Chapter 1

Using
Operations to
Create Value

Copyright ©2016 Pearson Education, Inc. All rights reserved. 3-1

 Learning Goals
1.1 Describe the role of operations in an organization and its historical
evolution over time.

1.2 Describe the process view of operations in terms of inputs, processes,

outputs, information flows, suppliers, and customers.

1.3 Describe the supply chain view of operations in terms of linkages between
core and support processes.

1.4 Define an operations strategy and its linkage to corporate strategy and
market analysis.
 Learning Goals
1.5 Identify nine competitive priorities used in operations strategy, and
explain how a consistent pattern of decisions can develop organizational
capabilities.

1.6 Identify the latest trends in operations management and understand how
firms can address the challenges facing operations and supply chain
managers in a firm.

1.7 Define the fourth industrial revolution (Industry 4.0) and understand how
its embedded technologies and automation are transforming the practice
of operations and supply chain management.

1.8 Understand how to develop skills for your career using this textbook
What Is Operations Management?
• Production is the creation of goods and services.

• Operations management (OM) is the set of activities that

create value in the form of goods and services by transforming
inputs into outputs.

• Operations management (OM) refers to the systematic design,

direction, and control of processes that transform inputs into
services and products for internal, as well as external,
customers.
 Operations Management
• Process is any activity or group of activities that takes one or
more inputs, transforms them, and provides on or more
outputs for its customers.

• Operation is a group of resources performing all or part of one

or more processes.
 Supply Chain Management
• Supply Chain is an interrelated series of processes within a
firms and across different firms that produce a service or
product to the satisfaction of the customers.
• Supply Chain Management is the synchronization of a firm’s
processes with those of its suppliers and customers to match
the flow of materials, services, and information with customer
demand.
• Members of the supply chain collaborate to achieve high levels
of customer satisfaction, efficiency and competitive advantage
 Operations Manager
• A firm can have multiple supply chains, which vary by the
product or service provided.
• The operations managers are responsible for key decisions
that affect the success of the organization.
• The head of operations holds the title Chief Operations
Officer (COO) or vice president of manufacturing.
 What Operations Managers Do
• Basic Management Functions
 Planning
 Organizing
 Staffing
 Leading
 Controlling
 Role of Operations in an Organization
Integration between Different Functional Areas of a Business
 Role of Operations in an Organization
• The circular relationships highlight the importance of the coordination
among the three mainline functions of any business: Operation,
Marketing, and Finance.
• Finance generates resources, capital, and funds from investors and
sales of its goods and services in the marketplace.
• Operations transforms these material and service inputs into product
and service outputs.
• Marketing is the responsible for producing sales revenue of the
outputs.
• Accounting, Information Systems, Human Resources, and Engineering
make the firm complete by providing essential information, services,
and other managerial support.
 How Processes Work

The numbered circles represent operations, and the arrows represent flows.
 A Process View
• Any process has inputs and outputs.
• Inputs can include: HR (workers and managers), capital
(equipment and facilities), purchased materials and
services, land, and energy.
• Process provide outputs to customers.
• Outputs may be services or tangible products.
• Every process and every person in an organization has
customers.
• External customers may be end users or intermediaries, …
• Internal customers may be employees in the firm.
 A Supply Chain View
Each activity in a process should add value to the preceding
activities; waste and unnecessary cost should be eliminated.

Two main types of processes in the supply chain:

1) Core processes
2) Support processes
 The Supply Chain View
Supplier relationship process – A process that selects the
suppliers of services, materials, and information and facilitates
the timely and efficient flow of these items into the firm
 The Supply Chain View
New service/product development – A process that designs and
develops new services or products from inputs from external
customer specifications or from the market
 The Supply Chain View
Order fulfillment process – A process that includes the activities
required to produce and deliver the service or product to the
external customer
 The Supply Chain View
Customer relationship process – A process that identifies, attracts and
builds relationships with external customers and facilitates the
placement of orders by customers (customer relationship management)
 The Supply Chain View
Support Processes - Processes like Accounting, Finance, Human
Resources, Management Information Systems and Marketing that
provide vital resources and inputs to the core processes
 Supply Chain Process
• Supply Chain Processes
 Business processes that have external customers
or suppliers
 Examples
• Outsourcing
• Warehousing
• Sourcing
• Customer Service
• Logistics
 Market Analysis
• Market Analysis
 Understand what the customers want and
how to provide it.
• Market Segmentation
• Needs Assessment
Competitive Priorities and Capabilities
Competitive Priorities
The critical dimensions that a process or supply chain must possess
to satisfy its internal or external customers, both now and in the
future.

Competitive Capabilities
The cost, quality, time, and flexibility dimensions that a
process or supply chain actually possesses and is able to
deliver.
 Order Winners and Qualifiers
Order Winners
A criterion customers use to differentiate the services or products
of one firm from those of another.

Order Qualifiers
Minimum level required from a set of criteria for a firm to do
business in a particular market segment.
Trends in Operations Management
• Several trends are currently having a great impact on
operations management:

− Productivity improvement

− Global competition

− Ethical, workforce, and environmental issues

 Fourth Industrial Revolution
(Industry 4.0)
• Fourth Industrial Revolution (Industry 4.0)
– The ongoing automation of traditional manufacturing and
industrial practices using modern smart technology
– Examples:
• Smart manufacturing technologies
• Smart products technologies
• Smart supply technologies
• Base technologies
 Fourth Industrial Revolution
(Industry 4.0)
• Manufacturing Execution Systems (MES)
– Computerized systems used in manufacturing to track and
document the transformation of raw materials to finished
goods and optimize their production output

• Artificial Intelligence (AI)

– A constellation of technologies, from machine learning to
natural language processing, that allows machines to
sense, comprehend, act, and learn
 Fourth Industrial Revolution
(Industry 4.0)
• Internet of Things (IoT)
– The interconnectivity of objects embedded with software,
sensors, and actuators that enable these objects to collect
and exchange data over a network without requiring
human intervention

• Additive Manufacturing
– The technologies that build 3D objects by adding layers of
material such as plastic, metal, or concrete
Improving Productivity at Starbucks

A team of 10 analysts
continually look for ways to
shave time. Some
improvements:

Stop requiring signatures on Saved 8 seconds per

credit card purchases under $25 transaction

Change the size of the ice scoop Saved 14 seconds per

drink

New espresso machines Saved 12 seconds per

shot
Improving Productivity at Starbucks

A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Operations improvements have
helped
Stop requiring signatures on StarbucksSaved
increase yearly
8 seconds per
credit card purchases under $25
revenue transaction
per outlet by $250,000 to
$1,000,000 in seven years.
Productivity
Change the size of the ice scoop has improved by 27%,
Saved 14 seconds peror
about 4.5% per year.
drink

New espresso machines Saved 12 seconds per

shot
Productivity Calculations
 Productivity Calculations
Labor Productivity: is an index of the output
per person or per hour worked

Output (Units produced)

Labor Productivity =
Labor-hours used

One resource input  single-factor productivity

 Productivity Calculations

• Machine Productivity: where the dominator

is the number of machines.

Output (Units produced)

Machine Productivity =
Number of Machines
 Multi-Factor Productivity
• Multifactor Productivity: is an index of the output provided
by more than one of the resources used in production.

Output
Productivity =
Labor + Material + Energy + Capital +
Miscellaneous

► Also known as total factor productivity

► Output and inputs are often expressed in dollars

Multiple resource inputs  multi-factor productivity

 Example 1
Calculate the productivity for the following operations
a. Three employees process 600 insurance policies in a
week. They work 8 hours per day, 5 days per week.
b. A team of workers makes 400 units of a product,
which is sold in the market for $10 each. The
accounting department reports that for this job the
actual costs are $400 for labor, $1,000 for materials,
and $300 for overhead.
 Example 1
SOLUTION
Policies processed
a. Labor productivity =
Employee hours

600 policies
= = 5 policies/hour
(3 employees)(40 hours/employee)

Value of output
b. Multifactor productivity =
Labor cost + Materials cost
+ Overhead cost

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

= = = 2.35
$400 + $1,000 + $300 $1,700
 Solved Problem 1
Student tuition at Boehring University is $150 per semester credit hour.
The state supplements school revenue by $100 per semester credit hour.
Average class size for a typical 3-credit course is 50 students. Labor costs
are $4,000 per class, material costs are $20 per student per class, and
overhead costs are $25,000 per class.

a. What is the multifactor productivity ratio for this course process?

b. If instructors work an average of 14 hours per week for 16 weeks

for each 3-credit class of 50 students, what is the labor
productivity ratio?
 Solved Problem 1
SOLUTION

a. Multifactor productivity is the ratio of the value of output to the

value of input resources.
$150 tuition +
50 student 3 credit hours $100 state support
Value of output =
class student credit hour

= $37,500/class

Value of inputs = Labor + Materials + Overhead

= $4,000 + ($20/student  50 students/class) + $25,000
= $30,000/class

Output $37,500/class
Multifactor productivity = = = 1.25
Input $30,000/class
 Solved Problem 1
SOLUTION

b. Labor productivity is the ratio of the value of output to labor

hours. The value of output is the same as in part (a), or
$37,500, so

14 hours 16 weeks
Labor hours of input =
week class

= 224 hours/class

Output $37,500/class
Labor productivity = =
Input 224 hours/class

= $167.41/hour
 Ethics, Social Responsibility, and
Sustainability
Challenges facing operations managers:

▶ Develop and produce safe, high-quality green products

▶ Train, retrain, and motivate employees in a safe workplace

▶ Honor stakeholder commitments