Operations and Competitiveness

1
CHAPTER 8
Producing Quality Goods and Services
2
What Do Operations Managers Do?

• What is Operations?
• a function or system that transforms inputs into
  outputs of greater value
• What is a Conversion 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

3
Conversion 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

4
The Production System
5
Maximizing Value Added in Operations

• How to add value
• Reduce product costs to customer.
• Make the product more readily available.
• Provide faster service.
• Provide customers with additional relevant
  information.
• Customize the product to the customers specific
  needs.

6
Historical Evolution
7
Trends Affecting Operations Strategy Decisions

• Globalization
• Global village with hyper-competition
• Continuous information technology advances
• Lower trade barriers
• Lower transportation costs
• Emergence of newly industrialized countries (NIC)
  with high-growth markets and high standards of
  living

• Technology
• Connectivityanyone, anywhere, all the time
• Speedinstantaneous transactions
• Intangibilityfocus on innovative services to
  gain competitive advantage

8
Fords Global Network to Supportthe
Manufacturing of the Escort
Source From Joseph E. Stiglitz, Principles of
Micro-economics, 2nd ed. (New York W. W. Norton
and Company, 1997), p. 58. Reprinted with
permission.
9
Characteristics of Products and Services

• Products
• Tangible
• Minimal customer contact
• Minimal customer participation
• Delayed consumption
• Equipment intensive
• Quality easily measured

• Services
• Intangible
• Extensive customer contact
• Extensive customer participation
• Immediate consumption
• Labor intensive
• Quality difficult to measure

10
Continuum from Goods to Services
11
Measuring Production Efficiency

• Economies of scale
• The effect of cost per product unit declines as
  production volume increases
• Fixed costs do not decrease as the number of
  units produced increases.
• Variable costs vary directly with the number of
  products produced.
• Break-even point
• Reflects the total quantity of units sold at
  which total revenue equals total costs (fixed and
  variable) and profitability begins.

12
Relationship between Production Volume and Costs
13
Relationship between Volume and Profitability
14
Operations as a Competitive Weapon

• Dell Computers
• Innovative Supply Chain Strategy (direct model)
• Southwest Airlines (Pegasus ?)
• Leader in lowfare flights, by elimination of all
  waste
• Zara
• Can deliver new styles in 3-6 weeks (compared to
  5-12 months for competitors)
• Tansas Markets (now part of Migros)
• Inventory Control system cuts stock-outs to 7.2
  from 19
• Vestel Durable Goods
• Distribution optimization leads to increased
  customer satisfaction as well as lower costs

15
Major Decisions at Pizza Inc.A Framework for OM

• Process
• How to produce deliver
• Quality
• Criteria, measurement process for achieving
• Capacity
• Physical facilities labor
• Inventory
• What, when how much?

16
Designing the Production Process

• Forecasting Demand
• Planning for Capacity
• Choosing Facility Location
• Designing a Facility Layout
• Scheduling Work

17
Supply Chain Management

• Integrating all of the facilities, functions, and
  processes associated with the production of goods
  and services, from suppliers to customers
• Collaboration with suppliers and customers is key

18
An Integrated Value Chain

• Value chain set of activities that create and
  deliver products to customer

19
Impact of E-Business on Operations Management
Benefits of E-Business

• Comparison shopping by customers
• Direct contact with customers
• Business processes conducted online
• Access to customers worldwide
• Middlemen are eliminated
• Access to suppliers worldwide
• Online auctions and e-marketplaces
• Better and faster decision making