Introduction to Operations Management

Operations Management

Operations management is the management of processes that transform inputs into

goods and services that add value for the customer.

LEARNING OBJECTIVES

Explain the role of operations management

KEY TAKEAWAYS

Key Points

 The goal of operations management is to maximize efficiency while producing

goods and services that effectively fulfill customer needs.
 Operations is one of the three strategic functions of any organization.
 Operations decisions include decisions that are strategic in nature, meaning that
they have long-term consequences and often involve a great deal of expense and
resource commitments.

Key Terms

 strategy: A plan of action intended to accomplish a specific goal.

 tactic: A maneuver or action calculated to achieve some end.
 Operations management: Management of processes that transform inputs into
goods and services that add value for the customer.

What is Operations Management?

Operations management is the management of processes that transform inputs into

goods and services that add value for the customer.

The Goal of Operations Management

The goal of operations management is to maximize efficiency while producing goods

and services that effectively fulfill customer needs.

Countless operating decisions must be made that have both long- and short-term
impacts on the organization’s ability to produce goods and services that provide added
value to customers. If the organization has made mostly good operating decisions in
designing and executing its transformation system to meet the needs of customers, its
prospects for long-term survival are greatly enhanced.

For example, if an organization makes furniture, some of the operations management

decisions involve the following:

 purchasing wood and fabric,

 hiring and training workers,
 location and layout of the furniture factory,
 purchase cutting tools and other fabrication equipment.

If the organization makes good operations decisions, it will be able to produce

affordable, functional, and attractive furniture that customers will purchase at a price
that will earn profits for the company.

The Role of Operations Management in the Organization

Operations is one of the three strategic functions of any organization. This means that it
is a vital part of accomplishing the organization’s strategy and ensuring its long-term
survival. The other two areas of strategic importance to the organization are marketing
and finance. The operations strategy should support the overall organization strategy.
Many companies prepare a 5-year pro-forma to assist in their operation planning. The
pro forma uses information from past and current financial statements in an effort to
predict future events such as sales, and capital investments.

Strategic Versus Tactical Operations Decisions

Operations decisions include decisions that are strategic in nature, meaning that they
have long-term consequences and often involve a great deal of expense and resource
commitments.

Strategic operations decisions include the following:

 facility location decisions,

 the type of technologies that the organization will use,
 determining how labor and equipment are organized,
 how much long-term capacity the organization will provide to meet customer
demand.

Tactical operations decisions have short to medium term impact on the organization,
often involve less commitment of resources, and can be changed more easily than
strategic decisions. The following are some tactical decisions:
  workforce scheduling,
 establishing quality assurance procedures,
 contracting with vendors,
 managing inventory.

Strategic and tactical operations decisions determine how well the organization can
accomplish its goals. They also provide opportunities for the organization to achieve
unique competitive advantages that attract and keep customers.

For example, United Parcel Service (UPS), an international package delivery service,
formed a partnership with its customer, Toshiba computers. Toshiba needs to provide a
repair service to its laptop computer customers. The old approach of providing this
service was cumbersome and time-consuming:

1. UPS picked up the customer computers.

2. UPS delivered the computers to Toshiba.
3. Toshiba repaired the computers.
4. UPS picked up the repaired computers and delivered them back to the customers.

Under this traditional approach, the total time to get a laptop computer repaired was two
weeks—a long time for people to be without their laptop! Then they came up with an
innovative idea for Toshiba to provide better service to its customers.

UPS hired, trained, and certified its own employees to repair Toshiba laptop computers.
The new repair process is much more efficient:

1. UPS picks up computers from Toshiba owners.

2. UPS repairs the computers.
3. UPS delivers the computers back to their owners.

The total time to get a computer repaired is now about two days.

Most Toshiba customers think that Toshiba is doing a great job of repairing their
computers, when in fact Toshiba never touches the computers! The result of this
operations innovation is better service to Toshiba customers and a strong and profitable
strategic partnership between UPS and its customer, Toshiba.
Operations Management: Blueprint for a commercial operations management solution.

A Study of Process

Operations management transforms inputs (labor, capital) into outputs (goods and
services) that provide added value to customers.

LEARNING OBJECTIVES

Analyze the importance of operations management in protecting an organization’s competitive

advantage

KEY TAKEAWAYS

Key Points

 Operations management transforms inputs (labor, capital, equipment, land,

buildings, materials, and information) into outputs ( goods and services ) that
provide added value to customers.
 All organizations must strive to maximize the quality of their transformation
processes to meet customer needs.
 Controlling the transformation process makes it difficult for competitors to
manufacture products of the same quality as the original producer.

Key Terms

 output: Production; quantity produced, created, or completed.

 input: Something fed into a process with the intention of it shaping or affecting the
outputs of that process.
  process: A series of events to produce a result, especially as contrasted to
product.

Operations Management and the Transformation Process

Operations management transforms inputs (labor, capital, equipment, land, buildings,

materials and information) into outputs (goods and services) that provide added value to
customers.

Figure 1 summarizes the transformation process. The arrow labeled “Transformation

System” is the critical element in the model that will determine how well the organization
produces goods and services that meet customer needs. It does not matter whether the
organization is a for-profit company, a non-profit organization (religious organizations,
hospitals, etc.), or a government agency; all organizations must strive to maximize the
quality of their transformation processes to meet customer needs.

Example: Strategic Importance of Operations Management

The 3M Company is a good example of the strategic importance of transforming inputs

into outputs that provide competitive advantage in the marketplace.

3M manufactures a top-quality adhesive tape called “Magic Tape”. Magic Tape is used
for everyday taping applications, but it offers attractive features that most other tapes do
not, including:

 Smooth removal from the tape roll

 An adhesive that is sticky enough to hold items in place (but not too sticky that it
can not be removed and readjusted if necessary! )
 A non-reflective surface

For several decades, 3M has enjoyed a substantial profit margin on its Magic Tape
product because 3M engineers make the manufacturing equipment and design the
manufacturing processes that produce Magic Tape. In other words, 3M enjoys a
commanding competitive advantage by controlling the transformation processes that
turn raw material inputs into the high value-added Magic Tape product.

Controlling the transformation process makes it extremely difficult for competitors to

produce tape of the same quality as Magic Tape, allowing 3M to reap significant profits
from this superior product.

An opposite example of the strategic implications of the input/output transformation

process is 3M’s decision in the 1980s to stop manufacturing VHS tape for video players
and recorders.
In the VHS tape market 3M had no proprietary manufacturing advantage, as there were
many Asian competitors that could produce high-quality VHS tape at lower cost. Since
3M had no proprietary control over the transformation process for VHS tape that would
allow the company to protect its profit margins for this product, it dropped VHS tape
from its offerings.

The two 3M examples of Magic Tape and VHS tape show how important the
transformation process and operations management can be to providing and protecting
an organization’s competitive advantage.

Example of a typical transformation process

Service Operations

Services operations often encounter different opportunities and challenges than tangible
goods, and thus require unique operational considerations.

LEARNING OBJECTIVES

Identify the key differences between services and other types of goods, and recognize the
operational implications of these differences
 KEY TAKEAWAYS

Key Points

 Service operations are the operational strategies and tactics which go into
delivering an intangible good to prospective consumers.
 Understanding this field of work requires an understanding of what a service
constitutes. One useful perspective in differentiating services from other goods is
the ‘5 I’s of services’ perspective.
 As services behave somewhat differently than tangible products, operations
managers must take into account different considerations when optimizing their
operational strategy.
 Improving overall quality through measuring consumer satisfaction, planning
facilities for optimal use of space, and effective scheduling are a few examples of
considerations service operators consider.

Key Terms

 Intangibility: The state of not being touchable. For example, an idea is real, but
not tangible.
 opportunity costs: The overall cost of something missed; through deciding to do
‘A’, an individual or organization incurs the opportunity cost of doing ‘B’.
 NPS surveys: Management tools that can be used to gauge the loyalty of a firm’s
customer relationships. It serves as an alternative to traditional customer
satisfaction research and claims to be correlated with revenue growth.

Service operations are simply the application of operations management to an

intangible good (i.e. a service). To understand how service operations function, let’s first
take a look at what is considered a service.
 Services Defined

An easy way to remember what a service is (compared to a

product) is through using the ‘5 I’s of Services’:

1. Intangibility – Services cannot be touched, shipped,

handled, or looked at. They are an occurrence, not a
tangible good.
2. Inventory – Services cannot be stored for later use.
They occur, or they do not occur.
3. Inseparability – Services cannot be pulled into different
parts or separated (as many tangible goods can be—
which makes operations management quite different for
products).
4. Inconsistency – Services tend to be unique. A teacher
may teach you a topic, and another teacher may teach
you the same topic in another course. Each teacher will
deliver this topic somewhat differently. This is a good
example of service inconsistency.
5. Involvement – Consumers are often directly involved in
the service delivery. A therapist is a good example of
Service-Goods this. The consumer is the center of the service, and thus
Continuum: This simple each instance of the service is unique based on the
line graph individual involved.
shows industries that are
nearly 100% service- Managing Service Operations
related at the top and
industries that are nearly This definition offers a great deal of insight when applied to
100% product-related at the concept of operational management. Without a tangible
the bottom. It is an
good to ship, handle and produce, operational managers are
illustration of how the
instead focused on the execution of an activity to fill a
consumer need. This management of an instance is rather
service-product continuum
different than the management of a product.
is more of a spectrum than
a black and white rule.
Managing operations is just as critical on the service side as it is on the product side.
While there are countless considerations to be made, many of which are unique to
specific organizations or industries, these core operational decisions are strong
indications of the mentality service management specialists consider:

Location

Choosing where to open a facility, how to lay out the facility, what size is appropriate,
and overall how efficiently a given space can be used relative to the cost are key
considerations. Consider a car mechanic opening a garage. Depending upon how many
jobs she anticipates having within a given period of time, and how many employees she
expects to be able to manage simultaneously, she may want to open a facility with three
garages or five garages. It really depends on how much output she expects she can
accomplish, and how much input demand will provide.

Scheduling

Just as a product manufacturing facility will know when a product will be where, so too
do service operators need to know when a given service should start and what duration
of time is required to complete it. Maximizing output through planning properly can
minimize opportunity costs and maximize revenue, and plays an integral role in
operational management of services. Take a doctor’s office. If they simply had everyone
come in whenever they wanted, there would be times when the staff would have nothing
to do (but be obligated to be there, and be paid), and other times when there would be
too much to do and capital and customers would be lost.

Quality

As the ‘5 I’s of Services’ indicate, most services tend to be completely unique. A hair
dresser rarely gives the same haircut twice and, even if they do, it would be cut to fit a
different individual. As a result, managing for high quality output is rather complex. Each
execution is measured relative to the specific instance and that specific consumer,
making tools like NPS surveys and other measures of individual satisfaction highly
useful in optimizing. Following these ratings, operational specialists must consider the
comments received and work to find a way to integrate this feedback into future
services.

Quality Management

Philosophies

Quality management adopts a number of management principles that can be used to

guide organizations towards improved performance.

LEARNING OBJECTIVES

Recognize how top management can improve quality performance

KEY TAKEAWAYS

Key Points

 There are eight primary quality management principles.

  The principles are the basis of the ISO 9001:2008 quality management system
standard.
 One of the permanent quality objectives of an organization should be the continual
improvement of its overall performance.

Key Terms

 value: The degree of importance you give to something.

 ISO 9001:2008: The ISO 9000 family of standards are related to quality
management systems and designed to help organizations ensure that they meet
the needs of customers and other stakeholders while meeting statutory and
regulatory requirements related to the product.
 Quality Management: Process of ensuring that an organization or product is
consistent. It can be considered to have four main components: quality planning,
quality control, quality assurance, and quality improvement. Quality management
is focused not only on product/service quality, but also the means to achieve it.

The Principles of Quality Management

Quality management adopts a number of management principles that can be used by

top management to guide their organizations towards improved performance. The
principles include:

 Customer focus: Since the organizations depend on their customers, they should
understand current and future customer needs, should meet customer
requirements, and try to exceed the expectations of customers. An organization
attains customer focus when all people in the organization know both the internal
and external customers and also what customer requirements must be met to
ensure that both the internal and external customers are satisfied.
 Leadership: Leaders of an organization establish unity of purpose and direction of
it. They should go for creation and maintenance of such an internal environment,
in which people can become fully involved in achieving the organization’s quality
objective.
 Involvement of people: People at all levels of an organization are the essence of it.
Their complete involvement enables their abilities to be used for the benefit of the
organization.
 Process approach: The desired result can be achieved when activities and related
resources are managed in an organization as process.
 System approach to management: An organization’s effectiveness and efficiency
in achieving its quality objectives are contributed by identifying, understanding,
and managing all interrelated processes as a system.
 Continual improvement: One of the permanent quality objectives of an
organization should be the continual improvement of its overall performance.
  Factual approach to decision making: Effective decisions are always based on the
data analysis and information.
 Mutually beneficial supplier relationships: Since an organization and its suppliers
are interdependent, therefore, a mutually beneficial relationship between them
increases the ability of both to add value.

These eight principles form the basis for the quality management system standard ISO
9001:2008.

TQM

Total quality management (TQM) is an integrative philosophy of management for

continuously improving the quality of products and processes.

LEARNING OBJECTIVES

Explain the principles of Total Quality Management (TQM)

KEY TAKEAWAYS

Key Points

 TQM functions on the premise that the quality of products and processes is the
responsibility of everyone who is involved with the creation or consumption of the
goods or services offered by an organization.
 Satisfying the customer involves making sure both internal and external customers
are happy.
 The internal suppliers are the subordinates who answer to a particular supervisor.
Satisfying them involves giving them the tools and motivation they need to do their
jobs.
 It is important to go beyond satisfaction, making the customer – and supplier – feel
important and valued, and part of the process.
 “Lean” focuses on eliminating the wasteful use of time, energy or resources, and
instead focusing activities completely on the creation of value.
 The focus of the Six Sigma management strategy is to reduce defect by
minimizing variation in processes.

Key Terms

 Total Quality Management (TQM): A strategic approach to management aimed

at embedding awareness of quality in all organizational processes.
  poka-yoke: A methodology of using low-cost techniques to error-proof production
processes.

Total Quality Management (TQM) is an integrative philosophy of management for

continuously improving the quality of products and processes.

TQM Practices Are Used in Many Industries: Here, two aviation structural mechanics are collaborating on
the wing of a F/A-18C Hornet, performing routine maintenance in the hangar bay. TQM practices ensure each
person involved with a product is responsible for its quality.

Overview

TQM functions on the premise that the quality of products and processes is the
responsibility of everyone involved in the creation or consumption of the goods or
services the organization offers. TQM capitalizes on the involvement of management,
the workforce, suppliers, and even customers in order to meet or exceed customer
expectations.

Considering the practices of TQM as discussed in six empirical studies, Cua, McKone,
and Schroeder (2001) identified nine common TQM practices:

1. Cross-functional product design;

2. Process management;
3. Supplier quality management;
4. Customer involvement;
5. Information and feedback;
6. Committed leadership;
7. Strategic planning;
8. Cross-functional training; and
9. Employee involvement.

Basic Principles of Total Quality Management

The basic principles for the Total Quality Management philosophy of doing business are
to satisfy the customer, satisfy the supplier, and continuously improve the business
processes.

Satisfy the Customer

The first, and major, TQM principle is to satisfy the customer–the person who pays for
the product or service. Customers want to get their money’s worth from a product or
service they purchase.

Satisfy the Users: If the user of the product is different than the purchaser, then both the
user and customer must be satisfied, although the person who pays gets priority.

Company Philosophy: A company that seeks to satisfy the customer by providing them
value for what they buy and the quality they expect will get more repeat business,
referral business, and reduced complaints and service expenses. Some top companies
not only provide quality products but also give extra service to make their customers
feel important and valued.

Internal Customers: Within a company, a worker provides a product or service to his or

her supervisors. If the person has any influence on the wages the worker receives, that
person can be thought of as an internal customer. A worker should have the mindset of
satisfying internal customers in order to keep his or her job and to get a raise or
promotion.
Chain of Customers:Often in a company, there is a chain of customers–each improving
a product and passing it along until it is finally sold to the external customer. Each
worker must not only seek to satisfy the immediate internal customer, but must also look
up the chain to try to satisfy the ultimate customer.

Satisfy the Supplier

A second TQM principle is to satisfy the supplier, which is the person or organization
from whom you are purchasing goods or services.

External Suppliers: A company must look to satisfy their external suppliers by providing
them with clear instructions and requirements and then paying them fairly and on time.
It is in the company’s best interest that its suppliers provide quality goods or services if
the company hopes to provide quality goods or services to its external customers.

Internal Suppliers: A supervisor must try to keep workers happy and productive by
providing good task instructions, the tools they need to do their job, and good working
conditions. The supervisor must also reward the workers with praise and good pay.

Get Better Work: The reason to do this is to get more productivity out of the workers, as
well as to keep the good workers. An effective supervisor with a good team of workers
will certainly satisfy his or her internal customers.

Empower Workers: One area of satisfying the internal suppler is by empowering the
workers. This means allowing them to make decisions on things that they can control.
This not only takes the burden off the supervisor, but it also motivates these internal
suppliers to do better work.

Continuous Improvement

The third principle of TQM is continuous improvement. You can never be satisfied with
the method used, because there always can be improvements. The competition is
always improving, so it is necessary to strive to keep ahead of the game.

Work Smarter, Not Harder: Some companies have tried to improve by making
employees work harder. This may be counterproductive, especially if the process itself
is flawed. For example, trying to increase worker output on a defective machine may
result in more defective parts. Examining the source of problems and delays and then
solving those problems is what works best. Often, the process has bottlenecks that are
the real cause of the problem. Those are what should be removed.

Worker Suggestions: Workers are often a source of continuous improvements. They

can provide suggestions on how to improve a process and eliminate waste or
unnecessary work.
Quality Methods: There are also many quality methods, such as just-in-time production,
variability reduction, and poka-yoke, that can improve processes and reduce waste.

Quality Inspections and Standards

Companies ensure the quality of products and services by adhering to ISO standards
and performing quality audits to ensure compliance.

LEARNING OBJECTIVES

Recognize the ISO’s role in ensuring quality standards

KEY TAKEAWAYS

Key Points

 The Quality Management System (QMS) standards were created by the

International Organization for Standardization (ISO) in 1987, and are reviewed
and updated every few years. These standards are used to certify the processes
and systems of an organization, but not the product or service itself.
 In 1994 three major standards were released as part of the ISO 9000:1994 series.
Major revisions were made in 2008.
 A quality audit is the systematic examination of a quality system, and is carried out
by internal or external auditors. It is a key element in ISO 9001 standards.
 Since 2008, the focus of quality audits has shifted from simply procedural
adherence to measuring the effectiveness of actual QMS’s.

Key Terms

 ISO 14000: a set of standards related to environmental management designed to

help organizations reduce the negative environmental effect of their operations,
meet legal requirements, and continually improve
 International Organization for Standardization (ISO): An international standard-
setting body composed of representatives from various national standards
organizations. Founded on February 23, 1947, the organization promulgates
worldwide proprietary, industrial, and commercial standards.
 Quality Audit: The process of systematic examination of a quality system carried
out by an internal or external quality auditor or audit team. It is an important part of
an organization’s quality management system and is a key element in the ISO
quality system standard, ISO 9001.
 Quality Management System (QMS): The organizational structure, procedures,
processes, and resources needed to implement quality management.
  ISO 9000: a set of standards related to quality management systems and
designed to help organizations ensure that they meet the needs of customers and
other stakeholders while meeting statutory and regulatory requirements related to
the product

Quality Standards

The International Organization for Standardization (ISO) created the Quality

Management System (QMS) standards in 1987. They were the ISO 9000:1987 series of
standards, comprising ISO 9001:1987, ISO 9002:1987, and ISO 9003:1987; which were
applicable in different types of industries, based on the type of activity or process
(designing, production, or service delivery).

The standards are reviewed every few years by the ISO. The version in 1994 was called
the ISO 9000:1994 series; consisting of the ISO 9001:1994, 9002:1994 and 9003:1994
versions.

A major revision occurred in 2008, and the series was called ISO 9000:2000 series. The
ISO 9002 and 9003 standards were integrated into one single certifiable standard: ISO
9001:2008. After December 2003, organizations holding ISO 9002 or 9003 standards
had to complete a transition to the new standard.

The ISO 9004:2009 document gives guidelines for performance improvement over and
above the basic standard (ISO 9001:2000). This standard provides a measurement
framework for improved quality management, similar to and based upon the
measurement framework for process assessment.

The Quality Management System standards created by ISO are meant to certify the
processes and the system of an organization, not the product or service itself. ISO 9000
standards do not certify the quality of the product or service.

In 2005 the International Organization for Standardization released a standard, ISO

22000, meant for the food industry. This standard covers the values and principles of
ISO 9000 and the HACCP standards. It gives one single integrated standard for the
food industry and is expected to become more popular in the coming years in the
industry.

ISO has also released standards for other industries. For example, Technical Standard
TS 16949 defines requirements in addition to those in ISO 9001:2008 specifically for the
automotive industry.

ISO has a number of standards that support quality management. One group describes
processes (including ISO/IEC 12207 & ISO/IEC 15288), and another describes process
assessment and improvement (ISO 15504).
Quality Audits

A quality audit is the process of systematic examination of a quality system carried out
by an internal or external quality auditor or audit team. It is an important part of
organization’s quality management system and is a key element in the ISO quality
system standard, ISO 9001.

Quality audits are typically performed at predefined time intervals and ensure that the
institution has clearly defined internal system monitoring procedures linked to effective
action. This can help determine if the organization complies with the defined quality
system processes and can involve procedural or results-based assessment criteria.

Quality Check: Quality assurance inspectors regularly perform audits.

With the upgrade of the ISO 9000 series of standards from the 1994 to 2008 series, the
focus of the audits has shifted from purely procedural adherence towards measurement
of the actual effectiveness of the Quality Management System (QMS) and the results
that have been achieved through the implementation of a QMS.
Audits are an essential management tool to be used for verifying objective evidence of
processes, to assess how successfully processes have been implemented, for judging
the effectiveness of achieving any defined target levels, to provide evidence concerning
reduction and elimination of problem areas.

For the benefit of the organisation, quality auditing should not only report non-
conformance and corrective actions, but also highlight areas of good practice. In this
way, other departments may share information and amend their working practices,
which contributes to continual improvement.

Quality audits can be an integral part of compliance or regulatory requirements. One

example is the US Food and Drug Administration, which requires quality auditing to be
performed as part of its Quality System Regulation (QSR) for medical devices (Title 21
of the US Code of Federal Regulations part 820).

Several countries have adopted quality audits in their higher education system
(including New Zealand, Australia, Sweden, Finland, Norway, and the USA). Initiated in
the UK, the process is focused primarily on procedural issues rather than on the results
or the efficiency of a quality system implementation.

Audits can also be used for safety purposes. Evans and Parker (2008) describe auditing
as one of the most powerful safety monitoring techniques and “an effective way to avoid
complacency and highlight slowly deteriorating conditions,” especially when the auditing
focuses not just on compliance but effectiveness.

The processes and tasks that a quality audit involves can be managed using a wide
variety of software and self-assessment tools. Some of these relate specifically to
quality in terms of fitness for purpose and conformance to standards, while others relate
to quality costs or (more accurately) to the cost of poor quality. In analyzing quality
costs, a cost of quality audit can be applied across any organization rather than just to
conventional production or assembly processes.

Reducing Waste and Environmental Impacts

Reducing waste by more efficient manufacturing is a key goal of management, with

supply chain sustainability seen as a key component.

LEARNING OBJECTIVES

Explain the benefits of reducing waste

KEY TAKEAWAYS

Key Points
  Waste minimization is often achieved through more efficient manufacturing
processes and the usage of better materials, but often requires some initial
investment.
 Governments often provide incentives to companies for waste minimization,
including subsidies and reduced taxes for companies that take steps to reduce
waste.
 A more sustainable supply chain is increasingly seen as leading to a more
profitable supply chain, and, thus, managers are increasingly looking for ways to
make their supply chains more sustainable.
 Collaboration is seen as a way of achieving the goal of supply chain sustainability.
 Many companies avoid collaboration due to a fear of a loss of commercial control.

Key Terms

 Supply Chain Sustainability: An essential component to delivering long-term

profitability. It has replaced monetary cost, value, and speed as the dominant topic
of discussion among purchasing and supply professionals.
 Collaboration: Working together to achieve a common goal.

Reducing Waste: The Incentives

In industrial production, using more efficient manufacturing processes and better

materials will generally reduce the production of waste. The application of waste
minimization techniques has led to the development of innovative and commercially
successful replacement products. Waste minimization has proven benefits to industry
and the wider environment.

Waste minimization often requires investment, which is, at least in theory, usually
compensated by the savings. However, waste reduction in one part of the production
process may create waste production in another part.

There are government incentives for waste minimization, which focus on the
environmental benefits of adopting waste minimization strategies.

In the United Kingdom, several pilot schemes, such as The Catalyst Project and the
Dee Waste Minimisation Project, have shown the efficacy of such policies. Fourteen
companies in Merseyside took part in the Catalyst Project; the project generated overall
savings of £9 million and landfill waste was reduced by 12,000 tonnes per year. ).
Colorful recycling containers: By producing using materials that are recyclable, landfill waste can be
minimized.

Supply Chain Sustainability

Supply chain sustainability is a business issue affecting an organization’s supply chain

or logistics network in terms of environmental, risk, and waste costs.

Sustainability in the supply chain is increasingly seen among high-level executives as

essential to delivering long-term profitability and has replaced monetary cost, value, and
speed as the dominant topic of discussion among purchasing and supply professionals.

One of the key requirements of successful sustainable supply chains is collaboration.

The practice of collaboration, such as sharing distribution to reduce waste by ensuring
that half-empty vehicles do not get sent out and that deliveries to the same address are
on the same truck, is not widespread because many companies fear a loss of
commercial control by working with others.

Investment in alternative modes of transportation, such as use of canals and airships,

can play an important role in helping companies reduce the cost and environmental
impact of their deliveries.

Sustainability has been found to be a major component of supplier relationship

management as an efficient way to cut costs among retailer giants such as Wal-Mart. In
fact, under Wal-Mart’s Supplier Energy Efficiency Project (SEEP), which is aimed at
eliminating emissions from the company’s supply chain, suppliers reduced GHG
emissions by 3,300 metric tons and saved $200,000 in energy costs.

Realizing the efficiency that effective supplier relationship management creates, Wal-
Mart has asked suppliers to be more efficient in managing their environmental footprint.

Looking to the supply chain to maximize efficiency and cut costs is a key cost-cutting
measure; using the same suppliers in a tight-knit relationship saves time and energy. As
industry leaders continue to add in cost-cutting measures, we are likely to see this trend
continue in supply chain sustainability for sustained improvement in relationship building
and cost reduction.

Productivity

Impacts of Productivity on Output

Productivity, or the efficiency of production, is important because it can drive increases

in output and improvements in living standards.

LEARNING OBJECTIVES

Develop a model to measure productivity

KEY TAKEAWAYS

Key Points

 Productivity is generally measured as the ratio of the total output to total input.
 In an economy, higher productivity leads to higher real income, the ability to enjoy
more leisure time, and better social services, such as health and education–all
leading to higher living standards.
 Surplus value refers to the difference between returns and costs. The higher is
surplus value; the more productive is the process.
 Small differences in productivity between countries can compound, leading to
large differences in prosperity in the long run.

Key Terms

 Surplus value: The part of the new value made by production that is taken by
enterprises as generic gross profit.
 productivity: The state of being productive, fertile, or efficient; the rate at which
goods or services are produced by a standard population of workers.
Defining Productivity

Productivity is a measure of the efficiency of production. Productivity is a ratio of

production output to what is required to produce it (inputs). The measure of productivity
is defined as a total output per one unit of a total input.

Productivity: Productivity is a measure of the efficiency of production.

In order to obtain a measurable form of productivity, operationalization of the concept is

necessary. In explaining and operationalizing, a set of production models are used. A
production model is a numerical expression of the production process that is based on
production data (i.e., measured data in the form of prices and quantities of inputs and
outputs0.

Production Income Model

There are no criteria that might be universally applicable to success. Nevertheless,

there is one criterion by which we can generalize the rate of success in production. This
criterion is the ability to produce surplus value.

As a criterion of profitability, surplus value refers to the difference between returns and
costs, taking into consideration the costs of equity in addition to the costs included in the
profit and loss statement as usual. Surplus value indicates that the output has more
value than the sacrifice made for it; in other words, the output value is higher than the
value (production costs) of the used inputs. If the surplus value is positive, the owner’s
profit expectation has been surpassed.

Impact on Output
When there is productivity growth, even the existing commitment of resources
generates more output and income. Income generated per unit of input increases.
Additional resources are also attracted into production and can be profitably employed.

At the national level, productivity growth raises living standards because more real
income improves people’s ability to purchase goods and services (whether they are
necessities or luxuries), enjoy leisure, improve housing and education and contribute to
social and environmental programs.

Over long periods of time, small differences in rates of productivity growth compound,
such as interest in a bank account, and can make an enormous difference to a society’s
prosperity. Nothing contributes more to the reduction of poverty, increases in leisure,
and to the country’s ability to finance education, public health, environment, and the
arts.

Productivity Gains from Software

New ways of developing and using software have led to higher efficiency and
productivity through greater interaction between users.

LEARNING OBJECTIVES

Explain how collaborative software increases productivity

KEY TAKEAWAYS

Key Points

 Collaborative software, or groupware, puts computers in the center of

communications between groups of workers, managers, and technicians. This
way of working has produced major gains in productivity since it was first
introduced.
 Examples of collaborative software include document sharing, shared calendars,
instant messaging, and web conferencing.
 In agile software development, solutions arise through collaboration between self-
organizing, cross-functional teams. It involves adaptive planning and flexbile
responses: tasks are broken into small increments with minimal longer-term
planning, and responses evolve to problems as they arise.
 The values espoused in the Agile Manifesto focus on people and functionality,
rather than rigidity, documentation, and planning. It is thought that better, more
useful software can be developed with these values.

Key Terms
  Collaborative software: Computer software designed to help people involved in a
common task achieve goals.
 Agile software development: A group of software development methods based
on iterative and incremental development, where requirements and solutions
evolve through collaboration between self-organizing, cross-functional teams. The
basic idea behind the agile method is to develop a system through repeated
cycles (iterative) and in smaller portions at a time (incremental), allowing software
developers to take advantage of what was learned during development of earlier
parts or versions of the system.

Collaborative Software

Collaborative software was originally designated as groupware and this term can be
traced as far back as the late 1980s, when Richman and Slovak said, “Like an
electronic sinew that binds teams together, the new groupware aims to place the
computer squarely in the middle of communications among managers, technicians, and
anyone else who interacts in groups, revolutionizing the way they work. ”

Collaborative software has produced major gains in productivity. The definition of an

office has dramatically changed as an individual is able to work efficiently as a member
of a group wherever there is a computer (or an iPad, or iPhone, or Blackberry).

Software: Collaborative software has produced major gains in productivity.

Examples of the major gains include:

 Document sharing (including group editing)

 Group calendars
 Instant messaging
  Web conferencing

Agile Software Development

Agile software development is a group of software development methods based on

iterative and incremental development, where requirements and solutions evolve
through collaboration between self-organizing, cross-functional teams.

It promotes adaptive planning, evolutionary development and delivery, a time-boxed

iterative approach, and encourages rapid and flexible response to change. It is a
conceptual framework that promotes foreseen interactions throughout the development
cycle.

Agile methods break tasks into small increments with minimal planning and do not
directly involve long-term planning.

Iterations are short time frames (timeboxes) that typically last from one to four weeks.
Each iteration involves a team working through a full software development cycle when
a working product is demonstrated to stakeholders. The development cycle includes:

 Planning
 Requirements analysis
 Design
 Coding
 Unit testing
 Acceptance testing

This approach minimizes overall risk and allows the project to adapt to changes quickly.
Stakeholders produce documentation as required.

An iteration might not add enough functionality to warrant a market release, but the goal
is to have an available release (with minimal bugs) at the end of each iteration. Multiple
iterations might be required to release a product or new features.

According to the Agile Manifesto:

Through this work we have come to value: individuals and interactions over
processes
and tools; working software over comprehensive documentation; customer collaboration
over contract negotiation; responding to change over following a plan. That is, while
there is value in the items on the
right
, we value the items on the left more.
Productivity Gains from Hardware

Productivity improving technologies lower traditional factors of production of land, labor

capital, materials, and energy.

LEARNING OBJECTIVES

Outline the progression of productivity improving technologies in the 20th century

KEY TAKEAWAYS

Key Points

 Productivity gains were not just the result of inventions, but also of continuous
improvements to those inventions which greatly increased output in relation to
both capital and labor compared to the original inventions.
 The technology of building mills and mechanical clocks was important to the
development of the machines of the Industrial Revolution.
 Machine tools–which cut, grind, and shape metal parts–were another important
mechanical innovation of the Industrial Revolution.
 The evolution of hardware has allowed computing to become widespread due to
its low cost and effectiveness. Microchips are now used in everything from
greeting cards to missile defense systems.

Key Terms

 cloud: Regarded as an amorphous omnipresent space for processing and storage

on the Internet; the focus of cloud computing.
 Industrial Revolution: The major technological, socioeconomic, and cultural
change in the late 18th and early 19th century, resulting from the replacement of
an economy based on manual labor to one dominated by industry and machine
manufacture.

Productivity Improving Technologies

Productivity improving technologies are technologies that lower the traditional factors of
production of land, labor capital, materials, and energy that go into production of
economic output. Increases in productivity are responsible for increases in per capita
living standards. Since the beginning of the Industrial Revolution, some major
contributors to productivity have been:

1. The spinning jenny and spinning mule greatly increased the productivity of thread
manufacturing compared to the spinning wheel.
 2. Replacing human and animal power with water power, wind power, steam,
electricity, and internal combustion greatly increased the use of energy.
3. Energy efficiency in the conversion of energy to useful work.
4. Infrastructures: canals, railroads, highways, and pipelines.
5. Mechanization of both production machinery and agricultural machines.
6. Work practices and processes: the American system of manufacturing, Taylorism
or scientific management, mass production, assembly line, modern business
enterprise.
7. Materials handling: bulk materials, palletization, and containerization.
8. Scientific agriculture: fertilizers and the green revolution, livestock and poultry
management.
9. New materials, new processes for production and dematerialization.
10. Communications: telegraph, telephone, radio, satellites, fiber optic network, and
the Internet.
11. Home economics: public water supply, household gas, appliances.
12. Automation and process control.
13. Computers and software, data processing.

Productivity gains were not just the result of inventions, but also of continuous
improvements to those inventions which greatly increased output in relation to both
capital and labor compared to the original inventions. Productivity also arises from
developing economies of scale, despite that not actually being a technology in its own
right.

Industrial Machinery

The most important mechanical devices before the Industrial Revolution were water and
windmills. Just before the Industrial Revolution, water power was applied to bellows for
iron smelting. Wind and water power were also used in sawmills. The technology of
building mills and mechanical clocks was important to the development of the machines
of the Industrial Revolution.

The spinning wheel was a medieval invention that increased thread making productivity
by a factor greater than ten. Later in the Industrial Revolution came the flying shuttle, a
simple device that doubled the productivity of weaving. Spinning thread had been a
limiting factor in cloth making, requiring 10 spinners using the spinning wheel to supply
one weaver. With the spinning jenny, a spinner could spin eight threads at once. The
spinning mule allowed a large number of threads to be spun by a single machine using
water power. A change in consumer preference for cotton at the time of increased cloth
production resulted in the invention of the cotton gin. Steam power eventually was used
as a supplement to water during the Industrial Revolution, and both were used until
electrification.

Machine Tools

Machine tools, which cut, grind, and shape metal parts, were another important
mechanical innovation of the Industrial Revolution. Before machine tools, it was
prohibitively expensive to make precision parts, an essential requirement for many
machines and interchangeable parts. Perhaps the best early example of a productivity
increase by machine tools and special purpose machines is the Portsmouth Block Mills.
With these machines, 10 men could produce as many blocks as 110 skilled craftsmen.

Historically important machine tools are the screw-cutting lathe, milling machine, and
metal planer (metalworking), which all came into use between 1800 and 1840.
However, around 1900, it was the combination of small electric motors, specialty steels,
and new cutting and grinding materials that allowed machine tools to mass produce
steel parts.

Productivity Gains From Computer Hardware

Computer hardware is the collection of physical elements that comprise a computer

system. Computer hardware refers to the physical parts or components of computer
(objects you can touch), such as a:

 Monitor;
 Keyboard;
 Printer;
 Chip;
 Hard disk; and
 Mouse.

The history of computing hardware is the record of the ongoing effort to make hardware
faster, cheaper, and capable of storing more data.

The Rapid Increase in Productivity

Early electric data processing was done by running punched cards through tabulating
machines, the holes in the cards allowing electrical contact to incremental electronic
counters. Tabulating machines were in a category called “unit record equipment,”
through which the flow of punched cards was arranged in a program-like sequence to
allow sophisticated data processing. They were widely used before the introduction of
computers.
The first digital computers were more productive than tabulating machines, but not by a
great amount. Early computers used thousands of vacuum tubes (thermionic valves),
which used a lot of electricity and constantly needed replacing. By the 1950s, the
vacuum tubes were replaced by transistors which were much more reliable and used
relatively little electricity. By the 1960s, thousands of transistors and other electronic
components were being manufactured on silicon semiconductor wafers as integrated
circuits, which are universally used in today’s computers.

In 1973, IBM introduced point of sale (POS) terminals in which electronic cash registers
were networked to the store’s mainframe computer. By the 1980s, bar code readers
were added. These technologies automated inventory management. The Bureau of
Labor Statistics estimated that bar code scanners at checkout increased ringing speed
by 30% and reduced the labor requirements of cashiers and baggers by 10-15%.

Computers did not revolutionize manufacturing because automation, in the form of

control systems, had already been in existence for decades. Although they did allow
more sophisticated control, which led to improved product quality and process
optimization. Today’s servers and mainframes are capable of processing enormous
amounts of data. Moreover, this type of processing power has become much easier to
obtain through cloud computing services.
Intel CPU: Hardware advancements, such as the CPU, greatly increased productivity for many areas of
society.

Productivity Technology: The introduction of the spinning mule into cotton production processes helped to
drastically increase industry consumption of cotton. This example is the only one in existence made by the
inventor Samuel Crompton. It can be found in the collection of Bolton Museum and Archive Service.

Controlling the Supply Chain

Purchasing

Purchasing is the formal process of buying goods and services.

LEARNING OBJECTIVES

Explain the purchasing process

KEY TAKEAWAYS

Key Points

 Purchasing directors and procurement directors guide and define the

organization’s acquisition procedures and standards.
  Most organizations use a three-way check as the foundation of their purchasing
programs. This involves three departments in the organization completing
separate parts of the acquisition process.
 The purchasing process usually starts with a demand for a physical part
(inventory) or a service. A requisition detailing the requirements is generated (and
in some cases provides a requirements speciation) and passed to the
procurement department.
 Purchase orders can be of various types: standard, one-time buy, planned
(agreement with a specific item at an approximate date), and blanket (an
agreement with non-specific date, quantity, and amount).
 Purchase orders are normally accompanied by terms and conditions, which form
the contractual agreement of the transaction.

Key Terms

 Purchasing: Purchasing refers to a business or organization attempting to

acquiring goods or services to accomplish the goals of its enterprise.

Purchasing is the formal process of buying goods and services. Purchasing

managers /directors, and procurement managers/directors, guide the organization’s
acquisition procedures and standards. The purchasing process can vary from one
organization to another but usually involves certain key elements.

Most organizations use a three-way check as the foundation of their purchasing

programs. This involves three departments in the organization, each of which completes
a different part of the acquisition process. The three departments do not report to the
same senior manager, which prevents unethical practices and lends credibility to the
process. These departments may be designated as any of the following: purchasing,
receiving, accounts payable or engineering, purchasing and accounts payable, or plant
management. Combinations vary significantly, but a purchasing department and
accounts payable are usually two of the three departments involved.

The purchasing process typically starts with a demand or specific requirements for a
physical part (inventory) or a service. A requisition detailing the requirements is
generated (and in some cases provides a requirements speciation) and passed to the
procurement department. A Request for Proposal (RFP) or Request for Quotation
(RFQ) is then produced. Suppliers respond to the RFQ with quotes, and a review is
undertaken in order to determine the best offer (a judgment based on price, availability,
and quality) and issue the purchase order.

Purchase orders (POs) can be of various types:

 Standard: a one time buy

 Planned: an agreement on a specific item at an approximate date
  Blanket: an agreement on specific terms and conditions (date and quantity and
amount are not specified)

POs are normally accompanied by terms and conditions, which represent the
contractual agreement of the transaction. The supplier delivers the product and/or
service and the customer records the delivery (in some cases, the delivery is
accompanied by a goods inspection process). The supplier then issues an invoice that
is cross-checked with the purchase order and the record of the product and/or service
received. Finally, payment is made.

Successful supply chain management requires an effective shift from the management
of individual functions to the integration of activities, such as purchasing, into key supply
chain processes. For instance, a purchasing department will place orders as
requirements become known.

Acquisition Process: Model of the acquisition process for major systems in industry and defense: The
process is defined by a series of phases, during which technology is defined and matured into viable concepts,
which are subsequently developed and prepared for production.

Inventory Management

Inventory management is primarily concerned with specifying the shape and percentage
of stocked goods to reduce costs and improve sales.

LEARNING OBJECTIVES

Recognize the applications and benefits of inventory management

KEY TAKEAWAYS
Key Points

 Inventory refers to a list compiled for some formal purpose, such as the details of
an estate or the contents of a rented house.
 Inventory management is required at different locations within a facility or within
many locations of a supply network in order to plan for the production and stock of
materials.
 Inventory management addresses issues including: replenishment lead time;
carrying costs of inventory; asset management; inventory forecasting; inventory
valuation; inventory visibility; and future inventory price forecasting.
 Supply chain activities can be grouped into strategic, tactical, and operational
categories.
 Supply chain activities can be grouped into strategic, tactical, and operational
levels.

Key Terms

 supply chain: A supply chain is a system of organizations, people, technology,

activities, information and resources involved in moving a product or service from
supplier to customer.
 tactical planning: an organization’s process of determining how to optimize
current resources and operations

In the United Kingdom, inventory typically refers to a list compiled for some formal
purpose, such as one that itemizes an estate going to probate or the contents of a
furnished house to be rented. In the U.S. and Canada, inventory has become the
equivalent of the British term stock; that is, it refers to material that is available from and
stocked by a business. In the context of accounting, inventory or stock is considered an
asset.

Inventory Management

Inventory management tracks the shape and percentage of stocked goods. At different
locations within a facility, or within many locations of a supply network, inventory
management must precede the regular and planned course of production and stocking
of materials.
Inventory Management: Inventory management is primarily concerned with specifying the shape and
percentage of stocked goods.

Inventory management addresses a number of concerns, including: replenishment lead

time; carrying costs of inventory; asset management; inventory forecasting; inventory
valuation; inventory visibility; future inventory price forecasting; physical inventory;
available physical space for inventory; quality management; replenishment; returns and
defective goods; and demand forecasting. By effectively managing these issues, a
business can achieve optimal inventory levels. However, the management process is
on-going as a business and its needs shift and respond to the wider environment.

Inventory management often involves a retailer seeking to acquire and maintain a

proper merchandise assortment while ordering, shipping, handling, and related costs
are kept in check. It requires systems and processes that identify inventory
requirements, set targets, provide replenishment techniques, report actual and
projected inventory status, and handle all functions related to the tracking and
management of material. These include the monitoring of material moved into and out
of stockroom locations, as well as the reconciling of inventory balances. Processes may
also include ABC analysis, lot tracking, and cycle counting support.

Management of inventories, aimed primarily at determining and controlling stock levels

within the physical distribution system, serves to balance the need for product
availability against the need for minimizing stock holding and handling costs. Reasons
for keeping an inventory include:

 Time: The time lag in the supply chain from supplier to user requires the
availability of a certain amount of inventory for use during this lead time. In
 practice, inventory is maintained for consumption during variations in lead time,
and lead time itself can be addressed by ordering a specified number of days in
advance.
 Uncertainty: Inventories are maintained as buffers to meet uncertainties in
demand, supply, and movement of goods.
 Economies of scale: To deliver one unit of product at a time, and in response to
the specific need and location of a given user, would be costly and logistically
difficult. In contrast, bulk buying, movement, and storage translate into economies
of scale and inventory.

Inventory and the Supply Chain

Supply chain activities can be grouped into strategic, tactical, and operational levels.
Inventory considerations present at each level include:

Strategic: Network optimization, including the number, location, and size of

warehousing, distribution centers, and facilities.

Tactical: Inventory decisions, including quantity, location, and quality of inventory.

Operational: Sourcing planning, including current inventory and forecast demand, done
in collaboration with all suppliers; inbound operations, including transportation from
suppliers and receiving inventory; outbound operations, including all fulfillment activities,
warehousing, and transportation to customers; management of non-moving, short-dated
inventory and avoidance of short-dated products.

Scheduling

The purpose of scheduling is to minimize production time and costs.

LEARNING OBJECTIVES

Explain the benefits of using modern scheduling tools

KEY TAKEAWAYS

Key Points

 Production scheduling aims to maximize the efficiency of operations and reduce

costs.
 Benefits of production scheduling include process change-over reduction;
inventory reduction; leveling; reduced scheduling effort; increased production
 efficiency; labor load leveling; accurate delivery date quotes; and real time
information.
 Minute-by-minute production scheduling for each manufacturing facility in the
supply chain occurs at the operational level of supply chain activities.
 Benefits of production scheduling include process change-over reduction,
inventory reduction, leveling, reduced scheduling effort, increased production
efficiency, labor load leveling, accurate delivery date quotes and real time
information.
 Production scheduling for each manufacturing facility in the supply chain (minute
by minute) takes place at the operational level of supply chain activities.

Key Terms

 Backward scheduling: Backward scheduling is planning the tasks from the due
date or required-by date to determine the start date and/or any changes in
capacity required.
 Forward scheduling: Forward scheduling is planning the tasks from the date
resources become available to determine the shipping date or the due date.
 maturity date: the time of the final payment of a loan or other financial instrument,
at which point the principal (and all remaining interest) is due to be paid

Scheduling is an important tool in the manufacturing and engineering industries, where

it can significantly impact the productivity of a particular process. In manufacturing, the
purpose of scheduling is to minimize production time and cost by telling a production
facility when to make a product and with which staff and equipment.

Production scheduling aims to maximize the efficiency of an operation and reduce its
costs. Modern scheduling tools greatly outperform older, manual scheduling methods.
Today’s tools provide the production scheduler with powerful graphical interfaces, which
can be used to visually optimize real time work loads in various stages of production.
Further, pattern recognition software reveals scheduling opportunities that might not be
apparent without this view into the data.
Scheduling Visualization: This Gantt chart aids in scheduling by visualizing and relating phases of production.

For example, in order to reduce costs, an airline may want to minimize the number of
airport gates required for its aircraft. Scheduling software allows planners to see how
this might be done, enabling them to analyze time tables, aircraft usage, or the flow of
passengers.

Companies use backward and forward scheduling to allocate plant and machinery
resources, determine human resources and production processes, and purchase
materials. Forward scheduling involves planning tasks from the date that resources
become available in order to determine the shipping date or the due date. Backward
scheduling involves planning tasks from the due date or required-by date in order to
determine the start date and/or necessary changes in capacity.

Production scheduling has a number of benefits:

 Process change-over reduction

 Inventory reduction and leveling
 Reduced scheduling effort
 Increased production efficiency
 Labor load leveling
 Accurate delivery date quotes
 Real time information

Finally, minute-by-minute production scheduling occurs for each manufacturing facility

in the supply chain at the operational level of supply chain activities.

Routing
Routing is the process of selecting paths in a network along which to send network
traffic.

LEARNING OBJECTIVES

Explain the process of routing

KEY TAKEAWAYS

Key Points

 Routing is performed for many kinds of networks, including the telephone network
(circuit switching), electronic data networks (such as the Internet), and
transportation networks.
 A transport network, (or transportation network in American English), is typically a
network of roads, streets, pipes, aqueducts, power lines, or nearly any structure
which permits either vehicular movement or flow of some commodity.
 Transport engineers use mathematical graph theory to analyze a transport
network to determine the flow of vehicles (or people) through it.
 At the tactical level of supply chain activities, the transportation strategy of goods
must be considered. This includes frequency, routes, and contracting.

Key Terms

 routing: a method of finding paths from origins to destinations in a network such

as the Internet, along which information can be passed
 transport network: A transport network, or transportation network in American
English, is typically a network of roads, streets, pipes, aqueducts, power lines, or
nearly any structure which permits either vehicular movement or flow of
somecommodity.

Routing is the process of selecting paths in a network along which to send network
traffic. Routing is performed for many kinds of networks, including the telephone
network (circuit switching), electronic data networks (such as the internet), and
transportation networks. This chapter focuses on the role of routing in transportation
networks.

Transport Networks

A transport network, (or transportation network in American English), is typically a

network of roads, streets, pipes, aqueducts, power lines, or nearly any structure which
permits either vehicular movement or flow of some commodity. Transport engineers use
mathematical graph theory to analyze a transport network to determine the flow of
vehicles (or people) through it. A transport network may combine different modes of
transport.

Anycast Routing: A visual display of Anycast routing.

Tactical Level

At the tactical level of supply chain activities, the transportation strategy of goods must
be considered. This includes frequency, routes, and contracting of goods. A goal of a
company when transporting goods is to ensure efficiency. Wear and tear of vehicles
and the cost of gas can make some routes more expensive than others. In order to
reduce costs, companies often look for ways to streamline routes and supply chain
activities. GPS, or global positioning system, is a technological advancement that has
helped companies determine which routes are the most expensive to maintain. These
routes can be analyzed to determine if they can be eliminated, divided, and/or merged
with other routes, or if finding a new route can help make the route more efficient.
Sometimes transport is subcontracted to specialists or logistics partners.

Outsourcing

Outsourcing is the contracting of an existing business process to an external,

independent organization.

LEARNING OBJECTIVES

Analyze the effects of outsourcing on the supply chain

KEY TAKEAWAYS

Key Points

 The specialization model creates manufacturing and distribution networks

composed of multiple, individual supply chains specific to products, suppliers, and
customers who work together to design, manufacture, distribute, market, sell, and
service a product.
 Outsourcing involves not only the procurement of materials and components, but
also the outsourcing of services that traditionally have been provided in-house.
 Managing and controlling a network of partners and suppliers requires a blend of
both central and local involvement.
  Managing and controlling a network of partners and suppliers requires a blend of
both central and local involvement. Hence, strategic decisions need to be taken
centrally, with the monitoring and control of supplier performance and day-to-day
liaison with logistics partners being best managed at a local level.

Key Terms

 supply chain: A supply chain is a system of organizations, people, technology,

activities, information and resources involved in moving a product or service from
supplier to customer.

Outsourcing is the process of contracting an existing business process which an

organization previously performed internally to an independent organization, where the
process is purchased as a service.

Outsourcing: Outsourcing is the process of contracting an existing business process which an organization
previously performed internally to an independent organization, where the process is purchased as a service.

The Rise of Outsourcing

In the 1990s, industries began to focus on “core competencies,” and adopted a

specialization model. Companies abandoned vertical integration, sold off non-core
operations, and outsourced those functions to other companies. This changed
management requirements by extending the supply chain well beyond company walls
and distributing management across specialized supply chain partnerships.

This transition also re-focused the fundamental perspectives of each respective

organization. OEMs became brand owners that needed deep visibility into their supply
base. They had to control the entire supply chain from above instead of from within.
Contract manufacturers had to manage bills of material with different part numbering
schemes from multiple OEMs and support customer requests for work -in-process
visibility and vendor-managed inventory (VMI).

Outsourcing and the Supply Chain

The specialization model creates manufacturing and distribution networks composed of

multiple, individual supply chains specific to products, suppliers, and customers who
work together to design, manufacture, distribute, market, sell, and service a product.
The set of partners may change according to a given market, region, or channel,
resulting in a proliferation of trading partner environments, each with its own unique
characteristics and demands.

Outsourcing involves not only the procurement of materials and components, but also
the outsourcing of services that traditionally have been provided in-house. The logic of
this trend is that the company will increasingly focus on those activities in the value
chain where it has a distinctive advantage, and outsource everything else. This
movement has been particularly evident in logistics, where the provision of transport,
warehousing, and inventory control is increasingly subcontracted to specialists or
logistics partners. Also, managing and controlling this network of partners and suppliers
requires a blend of both central and local involvement. Hence, strategic decisions need
to be taken centrally, with the monitoring and control of supplier performance and day-
to-day liaison with logistics partners being best managed at a local level.

Logistics

Logistics plans, implements, and controls the forward and reverse flow and storage of
goods between the point of origin and consumption.

LEARNING OBJECTIVES

Differentiate between supply chain and logistics

KEY TAKEAWAYS

Key Points

 Logistics involves the integration of information, transportation, inventory,

warehousing, material handling, and packaging, and often security. Today, the
complexity of production logistics can be modeled, analyzed, visualized, and
optimized by plant simulation software but is constantly changing.
 Logistics applies to activities within one company involving distribution of the
product, whereas the term ” supply chain ” also encompasses manufacturing and
procurement and, therefore, has a much broader focus.
  Logistics as a business concept evolved in the 1950s due to the increasing
complexity of supplying businesses with materials and shipping out products in an
increasingly globalized supply chain, leading to a call for experts called “supply
chain logisticians”.
 In business, logistics may have either internal focus (inbound logistics) or external
focus (outbound logistics), covering the flow and storage of materials from point of
origin to point of consumption (see supply chain management ).
 There are two fundamentally different forms of logistics. One optimizes a steady
flow of material through a network of transport links and storage nodes, and the
other coordinates a sequence of resources to carry out some project.
 There are two fundamentally different forms of logistics: one optimizes a steady
flow of material through a network of transport links and storage nodes; the other
coordinates a sequence of resources to carry out some project.

Key Terms

 logistics: The process of planning, implementing, and controlling the efficient,

effective flow and storage of goods, services, and related information from their
point of origin to point of consumption for the purpose of satisfying customer
requirements.
 supply chain: A system of organizations, people, technology, activities,
information. and resources involved in moving a product or service from supplier
to customer.
 inventory: The stock of an item on hand at a particular location or business.

Logistics

The term Logistics Management or Supply Chain Management is the part of Supply
Chain Management that plans, implements, and controls the efficient, effective, forward,
and reverse flow and storage of goods, services, and related information between the
point of origin and the point of consumption in order to meet customer’s requirements.
Distribution chain: Example of how companies may be supplied by the same distributor.

Logistics involves the integration of information, transportation, inventory, warehousing,

material handling, and packaging, and often security. Today, the complexity of
production logistics can be modeled, analyzed, visualized, and optimized by plant
simulation software but is constantly changing. This can involve anything from
consumer goods, such as food to IT materials, and aerospace and defense equipment.

There is often confusion over the terms “supply chain” and “logistics. ” It is now
generally accepted that the logistics applies to activities within one
company/organization involving distribution of product, whereas supply chain also
encompasses manufacturing and procurement and, therefore, has a much broader
focus as it involves multiple enterprises, including suppliers, manufacturers, and
retailers, working together to meet a customer’s need for a product or service.

The Evolution of Logistics

Logistics as a business concept evolved in the 1950s due to the increasing complexity
of supplying businesses with materials and shipping out products in an increasingly
globalized supply chain, leading to a call for experts or supply chain logisticians.
Business logistics can be defined as “having the right item in the right quantity at the
right time at the right place for the right price in the right condition to the right customer,”
and is the science of process and incorporates all industry sectors. The goal of logistics
work is to manage the fruition of project life cycles, supply chains, and resultant
efficiencies.

Starting in the 1990s, several companies chose to outsource the logistics aspect of
supply chain management by partnering with a 3PL, third-party logistics provider.
Companies also outsource production to contract manufacturers. Technology
companies have risen to meet the demand to help manage these complex systems.

Logistic Focus

In business, logistics may have either an internal focus (inbound logistics) or external
focus (outbound logistics).

Inbound logistics is one of the primary processes of logistics, concentrating on

purchasing and arranging the inbound movement of materials, parts, and/or finished
inventory from suppliers to manufacturing or assembly plants, warehouses, or retail
stores.

Outbound logistics is the process related to the storage and movement of the final
product and the related information flows from the end of the production line to the end
user.

Quality Control

Quality control is a process that evaluates output against a standard and takes
corrective action when output doesn’t meet that standard.

LEARNING OBJECTIVES

Discuss the role of quality control in business

KEY TAKEAWAYS

Key Points

 The purpose of quality control is to make sure that certain processes perform to a
company’s set standards.
 Quality control in relation to customers involves the continuous act of making sure
products, designed and manufactured, are produced to meet and exceed
customer needs.
 Quality should be measured differently for products and services and judged by
their own set of dimensions.
 Controls include product inspection, where every product is visually examined,
often with a stereo microscope to perceive fine detail before the product is sold
into the external market.
 Responsibility for overall quality lies with top management. Top management must
establish strategies, institute programs for quality, and motivate managers and
workers.
Key Terms

 total quality management: A strategic approach to management aimed at

embedding awareness of quality in all organizational processes.
 organizational culture: Organizational culture is the collective behavior of
humans who are part of an organization and the meanings that the people attach
to their actions.
 quality control: A control, such as inspection or testing, introduced into an
industrial or business process to ensure quality.

Quality can be thought of as the degree to which performance of a product or service

meets or exceeds expectations. Quality control is a process that evaluates output
against a standard and takes corrective action when output doesn’t meet these
predetermined standards. Therefore, quality control in relation to customers would be
the continuous act of making sure products, designed and manufactured, are produced
to meet and exceed the needs of customers. For contract work, particularly work
awarded by government agencies, quality control issues are among the top reasons for
not renewing a contract.

quality control: The purpose of quality control is to make sure that certain processes are performing up to a
company’s set standards.

This approach places an emphasis on three aspects:

 Elements such as controls, job management, defined and well-managed

processes, performance and integrity criteria, and identification of records
 Competence, such as knowledge, skills, experience, and qualifications
 Soft elements, such as personnel integrity, confidence, organizational culture,
motivation, team spirit, and quality relationships

Controls include product inspection, where every product is examined visually, often
using a stereo microscope for fine detail before the product is sold on the external
market. Inspectors will be provided with lists and descriptions of unacceptable product
defects such as cracks or surface blemishes.
An emphasis on quality control heightened during World War II. At that time quality
control evolved to quality assurance and is now better known as a Strategic Approach,
a tool for improving not only products but also processes and services. Quality should
be measured differently for products and services, and judged by their own set of
dimensions. Responsibility for overall quality lies with top management. Top
management must establish strategies, institute programs for quality, and motivate
managers and workers. Most of the time, managers aim to improve or maintain the
quality of an organization as a whole; this is referred to as Total Quality Management
(TQM). TQM involves a continual effort for quality improvement by everyone in an
organization. The entire supply chain must be involved for an organization to meet and
exceed goals of quality control.

Investment in Operations

Investment in information technology has made supply chains faster, cheaper, and
more reliable.

LEARNING OBJECTIVES

Examine the effect of technological advances on supply chain optimization

KEY TAKEAWAYS

Key Points

 Supply chain optimization applies processes and tools that ensure the optimal
operation of a manufacturing and distribution supply chain.
 Supply chain managers try to maximize the profitable operation of their
manufacturing and distribution supply chain.
 Supply chain optimization may include refinements at various stages of the
product lifecycle, and new, ongoing, and obsolete items are optimized in different
ways.
 Optimization solutions are typically part of, or linked to, the company’s
replenishment systems distribution requirements planning, so that orders can be
automatically generated to maintain the model stock profile. The algorithms used
are similar to those used in making financial investment decisions; the analogy is
quite precise, as inventory can be considered to be an investment in prospective
return on sales.
 Supply chain optimization may include refinements at various stages of the
product lifecycle, so that new, ongoing and obsolete items are optimized in
different ways: and adaptations for different classes of products, for example
seasonal merchandise.
Key Terms

 supply chains: A supply chain is a system of organizations, people, technology,

activities, information and resources involved in moving a product or service from
supplier to customer.

Supply chains have become faster, cheaper, and more reliable through investment in
information technology, cost-analysis, and process-analysis.

Supply chain optimization applies processes and tools that ensure optimal operation of
a manufacturing and distribution supply chain. These include the optimal placement of
inventory within the supply chain and the minimizing of operating costs associated with
manufacturing, transportation, and distribution. Optimization may also incorporate
computer-based mathematical modelling techniques.

Supply Chain: Supply chain optimization applies processes and tools that ensure the optimal operation of a
manufacturing and distribution supply chain.

Ongoing investment in a company’s operations is necessary in order for supply chain

optimization to be achieved. Supply chain managers may employ optimization such as
maximizing gross margin return on inventory invested (GMROII); balancing the cost of
inventory at all points in the supply chain with availability to the customer; minimizing
total operating expenses (e.g., transportation, inventory, and manufacturing); and
maximizing gross profit of products distributed through the supply chain.

Supply chain optimization addresses the general supply chain problem of delivering
products to customers at low cost and high profit. This involves balancing the costs of
inventory, transportation, distribution, and manufacturing, and supply chain optimization
has applications in all industries that manufacture and/or distribute goods (retail,
industrial, and/or consumer packaged goods [CPG]).

The classic supply chain approach has been to forecast future inventory demand using
statistical trending and “best fit” techniques, which are based on historic demand and
predicted future events. The advantage of this approach is that it can be applied to data
aggregated at a fairly high level (e.g., category of merchandise; weekly, by customer
category), thus requiring modest database sizes and small amounts of manipulation.
Unpredictability in demand is subsequently managed by setting safety stock levels; for
example, a distributor might hold two weeks of supply for a steadily in-demand article
but twice that supply for an article whose demand is more erratic.

Using this forecast demand, a supply chain manufacturing and distribution plan is
created to manufacture and distribute products to meet the demand at low cost and/or
high profit. This plan typically addresses several questions:

 How much of each product should be manufactured each day?

 How much of each product should be made at each manufacturing plant?
 Which manufacturing plants should re-stock which warehouses with which
products?
 What transportation modes should be used for warehouse replenishment and
customer deliveries?

The technical ability to record and quickly manipulate large databases has allowed for
the emergence of a new breed of supply chain optimization solutions, which are capable
of forecasting at a granular level (for example, per article per customer per day). Some
vendors are applying “best fit” models to this data, to which safety stock rules are
applied, while other vendors have started to apply stochastic techniques to the
optimization problem.

Supply chain optimization may include additional refinements at various stages of the
product lifecycle, and new, ongoing, and obsolete items are optimized in different ways.
Finally, while most software vendors are offering supply chain optimization as a
packaged solution and integrated in ERP software, some vendors are running the
software on behalf of clients as application service providers.

Planning for Operations

New Product Development

Organizations put a lot of time and money into new products and thus deploy various
methods in an attempt to mitigate the risks.
 LEARNING OBJECTIVES

Distinguish between minimum viable product, continuous deployment, split testing, vanity
metrics, laboratory tests, expert evaluations and customer evaluations

KEY TAKEAWAYS

Key Points

 Organizations use formal systems to evaluate new products.

 Product testing and sales forecasts are used to help diminish the risk of
introducing a new product.
 It’s possible to eliminate some of the risks associated with introducing a new
product by launching the smallest amount of the product possible to test demand.
 Several methods can be used to evaluate new products before they are launched.

Key Terms

 minimum viable product: The minimum viable product is a product stripped

down to it’s most basic, necessary features in order to get that product into the
consumer’s hands in the quickest, most affordable way.
 product placement: a form of advertising where a brand, good, or service is
placed in the media, for money
 product: Any tangible or intangible good or service that is a result of a process
and that is intended for delivery to a customer or end user.
 product differentiation: perceived differences between the product of one firm
and that of its rivals so that some customers value it more

Introduction

Organizations invest a lot of money to create new products that perform effectively.
Nonetheless, firms often struggle to convince people to incorporate these new products
into their routines (Arts 2008). For example, it took 18 years for microwave ovens to
gain acceptance in Greece (Tellis, Stremersch, and Yin 2003). The ultimate success of
new products depends on consumers accepting them (Arts 2008)..
New product: Organizations invest a lot of money to create new products that perform effectively.

Product Evaluation

The term “product” refers to both goods and services. A product is anything that can be
offered to a market to satisfy a want or need. When an organization adds a new
product, there is both potential benefit and risk. As a result, organizations implement
formal systems for evaluating new products. In particular, there is a concerted effort to
forecast projected sales and thus reduce some of the financial risk.

While evaluating new products, there is also the possibility of generating innovative
ideas that can later go through the testing process. Idea generation is an essential part
of marketing strategy and is critical to the success of a company. When such product
ideas move further along, a key step is to create a prototype or working version of the
new offering. Again, market testing is crucial at every stage in the development process.

Minimum Viable Product

A minimum viable product (MVP) is the “version of a new product which allows a team
to collect the maximum amount of validated learning about customers with the least
effort. ” The goal of an MVP is to test fundamental business hypotheses (or leap-of-faith
assumptions) and to help entrepreneurs begin the learning process as quickly as
possible.

For example, Ries notes that Zappos founder Nick Swinmurn wanted to test the
hypothesis that customers were ready and willing to buy shoes online. Instead of
building a website and a large database of footwear, Swinmurn approached local shoe
stores, took pictures of their inventory, posted the pictures online, bought the shoes
from the stores at full price, and sold them directly to customers if they purchased the
shoe through his website. Swinmurn deduced that customer demand was present, and
Zappos would eventually grow into a billion-dollar business based on the model of
selling shoes online.

Continuous Deployment
Continuous deployment is a process “whereby all code that is written for an application
is immediately deployed into production,” resulting in a reduction of cycle times. Ries
states that some of the companies he’s worked with deploy new code into production as
often as 50 times a day. The phrase was coined by Timothy Fitz, one of Ries’s
colleagues and an early engineer at IMVU.

Split Testing

A split test or A/B test is an experiment in which “different versions of a product are
offered to customers at the same time. ” The goal of a split test is to observe changes in
behavior between the two groups and to measure the impact of each version on an
actionable metric. A/B testing can also be performed in serial fashion where a group of
users one week may see one version of the product while the next week users see
another.

Vanity Metrics

Vanity metrics are measurements which give “the rosiest picture possible” but do not
accurately reflect the key drivers of a business. This is in contrast to actionable metrics,
the measurement of which can lead to a business decision and subsequent action.

Laboratory Tests

Laboratory tests provide information regarding the performance of new products in

extreme settings. For example, a new copy machine can be tested at various work
loads, like numbers of copies and speed per minute to test the relationship between
workload and paper jam.

Expert Evaluations

Expert evaluators can be used at all phases of the new product development process.
For instance, experts can be used to estimate whether or not a new product idea will be
accepted in the marketplace before a prototype even exists.

Customer Evaluations

In later stages of development, customers can be recruited to evaluate prototypes.

There is an attempt to test new products under conditions that are relatively close to
actual use.

Designing the Operation

Designing effective operations is critical, and can have both short-term and long-term
impacts on an organization’s longevity.

LEARNING OBJECTIVES

Explain the importance of operations management on the success of a business

KEY TAKEAWAYS

Key Points

 Operations management is a strategic function within an organization.

 Operations decisions include elements needed to produce goods and services,
and make them available to customers.
 Operations management touches upon multiple areas of a business, from
engineering and research & development, to human resources and accounting.

Key Terms

 operation: The method or practice by which actions are done.

 Operations management: An area of management concerned with overseeing,
designing, controlling the process of production, and redesigning business
operations in the production of goods and/or services.

Designing the Operation

Operations management is a strategic function in organizations that adds value to

customers and allows businesses to successfully produce goods and deliver services.
Operational decisions determine how well these goods and services meet the needs of
the organization’s target market, and consequently, whether the organization will be
able to survive over the long-term.
Smooth Landing: Operations management plays a key role in the success in airline companies.

If the organization has made mostly good operational decisions in designing and
executing its transformation system to meet the needs of customers, its prospects for
long-term survival are greatly enhanced.

Operations management and planning are common in industries such as the airlines,
manufacturing companies, service provider organizations, the military, and government.
Some examples of management and planning include:

 Scheduling airlines, including both planes and crew

 Deciding the appropriate place to site new facilities such as a warehouse, factory,
or fire station
 Managing the flow of water from reservoirs; identifying possible future
development paths for parts of the telecommunications industry
 Establishing the information needs and appropriate systems to supply them within
the health service
 Identifying and understanding the strategies adopted by companies for their
information systems

Operational Decisions

As mentioned, operations decisions have both long-term and short-term impacts on the
organization’s ability to produce goods and services, and can provide added value to
customers and employees. Operations management touches upon multiple areas of a
business, from engineering and research & development, to human resources and
accounting. Likewise, the decisions management makes when parceling technological,
monetary, and people resources across the organization typically falls under the
following areas:
  Inventory decisions
 Capacity decisions
 Quality decisions
 Scheduling decisions
 Process decisions
 Technology decisions
 Location decisions

Most often when a company sets operational goals and objectives, they are considered
relatively short term.

Capacity Planning

Capacity planning revolves around answering the question “How much? ” in both long-
term and short-term situations.

LEARNING OBJECTIVES

Compare and contrast long-term and short-term capacity decisions

KEY TAKEAWAYS

Key Points

 Capacity planning takes place on a daily basis in some industries.

 Organizations must closely examine the services and the cost of services offered
to their customers when making capacity decisions.
 In a grocery store or supermarket, managers must ensure that sufficient cash
registers and employees are on-hand to meet check-out demand and provide
good customer service.

Key Terms

 capacity: The maximum that can be produced on a machine or in a facility or

group.

Introduction

When making capacity decisions, managers must answer the simple question, “How
much?” Determining the organization’s capacity to produce goods and services involves
both long-term and short-term decisions. Long-term capacity decisions involve facilities
and major equipment investments.

capacity: The question managers must answer for capacity decisions is simply “How much?”

Long-term decisions

In 2007, Airbus introduced its Super Jumbo Jet that carries up to 850 passengers and
costs USD 3 billion. The Super Jumbo Jet provides huge amounts of passenger
carrying capacity, but before an airline purchases this jet, it needs to decide if it has
enough passengers to generate the revenue to pay for the plane and earn profits for the
airline. Buying a large single airplane like the Super Jumbo Jet may not be the right
capacity decision for an airline that serves numerous medium-sized cities. On the other
hand, an airline that serves passengers traveling between large cities like New York
City, USA, and Shanghai, China might find the Super Jumbo Jet to be a perfect choice
for meeting consumer demand.

Short-term decisions

Capacity decisions are also required in short-term situations. In a grocery store, the
number of customers that need to pay for their groceries at any one point during the day
will vary significantly. To provide good customer service, managers must make sure that
sufficient cash registers and employees are on-hand to meet check-out demand at any
given time.

Similarly, hotels must make sure that they have enough employees to register arriving
guests, clean hotel rooms, and provide food and beverages to customers. These
decisions must be made carefully to avoid excessive labor costs that result from having
an excess of employees available for the number of customers being served.

Facilities Layout

Facility layout decisions are based on criteria aimed at creating an effective and efficient
workflow and high standard production.
 LEARNING OBJECTIVES

Outline the key considerations in facility design

KEY TAKEAWAYS

Key Points

 There are three types of workflow layouts that managers can choose from.
 Office and factory facilities are approached differently.
 A facility manager’s industry can also influence the facilities layout design.

Key Terms

 facilities layout: Facility layout is simply the way a facility is arranged in order to
maximize processes that are not only efficient but effective towards the overall
organizational goal.

Introduction

Facilities is defined as the workspace and equipment needed to carry out the operations
of the organization. This includes offices, factories, computers, and trucks.

The location, design, and layout of an organizations’ facilities are central to maximising
the efficiency of the overall operations system.

In this unit, we’re going to focus on facility design and layout.

Facilities Design and Layout

After choosing the facility’s location, the next stage in operations planning is to design
the best physical layout for the facility. The avaliable space needs to be assessed with
workstations, equipment, storage, and other amenities need to be arranged. The aim is
to allow for the most efficient workflow without disruption. A workplace that has carefully
arranged its layout will allow for a more effictive and efficient workflow and produce its
good or services to a high standard.

There are three types of workflow layouts that managers can choose from:

 Process layout: arranged in departments (e.g., hospitals).

 Product layout: production line (e.g., a car assembly plant).
 Fixed-position layout: building a large item (e.g., jumbo jet).
Facility Layout Considerations

Facility managers should consider several factors when designing the layout of a facility
to achieve maximum effectiveness.

 Does the design and layout allow for growth or change? Is there a chance that
your company will experience significant growth? Could some other change come
about that could influence the layout of your facility? In business, anything is
possible. Make sure that same is true of your facilities layout. While making
changes is a costly and undertaking them shouldn’t be taken lightly, your layout
should be flexible enough to allow a redesign if the situation calls for it.
 Is the process flow smooth? If you are running a factory, for example, the flow
should be such that the raw materials enter at one end and the finished product
exits at the other. The flow doesn’t have to form a straight line, but there should be
no backtracking. Backtracking creates confusion. Employees get confused (“Has
that been done yet? “), parts get lost, and coordination is very difficult. You need
to have a smooth process to be efficient.
 Are materials being handled efficiently? Here simplicity is best.
 Does the facility layout aid the business in meeting its production needs? Is there
enough space and is it used efficiently? Have you allowed enough space for
shipping and receiving? Can different areas of the business communicate
effectively? Does the layout lend itself to promotional activities? (e.g., showing the
facilites to potential customers)
 Does the layout contribute to employee satisfaction and moral? Numerous studies
have linked employee moral to productivity. So managers should take this point
into consideration when designing the layout of their facilities. How can this be
done? Paint the walls light colors, allow for windows and space, include a
cafeteria and a gym. Some of the options may cost lots of money, but if it
increases productivity in the long run, it is probably worth making the investment.

Are the Facilities for an Office or a Factory?

Office Space: An office will have different layout requirements than a factory.

Office and factory facilities are approached differently.

Factories move materials from point A to point B to produce a final products. The
process uses equipment and utilities. Minimizing transportation costs may be one of the
criteria of planning the layout of a factory. Another important consideration for factories
in the necessity for maintenance of machinery. As such, careful consideration of
enabling access to technicians is critical to ensuring minimal workflow disruptions in a
scenario of updating, repairing or replacing machinery.

Offices, on the other hand, produces information. The form may be physical, electronic,
or oral, but the the final result is still information. Office facility layout is harder to
quantify than factory facilities layout, but the goal should be to minimize communication
costs and maximize productivity.

Your industry can also influence the facilities layout design. The facility layout for
service industries will differ from that of retailers and manufacturers. It all depends on
organization’s needs.

Location Choice and Site Planning

An organization’s location choice impacts its efficiency and effectiveness, so it is

important for it to properly weigh the various factors.

LEARNING OBJECTIVES

Outline the key considerations for deciding the location of facilities

KEY TAKEAWAYS
Key Points

 There are many factors that can determine where an organization will locate its
facilities. For any given situation, some factors become more important than
others in how facility location affects an organization’s efficiency and
effectiveness.
 The factors determining where a company chooses to locate its facilites include
supply, customer, community, and labor considerations.
 An essential part of choosing a location is doing proper research to verity that the
location matches an organization’s strategic requirements.

Key Terms

 facility: The physical means or contrivances to make something (especially a

service) possible; the required equipment, infrastructure, location etc.

Introduction

There are many factors that can determine where an organization will locate its
facilities. For any given situation, some factors become more important than others in
how facility location affects an organization’s efficiency and effectiveness.

Key Factors

 Proximity to sources of supply: Firms that process bulk raw materials usually
locate close to the source of supply to reduce transportation costs. Paper mills
locate close to forests, canneries are built close to farming areas, and fish
processing plants are located close to the harbors where the fishing vessels dock.
 Proximity to customers: There are several reasons why an organization would
locate close to end customers. Service firms need to be close to customers to be
convenient, as is the case for grocery stores, gas stations, fast food restaurants,
and hospitals. Transportation costs can also require proximity to customers, as in
the case of concrete manufacturing. Perishable products often require that they be
produced close to the final market, as is the case for bakeries and fresh flowers.
 Community factors: Communities may offer a number of incentives to entice
companies, including waiving or reducing taxes, and providing access roads,
water and sewer connections, and utilities. Community attitudes can also play a
role in an organization’s location decision. Some communities may actively
discourage companies that might bring more pollution, noise, and traffic to the
area. Some communities may not want a prison to be located in their community.
Other communities may welcome such firms because of the jobs, tax revenues,
and economic diversity they promise.
  Labor factors: Research shows that the majority of location decisions are largely
based on labor factors, since labor is a critical variable for many firms. Labor
factors include the prevailing wage rate in a community for similar jobs, the supply
of qualified workers, and the average education level of the local population
(percentage of high school graduates, etc.). Other labor factors can include the
degree of union organizing and the general work ethic of a community, as well as
other measures of absenteeism, and worker longevity in a job can play a strong
role when a firm makes a location decision.
 Other factors: Many other factors can play a role in the location decision, including
quality of life (crime rates, good schools, climate, and recreation options), access
to major transportation arteries, construction costs, proximity of the competition,
and opportunities for future expansion.

As mentioned earlier, the importance of any location factor can vary greatly, depending
on the circumstances of the decision.

Colorado river: Colorado is beautiful, but it might not be the best location for all organizations.

In the 1990s, MCI, a major US telecommunications company, decided to relocate its

engineering services division from MCI’s headquarters in Washington DC to Colorado
Springs, Colorado to reduce labor and facility costs. The decision was largely
unsuccessful due to the high costs of employee relocation and the fact that much of the
ethnically diverse engineering workforce did not want to live in Colorado Springs.
Unlike Washington DC, Colorado Springs did not have cultural diversity to match with its
diverse and highly educated workforce, it lacked employment options for spouses, and
the work ethic was more relaxed due to the beautiful natural setting that provided
unlimited options for outdoor recreation.

In short, if MCI had put more effort into researching how well the Colorado Springs
location matched its strategic requirements, it probably could have saved itself millions
of dollars and a great deal of internal disruption to the organization.

Sustainability Initiatives

Sustainability initiatives consider every dimension of how a business operates in the

social, cultural, and economic environment.

LEARNING OBJECTIVES

Explain the principles of corporate sustainability

KEY TAKEAWAYS

Key Points

 Transparency deals with the idea that having an engaging and open environment
within the company, as well as the community, will improve performance and
increase profits.
 Employee development involves the idea that people are the most important
renewable resource and, therefore, are the strongest asset to any organization.
 Resource efficiency refers to that fact that companies must adapt to a rapidly
changing environment by being prepared to change and implement new creative
ideas related to sustainability.
 Essential principles of a sustainability initiative include triple top-line value
production, nature-based knowledge and technology, products of service and
products of consumption, renewable energy, local economies, and continuous
improvement.

Key Terms

 stewardship: The act of caring for or improving with time.

 geothermal: Pertaining to heat energy extracted from reservoirs in the earth’s
interior.
 sustainability: The capacity to support, maintain, or endure.
Sustainability, in a general sense, is the capacity to support, maintain, or endure. Since
the 1980s, human sustainability has been related to the integration of environmental,
economic, and social dimensions towards global stewardship and responsible
management of resources.

Sustainability: Sustainability is related to the integration of environmental, economic, and social dimensions
towards global stewardship and responsible management of resources.

Corporate sustainability is a business approach that creates long-term consumer and

employee value by not only creating a “green” strategy aimed towards the natural
environment, but taking into consideration every dimension of how a business operates
in the social, cultural, and economic environment. It also involves formulating strategies
to build a company that fosters longevity through transparency and proper employee
development. Three key principles that should form the foundation of a corporate
sustainability initiative are: transparency, employee development, and resource
efficiency.

Transparency deals with the idea that having an engaging and open environment within
the company, as well as the community, will improve performance and increase profits.
An open culture promotes employee involvement in regards to the innovation and
creative processes. Reaching out to the community creates a much bigger team and
provides evaluation from all angles. Companies are looking inward and realizing
changes must be made to fulfill environment needs such as energy efficiency, limiting
product waste and toxicity, and designing innovative products.
Employee development involves the idea that people are the most important renewable
resource and, therefore, are the strongest asset to any organization. A strong
development program could be the underlying factor for a company’s success or failure.
Employees are the concrete foundation for the company and must be thoroughly
analyzed and evaluated to tap into their true motivations and desires. For a company
that wants to reach its greatest potential, employees must work towards improvement
rather than perfection. Programs should be implemented that reward star performers,
foster the creative learning process, and provide comprehensive training and
evaluating.

Resource efficiency refers to that fact that companies must adapt to a rapidly changing
environment by being prepared to change and implement new creative ideas related to
sustainability. Companies should not throw away old products and materials, but rather
be prepared with upgraded technology that can transform the product. New solutions
that improve recycling and waste redirecting can ultimately reduce costs and increase
profits. For example, Wal-Mart Stores Inc. has redirected more than 64% of the waste
generated by stores and Sam’s Club facilities. In 2009 alone, they recycled more than
1.3 million pounds of aluminum, 120 million pounds of plastics, 11.6 million pounds of
mixed paper, and 4.6 billion pounds of cardboard. On an annual basis, they expect to
save around $20 million and prevent 38 million pounds of waste being sent to landfills.

Essential Principles of a Sustainability Initiative

1. Triple top-line value production: This establishes three simultaneous requirements

of sustainable business activities: 1) financial benefits for the company, 2) natural
world betterment, and 3) social advantages for employees and members of the
local community—with each of these three components recognized as equal in
status.
2. Nature-based knowledge and technology: This biomimicry-based principal
involves the conscious emulation of natural-world genius in terms of growing our
food, harnessing our energy, construction, conducting business, healing
ourselves, processing information, and designing our communities.
3. Products of service and products of consumption: Products of service are durable
goods routinely leased by the customer that are made of technical materials and
are returned to the manufacturer and re-processed into a new generation of
products when they are worn out. Products of consumption are shorter lived items
made only of biodegradable materials. This principal requires that we manufacture
only these two types of products and necessitates the gradual but continual
reductions of products of service and their replacement with products of
consumption as technological advancements allow.
4. Solar, wind, geothermal, and ocean energy: This principal advocates employing
only sustainable energy technology—solar, wind, ocean, and geothermal—that
can meet our energy needs indefinitely without negative effects for life on Earth.
5. Local-based organizations and economies: This principle calls for durable,
beautiful, and healthy communities with locally-owned and operated businesses
and locally-managed non-profit organizations, along with regional corporations
and shareholders working together in a dense web of partnerships and
collaborations.
6. Continuous improvement process: This principle suggests that operational
processes inside successful organizations include provisions for constant
advancements and upgrade as the company does its business.