Chapter 1 Operations As a Competitive Weapon

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Chapter 1 -Operations As a Competitive Weapon
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POINTS TO PONDER

• It has never been a better time to be an industry
  revolutionary. Conversely, it has never been a
  more dangerous time to be complacent The
  dividing line between being a leader and being a
  laggard is today measured in months or a few
  days, and not in decades. (Garry Hammel,
  Strategos (1998))
• You have to kiss a lot of frogs to find the
  prince. But remember, one prince can pay for a
  lot of frogs. (Art Fry 3M)

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What is Operations?

• A process _at_ system that transforms inputs into
  output(s) of a greater value in a specific
  environment.

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Processes
Feedback-Internal and external customers

• Outputs
• Services
• Goods

• Inputs
• Workers
• Managers
• Equipment
• Facilities
• Materials
• Services
• Land
• Energy

Feedback-Information on performance
Figure 1.1
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Systems Perspective

• Inputs
• Transformation System
• Alter
• Transport
• Store
• Inspect
• Outputs
• Environment

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Transformation Processes

• Physical (manufacturing)
• Locational (transportation/ warehouse)
• Exchange (retail)
• Physiological (health care)
• Psychological (entertainment)
• Informational (communications)

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Some operations management activities at IKEA
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Profitability (Revenue Cost) Profitability
Revenue ( or Sales) ?Cost? Profitability
rate? Profitability -Cost (efficiency in
production) Profitability rate?
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Effectiveness (Do the right thing) vs.
Efficiency (Do things right the first time)
If I register for your MBA (Operations) class,
will I be able to increase my companies sales
from RM200,000 to RM400,000?
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Where does the business get its competitive
advantage?
The technological specification of its
product/service?
Product/Service Technology
The way it produces its goods and services?
The way it positions itself in its market?
Marketing
Operations
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When they are able to fully coordinate all
strategies and activities in all functions
involved in the organization and align them with
the Corporate Strategy.
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Diversity and Importance of Operations

• Improvements in operations can simultaneously
  lower costs and improve customer satisfaction.
• Improving operations often dependent on advances
  in technology.
• Can obtain competitive advantage by improving
  operations.

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Operations

• Heart of every organization
• Operations are the tasks that create value

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Operations as the Technical Core
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Operations as the Engine of the System
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Nested Processes at Chase Manhattan Bank
Figure 1.2
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Types of OM Decisions

• Strategic choices
• Process
• Quality
• Capacity, Location,Layout
• Operating Decisions

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Operations Management as a Function
Figure 1.3
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Operations Management As a Function
Figure 1.3
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Further innovations
Innovative plastic design with few parts
which funds
Product/ service design
Operations
Marketing
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Continuum of Characteristics
More like a manufacturing organization
More like a service organization

• Physical, durable product
• Output that can be inventoried
• Low customer contact
• Long response time
• Regional, national, or international markets
• Large facilities
• Capital intensive
• Quality easily measured

• Intangible, perishable product
• Output that cannot be inventoried
• High customer contact
• Short response time
• Local markets
• Small facilities
• Labor intensive
• Quality not easily measured

Figure 1.4
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The output from most operations is a mixture of
goods and services
PURE GOODS
Tangible
Can be stored
Production precedes consumption
Low customer contact
CRUDE OIL PRODUCTION
Can be transported
ALUMINIUM SMELTING
Quality is evident
SPECIALIST MACHINE TOOL
MANUFACTURER
RESTAURANT
COMPUTER SYSTEMS SERVICES
Intangible
Cannot be stored
MANAGEMENT CONSULTANCY
Production and consumption are simultaneous
PSYCHOTHERAPY CLINIC
High customer contact
Cannot be transported
Quality difficult to judge
PURE SERVICES
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The Fact
Todays organizations cannot just produce goods
to the market, but they must pack them together
with a better service or vice versa.
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Service Sector Jobs
Figure 1.5
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Productivity
Cost per unit
Diseconomies of Scale
Economies of Scale
Quantity
Optimum Quantity
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Operations Activities

• Strategy
• Output Planning
• Capacity Planning
• Facility Location
• Facility Layout
• Aggregate Planning

• Inventory Management
• Materials Requirements Planning
• Scheduling
• Quality Control

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Productivity
Example 1.1a
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Productivity
Example 1.1a
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Productivity
Labor productivity 5 policies/hour
Example 1.1a
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Productivity
Labor productivity 5 policies/hour
Multifactor productivity
Quantity at standard cost Labor cost Materials
cost Overhead cost
Example 1.1b
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Productivity
Labor productivity 5 policies/hour
Multifactor productivity
Example 1.1b
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Productivity Measures

• OM Explorer
• Tutor 1.1Productivity Measures
• The state ferry service charges 18 per ticket
  plus a 3 surcharge to fund planned equipment
  upgrades. It expects to sell 4,700 tickets during
  the eight-week summer season. During that period,
  the ferry service will experience 110,000 in
  labor costs. Materials required for each passage
  sold (tickets, a tourist-information sheet, and
  the like) cost 1.30. Overhead during the period
  comes to 79,000.
• a. What is the multifactor productivity ratio?
• b. If ferry-support staff work an average of 310
  person-hours per week for the 8 weeks of the
  summer season, what is the labor productivity
  ratio? Calculate labor productivity on an hourly
  basis.
• Click here to continue.

Figure 1.6a
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Productivity Measures

• Tutor 1.1Productivity Measures
• Enter data in yellow areas. Use Tab to advance
  from one input cell to the next.
• a. Multifactor productivity is the ratio of the
  value of output to the value of input.
• Step 1. Enter the number of tickets sold during a
  season, the price per ticket, and the surcharge
  per ticket. To compute value of output, multiply
  tickets sold by the sum of price and surcharge.
• Tickets sold 4,700 Value of output
• Price 18
• Surcharge 3
• Step 2. Enter labor costs, materials costs per
  passenger, and overhead cost. For value of input,
  add together labor costs, materials costs times
  number of passengers, and overhead costs.
• Labor costs 110,000 Materials
  costs 1.30 Overhead 79,000
• Value of input
• Step 3. To calculate multifactor productivity,
  divide value of output by value of input.

Figure 1.6b
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Productivity Measures

• Tutor 1.1Productivity Measures
• Enter data in yellow areas. Use Tab to advance
  from one input cell to the next.
• b. Labor productivity is the ratio of the value
  of output to labor hours The value of output is
  computed in part a, step 1.
• Step 1. Enter person-hours per week and the
  number of weeks in the season multiply the two
  together to calculate labor hours of input.
• Hours per week 310 Weeks 8
• Labor hours of input
• Step 2. To calculate labor productivity, divide
  value of output by labor hours of input.
• Labor productivity

Figure 1.6b
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Productivity Measures

• Tutor 1.1Productivity Measures
• Place cell pointer on green shaded areas to
  examine formulas.
• a. Multifactor productivity is the ratio of the
  value of output to the value of input.
• Step 1. Enter the number of tickets sold during a
  season, the price per ticket, and the surcharge
  per ticket. To compute value of output, multiply
  tickets sold by the sum of price and surcharge.
• Tickets sold 4,700 Value of output 98,700
• Price 18
• Surcharge 3
• Step 2. Enter labor costs, materials costs per
  passenger, and overhead cost. For value of input,
  add together labor costs, materials costs times
  number of passengers, and overhead costs.
• Labor costs 110,000 Materials
  costs 1.30 Overhead 79,000
• Value of input 195,110
• Step 3. To calculate multifactor productivity,
  divide value of output by value of input.

Figure 1.6c
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Productivity Measures

• Tutor 1.1Productivity Measures
• Place cell pointer on green shaded areas to
  examine formulas.
• b. Labor productivity is the ratio of the value
  of output to labor hours The value of output is
  computed in part a, step 1.
• Step 1. Enter person-hours per week and the
  number of weeks in the season multiply the two
  together to calculate labor hours of input.
• Hours per week 310 Weeks 8
• Labor hours of input 2,480
• Step 2. To calculate labor productivity, divide
  value of output by labor hours of input.
• Labor productivity 39.80

Figure 1.6c
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Productivity Growth
Average annual growth in productivity
3 2 1 0
2.8 2.8
2.0
1.9
1.4
Percent
1950s 1960s 1970s 1980s 1990s
Figure 1.7(a)
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Productivity Growth
Value added per hour worked
Whole economy
100 80 60 40 20 0
Percent
United States
Japan
Britain
France
Germany
Figure 1.7(b)
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Productivity Growth
Value added per hour worked
Whole economy Manufacturing
100 80 60 40 20 0
Percent
United States
Japan
Britain
France
Germany
Figure 1.7(b)
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Operations as a Competitive Weapon

• It coordinates all issues with all other
  functions to align them with Corporate Strategy.
• Its the engine of the operating system.
• Its the pure determinant of producing goods or
  services.