing number of competitors and sources of
lower-cost labor. For example, labor costs are far
cheaper outside the United States (where
manufacturing labor averages about $40 per hour);
in Asia, Mexico, and South America, labor costs
range from $3 to $10 per hour. In addition,
managing operations in countries with vastly
different cultures can be problematic.
Sustainability
Performance in global operations
and supply chains use to mean a focus on
cost, quality, and time. Today, sustainability is
a fourth major performance area. Global
sourcing managers, for example, must qualify
suppliers on at least these four performance
areas. A global supplier that is best at cost,
quality, and delivery performance but uses
child labor or pollutes community drinking
water is not going to do business with the
modern companies of today.
Optimizing supply chains
Value chains now span across many
continents. Companies today face many challenges
in designing and optimizing their supply chains.
These include determining where to best source raw
materials, components, and finished goods.
Sourcing abroad, of course, requires efficient
transportation and scheduling, and also incurs risks
related to intellectual property and supply chain
disruptions from natural disasters and other factors.
Coordinating this entire process to minimize total
costs is a continuing challenge.
Chapter 1 Presentation End
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