Chapter 1

Operations and Competitiveness

Operations
Operations Management
Management -- 44thth Edition
Edition

Roberta Russell & Bernard W. Taylor, III

Copyright 2006 John Wiley & Sons, Inc.

 Lecture Outline

 What Do Operations Managers Do?

 Operations Function
 Evolution of Operations Management
 Operations Management and E–business
 Globalization and Competitiveness
 Primary Topics in Operations Management
 Learning Objectives for this Course

Copyright 2006 John Wiley & Sons, Inc. 1-2

 What Do Operations
Managers Do?
 What is Operations?
 a function or system that transforms inputs into outputs of greater value
 What is a Transformation Process?
 a series of activities along a value chain extending from supplier to
customer.
 activities that do not add value are superfluous and should be
eliminated
 What is Operations Management?
 design, operation, and improvement of productive systems

Copyright 2006 John Wiley & Sons, Inc. 1-3

 Transformation Process

 Physical: as in manufacturing operations

 Locational: as in transportation operations
 Exchange: as in retail operations
 Physiological: as in health care
 Psychological: as in entertainment
 Informational: as in communication

Copyright 2006 John Wiley & Sons, Inc. 1-4

 Operations as a
Transformation Process

INPUT
•Material
TRANSFORMATION OUTPUT
•Machines
•Goods
•Labor PROCESS
•Services
•Management
•Capital

Feedback

Copyright 2006 John Wiley & Sons, Inc. 1-5

 Operations Function

 Operations
 Marketing
 Finance and
Accounting
 Human
Resources
 Outside
Suppliers

Copyright 2006 John Wiley & Sons, Inc. 1-6

 How is Operations Relevant to my
Major?
 “As an auditor you must understand
 Accounting
the fundamentals of operations
management.”
 Information  “IT is a tool, and there’s no better
Technology place to apply it than in operations.”
 “We use so many things you learn in
 Management an operations class—scheduling, lean
production, theory of constraints, and
tons of quality tools.”

Copyright 2006 John Wiley & Sons, Inc. 1-7

 How is Operations Relevant to my
Major?
 “It’s all about processes. I live
 Economics by flowcharts and Pareto
analysis.”
 Marketing  “How can you do a good job
marketing a product if you’re
unsure of its quality or delivery
status?”
 Finance  “Most of our capital budgeting
requests are from operations,
and most of our cost savings,
too.”

Copyright 2006 John Wiley & Sons, Inc. 1-8

 Evolution of Operations
Management
 Craft production
 process of handcrafting products or
services for individual customers
 Division of labor
 dividing a job into a series of small tasks
each performed by a different worker
 Interchangeable parts
 standardization of parts initially as
replacement parts; enabled mass
production

Copyright 2006 John Wiley & Sons, Inc. 1-9

 Evolution of Operations
Management (cont.)

 Scientific management
 systematic analysis of work methods
 Mass production
 high-volume production of a standardized
product for a mass market
 Lean production
 adaptation of mass production that prizes
quality and flexibility

Copyright 2006 John Wiley & Sons, Inc. 1-10

 Historical Events in
Operations Management
Era Events/Concepts Dates Originator
Industrial Steam engine 1769 James Watt
Division of labor 1776 Adam Smith
Revolution
Interchangeable parts 1790 Eli Whitney
Scientific Principles of scientific 1911 Frederick W. Taylor
Management management
Time and motion studies 1911 Frank and Lillian
Gilbreth
Activity scheduling chart 1912 Henry Gantt
Moving assembly line 1913 Henry Ford

Copyright 2006 John Wiley & Sons, Inc. 1-11

 Historical Events in
Operations Management (cont.)
Era Events/Concepts Dates Originator
Human Hawthorne studies 1930 Elton Mayo
Relations Motivation theories 1940s Abraham Maslow
1950s Frederick Herzberg
1960s Douglas McGregor
Operations Linear programming 1947 George Dantzig
Research Digital computer 1951 Remington Rand
Simulation, waiting 1950s Operations research
line theory, decision groups
theory, PERT/CPM
MRP, EDI, EFT, CIM 1960s, Joseph Orlicky, IBM
1970s and others

Copyright 2006 John Wiley & Sons, Inc. 1-12

 Historical Events in
Operations Management (cont.)
Era Events/Concepts Dates Originator
Quality JIT (just-in-time) 1970s Taiichi Ohno (Toyota)
Revolution TQM (total quality 1980s W. Edwards Deming,
management) Joseph Juran
Strategy and 1990s Wickham Skinner,
operations Robert Hayes
Business process 1990s Michael Hammer,
reengineering James Champy

Copyright 2006 John Wiley & Sons, Inc. 1-13

 Historical Events in
Operations Management (cont.)
Era Events/Concepts Dates Originator
Globalization WTO, European Union, 1990s Numerous countries
and other trade 2000s and companies
agreements
Internet Internet, WWW, ERP, 1990s ARPANET, Tim
Revolution supply chain management Berners-Lee SAP,
i2 Technologies,
ORACLE,
PeopleSoft
E-commerce 2000s Amazon, Yahoo,
eBay, and others

Copyright 2006 John Wiley & Sons, Inc. 1-14

 Continuum from Goods
to Services

Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff,

Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.

Copyright 2006 John Wiley & Sons, Inc. 1-15

 Operations Management
and E-Business
Business Consumer
Business

B2B B2C
[Link] [Link]
Consumer

C2B C2C
[Link] [Link]

Categories of E-Commerce

Copyright 2006 John Wiley & Sons, Inc. 1-16

 An Integrated Value Chain
 Value chain: set of activities that create and deliver
products to customer

Customer Manufacturer Supplier

Flow
Flow of
of information
information (customer
(customer order)
order)
Flow of product (order fulfillment)
Copyright 2006 John Wiley & Sons, Inc. 1-17
 Impact of E-Business on
Operations Management
Benefits of E-Business Impact on Operations
 Comparison shopping  Customer expectations escalate;
quality must be maintained and
by customers costs lowered
 No more guessing about demand is
necessary; inventory costs go down;
 Direct contact with product and service design
customers improves; build to-order products
and services is made possible
 Transaction costs are lower;
 Business processes customer support costs decrease; e-
procurement saves big bucks
conducted online

Copyright 2006 John Wiley & Sons, Inc. 1-18

 Impact of E-Business on
Operations Management (cont.)
Benefits of E-Business Impact on Operations
 Access to customers  Demand increases; order fulfillment
and logistics become major issues;
worldwide production moves overseas
 Logistics change from delivering to a
store or distribution center to delivering
 Middlemen are to individual homes; consumer
eliminated demand is more erratic and
unpredictable than business demand
 Outsourcing increases; more alliances
 Access to suppliers and partnerships among firms are
worldwide formed; supply is less certain; global
supply chain issues arise

Copyright 2006 John Wiley & Sons, Inc. 1-19

 Impact of E-Business on
Operations Management (cont.)
Traditional Value Chain

Wholesale /
Manufacturer Retailer Consumer
Distributor

A New Value Chain

Wholesale /
Manufacturer Retailer Consumer
Distributor

Manufacturer Infomediary E-Retailer Aggregator Portal Consumer

Copyright 2006 John Wiley & Sons, Inc. 1-20

 Impact of E-Business on
Operations Management (cont.)
Benefits of E-Business Impact on Operations
 Online auctions and e-  Competitive bidding lowers cost
of materials; supply needs can be
marketplaces found in one location
 Better and faster  More timely information is
decision making available with immediate access
by all stakeholders in decision-
making process; customer orders
and product designs can be
clarified electronically; electronic
meetings can be held;
collaborative planning is
facilitated

Copyright 2006 John Wiley & Sons, Inc. 1-21

 Impact of E-Business on
Operations Management (cont.)
Benefits of E-Business Impact on Operations
 IT synergy  Productivity increases as
information can be shared more
efficiently internally and
between trading partners
 Order fulfillment, logistics,
 Expanded supply warehousing, transportation and
chains delivery become focus of
operations management; risk is
spread out; trade barriers fall

Copyright 2006 John Wiley & Sons, Inc. 1-22

 Globalization and
Competitiveness
 Favorable cost
 Access to international
markets
 Response to changes in
demand
 Reliable sources of
supply
 14 major trade
agreements in 1990s
 Peak: 26% in 2000
World Trade Compared to World GDP
Source: “Real GDP and Trade Growth of OECD Countries, 2001–03,”
International Trade Statistics 2003, World Trade Organization,
[Link]
Copyright 2006 John Wiley & Sons, Inc. 1-23
 Globalization and
Competitiveness (cont.)
Germany:
Germany: $26.18
$26.18

USA:
USA: $21.33
$21.33

Taiwan:
Taiwan: $5.41
$5.41

Mexico:
Mexico: $2.38
$2.38

Hourly Wage Rates for Selected Countries

Source: “International Comparisons of Hourly Compensation Costs for Production Workers in
Manufacturing,” Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003. China:
China: $0.50
$0.50
Copyright 2006 John Wiley & Sons, Inc. 1-24
 Globalization and
Competitiveness (cont.)

Trade with China: Percent of each country‘s trade

Source: “Share of China in Exports and Imports of Major Traders, 2000 and 2002,” International Trade Statistics 2003, World Trade Organization, [Link]

Copyright 2006 John Wiley & Sons, Inc. 1-25

 Risks of Globalization

 Cultural differences
 Supply chain logistics
 Safety, security, and
stability
 Quality problems
 Loss of capabilities

Copyright 2006 John Wiley & Sons, Inc. 1-26

 Competitiveness and
Productivity
 Competitiveness
 degree to which a nation can produce goods and
services that meet the test of international markets
 Productivity
 ratio of output to input
 Output
 sales made, products produced, customers served,
meals delivered, or calls answered
 Input
 labor hours, investment in equipment, material
usage, or square footage

Copyright 2006 John Wiley & Sons, Inc. 1-27

 Competitiveness and
Productivity (cont.)

Measures of Productivity

Copyright 2006 John Wiley & Sons, Inc. 1-28

 Changes in Productivity
for Select Countries
Internet-enabled
Internet-enabled
productivity
productivity

-- Dot
Dot com
com bust
bust
-- 9/11
9/11 terrorist
terrorist attacks
attacks

Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor
Statistics, U.S. Department of Labor, September 2003. U.S. figures for 2002–2003 from “Major Sector Productivity and
Costs Index,” Bureau of Labor Statistics, U.S. Department of Labor, March 2004

Copyright 2006 John Wiley & Sons, Inc. 1-29

 Productivity Increase
 Become efficient
 output increases with little or no increase in input
 Expand
 both output and input grow with output growing more
rapidly
 Achieve breakthroughs
 output increases while input decreases
 Downsize
 output remains the same and input is reduced
 Retrench
 both output and input decrease, with input decreasing
at a faster rate

Copyright 2006 John Wiley & Sons, Inc. 1-30

 Competitiveness and
Productivity

Breakthrough
Breakthrough
Performance
Performance

More
More Efficient
Efficient

Retrench
Retrench

Productivity as a Function of Inputs and Outputs, 2001–2002

Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of
Labor Statistics, U.S. Department of Labor, September 2003

Copyright 2006 John Wiley & Sons, Inc. 1-31

 Global Competitiveness
Ranking
1. Finland
2. United States
3. Sweden
4. Denmark
5. Taiwan
6. Singapore
7. Switzerland
8. Iceland
9. Norway Source: Global Competitiveness Report
2003–2004, World Economic Forum,
10. Australia January 2004, [Link]

Copyright 2006 John Wiley & Sons, Inc. 1-32

 Operations–oriented
Barriers to Entry

 Economies of Scale
 Capital Investment
 Access to Supply and Distribution
Channels
 Learning Curve

Copyright 2006 John Wiley & Sons, Inc. 1-33

Copyright 2006 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation
of this work beyond that permitted in section 117
of the 1976 United States Copyright Act without
express permission of the copyright owner is
unlawful. Request for further information should
be addressed to the Permission Department,
John Wiley & Sons, Inc. The purchaser may
make back-up copies for his/her own use only
and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions,
or damages caused by the use of these
Copyright 2006 John Wiley & Sons, Inc. 1-34