NO PLAGIARISM GRADUATE WRITING SKILL ONLY
 

Text

Vonderembse, M. A., & White, G. P. (2013).

Operations management

[Electronic version]. Retrieved from https://content.ashford.edu/
ANSWER ALL QUESTIONS AND USE  SCHOLARLY SOURCES

– 

Midas

Read the “Midas” case study in Chapter 2 of your text and respond to the guided response below in a three- to four-page paper in accordance with APA guidelines as outlined in the Ashford Writing Center. In this paper you must:

• Discuss the anticipated impacts (both positive and negative) upon operating efficiencies, and recommend solutions to minimize the negative impacts.
• Discuss whether or not operating practices should be changed to accommodate the tune-ups. Be sure to explain your reasoning.
• Examine the reasons why input should be gathered from the shop owners.
• Discuss the type of input that should be gathered.
• Describe the processes and steps needed to launch this new program.

Your paper should be in paragraph form (avoid the use of bullet points) and supported with the concepts outlined in your text and additional scholarly sources. Submit your three- to four-page paper (not including the title and reference pages). Your paper must be formatted according to APA style as outlined in the Ashford Writing Center and must cite at least three scholarly sources in addition to the textbook. Carefully review the

Grading Rubric (Links to an external site.)

for the criteria that will be used to evaluate your assignment.

2

Dominik Pabis/Ve�a/Ge�y Images

Gaining Competitive Advantage Through
Operations

Learning Objec�ves
A�er comple�ng this chapter, you should be able to:

Understand how business processes create compe��ve capabili�es that enable organiza�ons to sa�sfy
customer requirements.
Explain how opera�ons management can maintain an organiza�on’s compe��ve edge through high-quality
produc�on, convenient delivery, effec�ve customer service, and compe��ve cost.
Describe key business processes including strategy development, product development, system crea�on to
produce services and goods, and order fulfillment.
Discuss why opera�ons are strategically important.
List and define the steps necessary to link opera�ons to corporate strategy.
Describe how opera�ons managers use informa�on technology to increase produc�vity, improve quality,
provide a safer environment, and reduce costs.

A compe��ve advantage gives an organiza�on the edge over its
compe��on. By improving profits, increasing market share, and
expanding into new areas, opera�ons can work toward achieving this
desired advantage.

Stockbyte/Thinkstock

Control Brand; The Ba�le to Get on Your Plate:
High Stakes in the Food Industry

2.1 Achieving Competitive Advantage

Opera�ons presents top management with many opportuni�es to develop compe��ve advantages. A
compe��ve advantage is a capability that customers value, such as short delivery lead-�me or high product
quality that gives an organiza�on an edge against its compe��on. When properly used, opera�ons can be an
important tool for improving profits, increasing market share, and developing new markets. A firm’s market
share is its percentage of sales in a par�cular market, that is, its sales divided by total sales for all organiza�ons
compe�ng in a par�cular market.

An organiza�on creates a compe��ve
advantage by giving customers what they
want in a be�er way than other companies.
What do customers want, or in other
words, what do they value? Figure 2.1
provides a model for understanding how an
organiza�on can deliver compe��ve
advantage to its customers. An organiza�on
should know its external environment
(threats and opportuni�es) and its internal
environment (strengths and weaknesses),
and have a clear understanding of the
customers it is trying to serve. This is o�en
called “SWOT analysis,” for strengths,
weaknesses, opportuni�es, and threats. An
in-depth understanding of customer
requirements allows the firm to determine

a set of compe��ve capabili�es that will enable it to delight, rather than merely sa�sfy, customers. These
compe��ve capabili�es are, in turn, the result of well-designed business processes. These key business
processes are cross-func�onal and require opera�ons managers to work closely with their counterparts in
accoun�ng, finance, informa�on systems, marke�ng, and other disciplines within the organiza�on.

A list of factors that customers value is provided in Figure 2.1. The factors that customers value as well as the rela�ve importance of each factor vary from industry to industry and
from customer to customer, but this list presents a good star�ng point. Figure 2.1 also provides a set of compe��ve capabili�es that are affected by decisions made by opera�ons
managers. These compe��ve capabili�es help the organiza�on meet customer requirements, although there is not a one-to-one correla�on between a compe��ve capability and a
customer requirement. For example, flexibility in opera�ons enables firms to meet specific customer needs quickly, but it may also impact product quality and price.

Figure 2.1: Model for developing compe��ve advantage

As shown in Figure 2.1, organiza�ons must create business processes that enable the organiza�on to improve the compe��ve capabili�es needed to meet customer requirements,
thereby sa�sfying customers. However, an organiza�on’s impact on compe��ve capabili�es is not immediate, that is, no firm can create flexibility, produc�vity, or quality.
Compe��ve capabili�es are indirectly impacted through effec�ve design and the implementa�on of the business processes that help the firm meet customer requirements. Figure
2.1 also provides a list of business processes that are related to opera�ons. This list also may vary from industry to industry and from company to company within the same
industry. Other processes not listed, such as those to recruit personnel or raise capital, are important, but they are not discussed in this text mainly because they are not central
elements of opera�ons management.

Upcoming sec�ons in this chapter examine customer requirements, compe��ve capabili�es, business processes, and technology, which is a cri�cal tool for developing compe��ve
advantage. Coverage of the environmental factors o�en appears in a course on business strategy or business policy and, with the excep�on of global compe��on and technology,
will not be discussed here.

Control
Brand
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wID=100753&xtid=42270)

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Because gasoline is, essen�ally, an undifferen�ated product, customers purchase it based on
convenience, price, service, and loca�on.

iStockphoto/Thinkstock

2.2 Customer Requirements

Customers are at the core of business opera�ons. Sa�sfying customer requirements
leads to a compe��ve advantage if an organiza�on can meet needs be�er than its
compe�tors. If these requirements were equally valued by all customers, regardless of
product or industry, assessing customer requirements would be easy. However, there is
no universal set of customer requirements for all industries or for all customers within
one industry. For example, customers who purchase gasoline buy based on convenience,
price, and service because gasoline is (despite industry claims to the contrary) an
undifferen�ated or standard product that is virtually iden�cal from one company to the
next. On the other hand, many customers buy automobiles based on product features,
performance, quality, and price because automobiles are differen�ated products. Some
automobile buyers are less concerned about price and buy for the status associated with
a highpriced, high-performance luxury car with all possible features. The same customer
may have requirements that change over �me, so organiza�ons must con�nuously
measure and evaluate customer requirements.

To be successful at building compe��ve advantage, organiza�ons should know who their
customers are, and what their customers want. By understanding their customers’
requirements, organiza�ons can build a compe��ve advantage that enables them to
compete in global markets. Understanding these customer requirements is essen�al for
focusing on the right compe��ve capabili�es and designing the best business processes.
A brief descrip�on of customer requirements is listed in Figure 2.1.

Mee�ng specific customer needs—Value is created by precisely mee�ng specific customer needs. For example, one approach to providing payroll so�ware is to provide a generic
package that many firms can use, but that does not exactly fit any given customer’s needs. The generic package is usually less expensive than a so�ware package wri�en
specifically for a par�cular organiza�on. The generic package may require extra work by the customer, or the customer may decide to pay an addi�onal fee to have the so�ware
customized to meet its needs. A compe��ve advantage can be gained by crea�ng so�ware with built-in flexibility, so that it meets the different needs of various customers. The
compe��ve advantage of the so�ware is greatly enhanced when this flexibility is offered and the price is close to the price for so�ware that lacks this flexibility. This approach,
some�mes called mass customiza�on, enables firms to design, produce, and quickly deliver products that meet specific customer needs at a price that rivals mass-produc�on.
Mass customiza�on is the firm’s ability to produce differen�ated products with cost effec�veness, volume effec�veness, and responsiveness to customers’ needs. Volume
effec�veness is the ability to produce goods and services in large enough quan��es to meet overall demand.
Quick response—It is usually an advantage for customers to have products available immediately upon request. Late delivery may create delays, increase costs, and create other
problems for customers. Early delivery o�en creates storage problems, raises the risk of the� or damage as the item sits in inventory, and increases the need for working capital to
carry inventory. Long lead �mes force customers to commit to the purchase decision before they need the product. This situa�on can lead to mistakes because the circumstances
may change during the lead �me. For example, buying next summer’s wardrobe at a clearance sale in September incurs substan�al risk for the style-conscious consumer. Similar
problems occur when organiza�ons force their customers to contend with long lead �mes when placing orders.
Product performance and features—Generally, high-performing products with many features are preferred by consumers, especially when acquired for li�le or no addi�onal cost.
Organiza�ons that are innova�ve in design and produc�on of services and goods can achieve this. When it was first proposed that automobiles come equipped with air bags to
increase safety, there was great concern that the cost of the air bag (es�mated at about $600–700 each) would make the price of an automobile too high for the average
consumer. Today, air bags are touted as an important safety feature; some vehicles have six, seven, or more. The cost of air bags has dropped drama�cally because of be�er
design, economies of scale in produc�on, and produc�vity improvement through learning how to make the product be�er and cheaper—o�en called the learning curve. This is
true for a variety of goods and services from the iPhone to automa�c braking systems for vehicles, to mobile phone plans that offer more minutes as well as data downloads and
Internet access at lower prices than voice-only plans from a few years ago.
Product quality—To the customer, product quality means fitness for use. Does the product do what the customer wants, and does it perform well? Quality is broadly defined and
can include both product performance and features.
Price—The amount paid for a service or good is s�ll important to consumers. In fact, it is the other half of the value equa�on. Value is what a customer gets for the price paid.
Service—Service is broadly defined. It includes companion ac�vi�es, such as helping to arrange financing for a purchase or helping to install equipment. It also includes service
a�er the sale—advice on opera�ng a piece of equipment, providing repair parts, and processing warranty claims. If an organiza�on can provide be�er service than its compe�tors,
it may achieve a compe��ve advantage.

A barber chair can easily be adjusted to best fit each customer’s height.
This exemplifies opera�onal flexibility, which is the ability to alter
produc�on processes in response to customer demands, with minimal
costs or delays.

©Ge�y Images/Jupiterimages/Comstock/Thinkstock

2.3 Competitive Capabilities

Compe��ve capabili�es are the outcomes of well-designed business processes and, in turn, enable a firm to sa�sfy
its customer requirements. They are outcomes that an organiza�on has achieved, such as flexibility, so that a
customer’s needs can be met precisely, or produc�vity, so that costs can be kept low. The purposes of this
discussion are to iden�fy and define some of the most important capabili�es required by most organiza�ons and
to describe how they might be achieved. The list of compe��ve capabili�es in Figure 2.1 is not intended to be
exhaus�ve. The emphasis is on opera�ons and discussion focuses primarily on opera�ng issues and concerns.

Flexibility

Flexibility, as defined for opera�ons, is the ability to modify produc�on from one product to another in response
to customer demands with minimal costs and delays. With flexibility, customer sa�sfac�on increases and delivery
�me is reduced. Flexibility in opera�ons may be as simple as a barber’s chair that can be adjusted for a customer’s
height. It may be an employee at a medical clinic who can schedule pa�ents, access electronic medical records,
and bill insurance companies for medical claims. It may be a metal-bending press that can quickly be changed to
produce a van door panel or a car hood. Flexibility can be helpful in gaining a compe��ve advantage in a variety of
ways:

With the ability to produce a wide variety of products quickly and cheaply, marke�ng can meet specific
customer demands more closely and at a lower cost.
Timely deliveries are possible because flexibility implies that inexpensive and quick changes can be made from
one product to another.
Changeover costs are reduced because it takes less �me and effort to change produc�on resources, thereby
reducing opera�ng costs.
When sudden shi�s in market preference occur, the cost of redesigning facili�es and equipment is reduced
because the system can more easily adapt to producing new and different products.

Marke�ng departments would like to sa�sfy all demands made by any customer because selling is part of the job.
Sales can be more easily achieved when a wide variety of products is available for customer choice. Marke�ng also
aims to avoid any unnecessary delays in delivering the service or good. Reques�ng that opera�ons keep adequate
stock of inventory for all items is one approach that can be used in the produc�on of goods. Inventory, however, is
very expensive to hold. Also, a high level of inventory does not ensure that the firm has what the customer wants
because companies o�en have in inventory what is not selling, rather than what is selling. An organiza�on can
maintain quick delivery and s�ll keep finished goods inventory low through reducing the changeover �me between
products, thereby adjus�ng produc�on to meet the customer’s needs.

Real World Scenarios: Flint Auto Stamping Creates Flexibility Through Set-up Time Reduc�on

Flint Auto Stamping uses flexibility to gain a compe��ve advantage. Stamping involves sending flat sheets of steel through a series of large presses that shape the metal by
hi�ng it with dies (molds). The dies are formed to the shape of the finished product. Flint Auto Stamping produces le�-front and right-front quarter panels (fenders) for cars.
To change from le� to right quarter panels, the press must be stopped, and the dies that shape the metal must be changed. At Flint Auto Stamping, 4–8 hours are required to
change dies. If they change dies each day, they will spend four to eight hours each day without produc�on. Because of these delays, management will probably choose long
produc�on runs so the changeover �mes and costs will not be excessive. Longer produc�on runs will lead to greater inventory of one part. Demand for the quarter panel not
being produced must be sa�sfied from inventory because car assembly requires both front quarter panels at the same �me.

If the �me required to make the change was reduced to only 15 minutes, then management could afford more changeovers because less �me would be taken away from
produc�on. More changes mean less inventory buildup, because the �me un�l the next change is short and less inventory is needed to supply the part that is not being
produced. Less inventory leads to lower cost, which is a compe��ve advantage.

Greater flexibility is a result of good planning and effec�vely organized changeover procedures that use wri�en documenta�on and dedicated people—engineering,
management, and labor—who are willing to work together. Flexibility can also be enhanced through the applica�on of the most current technologies.

For service organiza�ons, flexibility can be achieved by cross-training employees. Many service opera�ons are labor intensive; if an organiza�on wants to deliver a variety of services,
it is important to train employees to perform more than one func�on. For example, an automo�ve repair firm may repair brakes, align wheels, and install ba�eries. If it has only
one person who specializes in performing each service, it may have customers wai�ng for ba�eries, while no work is being done in brakes and wheel alignments, and two idle
workers are present. Cross training can eliminate a problem such as this.

Flexibility in the produc�on process also permits facili�es to adapt to market changes. Disrup�ve technology, geo-poli�cal change, and global trade can cause rela�vely quick
changes. Drama�c changes make it difficult for companies to maintain their compe��veness. Without the flexibility to adjust, firms may face lower profitability, declining market
share, and even bankruptcy.

Highlight: Market Changes in Communica�on, Automo�ve, and Health Care Industries

The advent of farming equipment caused farm labor in the United States to decline from 95% to less
than 3%. This shi� allowed workers to focus on crea�ng and producing consumer goods and services.

Hemera/Thinkstock

iPhone as Disrup�ve Technology. A disrup�ve technology is a product that is substan�ally be�er than exis�ng products: The iPhone is one such example. Disrup�ve technology
makes it difficult for other companies to compete. For several years, the iPhone was available only with AT&T service, but as service expanded to include Verizon as an op�on,
a large segment of the market purchased the iPhone. This had a nega�ve impact on sales of the BlackBerry unit sold by Research In Mo�on (RIM), and RIM is struggling to
regain lost market share with new products that are designed to compete with the iPhone. So far, these products have not been successful compe�tors. As a result, the stock
price for RIM dropped from more than $80 per share to less than $15 in a very short �me. Over the same period of �me, Apple’s stock price has increased to more than $600
per share. Supplying new, be�er performing products to the market more quickly could possibly have helped RIM maintain its market share and financial performance. Apple’s
ability to design and improve its technology quickly—flexibility in design and produc�on—and RIM’s inability to do the same determine in large part their rela�ve performance.

Oil Price and the U.S. Automobile Industry. Since 1973, the date of the first oil embargo, the U.S. automobile industry has faced several major changes in market preference
between large and small cars. Prior to the embargo, gasoline was selling for $.30/gallon, but a�erward, gasoline doubled to $.60/gallon, sending shock waves through the
industry. In the early-1980s, the price more than doubled again to about $1.30/gallon. In 1986, with crude oil prices falling, the price of gasoline dropped drama�cally to about
$.70/gallon. However, the price soared again in 1990 to about $1.50/gallon, only to drop again in 1998 to $1.10/gallon. From 2000 to 2004, the price of gasoline fluctuated
from as high as $1.90/gallon to as low as $1.20/gallon. By 2007, it approached $5.00/gallon, but it was back below $2.00 a gallon the next year. As of late-2012, it stands at
about $3.50/gallon, and it is not clear what the cost will be in the future.

Each drama�c increase in gasoline prices has decreased the demand for large vehicles with 8-cylinder engines and increased the demand for more fuel-efficient small cars with
4-cylinder engines. Once gasoline prices stabilized (or at least remained stable for a while) larger vehicles with 8-cylinder engines were in demand once again. For many years,
the produc�on lines that machined the engines were not flexible; they were set up to make only one type of engine. It was very �me consuming and costly to shi� produc�on
from 8-cylinder engines to 6-cylinder or 4-cylinder engines, and it was just as expensive to shi� back when gasoline prices dropped. This inflexibility was a func�on of
equipment design. When determining the most effec�ve level of flexibility, decision makers in the automobile industry should consider the tradeoffs between shi�s to new
technology, extra costs of designing and opera�ng flexible machining centers for engine blocks, and the cost of conver�ng inflexible systems each �me crude oil prices
dras�cally change.

Global Trade and Health Care. For many years, items once manufactured in the United States such as apparel, furniture, and televisions, have been produced in other
countries, such as Mexico, China, and India. Now, global trade is impac�ng health care as well as hospitals. Other countries are a�emp�ng to lure U.S. pa�ents abroad for
surgical and other procedures because the costs for these procedures are far less in other countries. This small but growing trend, called medical tourism, may eventually
impact hospitals in the same way that global trade has impacted manufacturing. Health care providers must find ways to keep costs in check or reduce them, improve service
quality, and enhance customer service to maintain their market posi�on.

Productivity

Produc�vity is a mathema�cal calcula�on; it is the ra�o of the outputs achieved divided by the inputs consumed to achieve those outputs. As produc�vity increases, organiza�ons
can do the same work with less effort, or can do more work with the same effort. Increases in produc�vity reduce costs, lower prices, and provide a basis for compe�ng in world
markets. While produc�vity is defined by a mathema�cal equa�on, efficiency is a general descriptor of the �me or effort needed to do work. Efficiency is o�en used to mean
achieving an outcome with a minimum amount of effort, that is, no waste. In this way, efficiency addresses the same challenges as produc�vity, which is a precise measure. More is
discussed about produc�vity in a later chapter.

Produc�vity improvements are beneficial to the organiza�on, to management, to
consumers, and to workers. In any situa�on, there are limits on resources, capital
and equipment, material and energy, and labor. Addi�onally, none of these
resources is free. If an organiza�on can produce more products with fewer
resources, while improving quality, it will achieve two significant advantages. First,
the unit cost of the product will decline because less labor or fewer materials are
required to produce each unit. This, in turn, makes the product cost less and the
company more price compe��ve. Second, there will be unused resources that can
be used to develop and produce new products and enhance exis�ng products.
When significant increases in produc�vity have been achieved, revolu�onary
changes in resource alloca�on have occurred. These types of shi�s in resource
alloca�on have changed the face of economic development in the United States
three �mes.

The First Revolu�on

Increases in farming produc�vity resul�ng from the development of be�er methods
and machinery have caused farm labor in the United States to decline from 95% in
the early 1800s to less than 3% today. Those who had been working on the farms
then became free to work in other areas producing a vast array of consumer goods.
It also provided the opportunity to expand leisure �me by reducing the work �me
to only 40 hours per week. At the same �me, the prices consumers paid for food as

a percentage of income have declined dras�cally. Consumer goods such as automobiles, home appliances, and electronic gadgets were developed and produced by labor freed from
farming tasks. These changes have improved business opportuni�es, created new jobs, and improved living standards. These improvements would not have been possible without
the development of be�er methods and machinery that allowed companies to reallocate their human and physical resources from farming to the produc�on of goods.

The Second Revolu�on

During the late-1800s and the first half of the 1900s, improvements in manufacturing produc�vity freed resources for the rapid expansion of service opera�ons. As manufacturers
invested in equipment to automate produc�on, less labor was needed to make the same amount of finished goods. Banking, health care, insurance, retail, and other service

industries grew because of the labor freed by mechanizing opera�ons. Greater opportuni�es for services became possible because labor produc�vity improvements in manufacturing
allowed the U.S. economy to do more with fewer people and resources. This is how real improvement in living standards can be made.

The Third Revolu�on

The next wave of produc�vity improvements began in the 1950s with the development and commercial applica�on of computers. This phase, which some call the post-industrial
era, began with large, difficult to operate mainframe computers used by governments and a few very large businesses. Improvements have progressed with the use of large scale
databases, telecommunica�ons technology, the personal computer, the Internet, and smart devices. Now, the possibili�es and poten�al uses of these kinds of technologies are
endless. As this technology is applied to problems in decision making on the factory floor, in the office, in the hospital, in government, and so and on, produc�vity of blue- and
white-collar workers will increase. This technology allows fewer people to do more work.

Building Quality into Products

For firms to remain compe��ve in today’s global markets, they must produce high-quality products. To remain cost-compe��ve, organiza�ons must find ways to improve product
quality without increasing costs. Technological advances can lead to reduced costs, improved product performance, and enhanced quality. Enhancements in quality can result from
applying new technology (such as advances in micro and robo�c surgery), developing new materials (such as high-strength carbon fiber composite materials to replace steel), and
improving opera�ons through be�er management and training.

Highlight: Building a Culture of Quality: China and Japan

The importance of building quality into products is evident in a growing reluctance to purchase certain products, including food and toys from China because of well-publicized
failures in China’s produc�on systems. For China to maintain and grow its economy through global trade, it must create a culture of quality that will root out these problems,
and build products that customers will seek out and pay a price premium to obtain. This is the approach Japan has taken, beginning in the 1950s under the leadership of W.
Edward Deming and Joseph Juran. Using their quality principles, Japan changed its percep�on from low-quality trinket producer a�er World War II to the maker of high-quality,
high-technology products by the 1970s. However, even with this renewed percep�on, a long history of high-quality products can be damaged. For example, the substan�al
quality defects involving Toyota automobiles with unintended accelera�on have had a significant and nega�ve impact on sales. The quality defects and the impact of the 2011
tsunami on key suppliers’ ability to deliver components have lowered Toyota from the number one spot in worldwide automobile sales, a posi�on now occupied by General
Motors (GM).

High Quality and Low Costs: The Ideal

At one �me, many consumers believed the old adage “You get what you pay for.” As a result, consumers thought they had to pay more to get high quality. Although this statement
has intui�ve appeal, history has shown that improvements in quality can be achieved while costs are held constant or even reduced. Consumer electronics such as flat panel
televisions and home security systems have seen large improvements in quality while prices have remained the same or have dropped substan�ally. The flat panel televisions of
today offer be�er picture quality and features for about a third of the price of those from 10 years ago. Research and development has helped to drive these improvements.
Automobiles, which have risen in price over the past 30 years, have had substan�al innova�on and improvement, drama�cally enhancing quality. Passenger safety, fuel economy,
entertainment and naviga�on systems, and rear view cameras are now mainstay features. The price of today’s vehicles compared with vehicles from 30 years ago is rela�ve if prices
are adjusted for infla�on.

It is true that high quality can be achieved with high costs and that there will always be a market for exclusive products. But mass-market appeal requires the right combina�on of
quality and lower costs, as illustrated in Figure 2.2. Organiza�ons that can come closest to achieving this ideal product will have a tremendous advantage over the compe��on.

Figure 2.2: Blending quality and costs

Moving Toward the Ideal Through Technology

To move toward the ideal of high quality and low costs, improvements in product and process technology should be considered. Recall from Chapter 1 that product technology
refers to the way the product func�ons, and process technology refers to the way the product is made.

A look back at the evolu�on of television provides a perspec�ve on product technology’s poten�al impact on quality and cost. In the mid-1950s, when color television was first
introduced, televisions had a large picture tube and a dozen or more smaller tubes inside, and each unit cost about $600. Minimum wage at the �me was $1.00/hour. Picture
quality was poor and the life of a color television set was only a few years. Refinements in technology, including transistors and printed circuit boards, allowed producers to reduce
costs and significantly improve quality. In 1982, a 25-inch color console television cost about $500. With today’s digital technology, a 50-inch, non-3D, flat panel television costs
about $600, and the minimum wage is now more than $7.00/hour. Televisions are now an especially good bargain because these prices are not adjusted for infla�on.

Process technology is the method of making a product, so it may not be possible to see the improvement in the product itself. For example, gall bladder surgery is rou�nely
completed using microsurgery, which is less invasive, takes less �me, and has a shorter recovery period than other methods. The product remains the same, removal of a non-

During the past 30 years, substan�al innova�ons have been made to
enhance the quality of today’s cars. Features include improved
passenger safety, fuel economy, and entertainment and naviga�on
systems.

©Ge�y Images/Jupiterimages/Photos.com/Thinkstock

E-business is an electronic pla�orm that enables fundamental changes
in the way organiza�ons, supply chains, and customers interact.

Hemera/Thinkstock

performing gall bladder, but only the process and the quality change. In manufacturing, improvements in process
may also include the use of machines to complete difficult and demanding jobs. It is likely that most vehicles
currently on the road are held together with spot-welding completed by robots rather than people. Robots will not
�re or fail to show up for work. Robots can complete high-quality welds and place them in the exact same loca�on
each �me. By placing the weld in precisely the right place each �me, fewer welds are needed to make a strong
frame than if placed by humans. In most cases, mechanized welding of all types is a process improvement that
leads to faster, cheaper, and stronger welds than manual welding.

Moving Toward the Ideal Through Be�er Management

Higher quality and lower costs can also be achieved through be�er management prac�ces, including quality and
cost-management programs that trim waste from opera�ons, be�er training and mo�va�on for employees, and
greater a�en�on to machine maintenance.

But which should be first: new technologies or improved management prac�ces? Improved management prac�ces
should come first. Full benefits from implemen�ng new technology will result when exis�ng opera�ons are well
understood and running properly. Implemen�ng new technology prior to correc�ng poor management systems
usually leads to li�le, if any, return on the organiza�on’s investment. If managers are having difficulty with exis�ng
opera�ons processes, it is unlikely that they will be able to understand and control more sophis�cated technology
and opera�ons.

Time

Compe�ng on �me has become an important way to build compe��ve advantage because rapid market changes
place a premium on quick response. Time-based compe��on is a strategy of seeking compe��ve advantage by
quickening the pace of cri�cal organiza�onal processes, such as product development, order entry, produc�on,
distribu�on, and service. The emphasis is on end-to-end �me (i.e., aggregate �me) from the genera�on of new
product concepts to the delivery of finished products, rather than the �me to perform specific tasks or func�ons.
Time is a fundamental business performance variable. Time, therefore, becomes one of the cri�cal objec�ves for
organiza�ons redesigning their business processes. Organiza�ons such as Hewle�-Packard, L.L. Bean, and GE are
compe�ng on �me. Each company is quickly introducing new products. These companies, and many others, are
reducing �me from product development as well as order fulfillment.

E-Business

E-business (i.e., electronic business) o�en means different things to different people. E-business involves the use of electronic pla�orms to conduct company business. It means
applying computer and informa�on technology to design, plan, and manage opera�ons and to track transac�ons between organiza�ons and suppliers, and between an organiza�on
and its customers. Two decades ago, computer systems focused on repor�ng results and tracking performance. Today, computer technology has become a proac�ve tool for working
with suppliers and customers. The primary reasons for the differences between the e-business systems of today and the computer systems of 20 years ago include advances in
so�ware development, and substan�al improvements in speed, power, size, and costs of hardware. Today, processing speeds, database capacity, telecommunica�ons capability,
networking, and handheld devices (among others) have improved exponen�ally while costs have dropped dras�cally. These improvements are powerful forces that enable e-business
solu�ons to make fundamental changes in the ways that organiza�ons, supply chains, and customers interact.

E-business can be divided into two elements: business-to-business (B2B), or supply chains, and business-to-
consumer (B2C), or customer rela�onships. B2B refers to transac�ons between organiza�ons in a supply chain,
such as IBM selling computer services to Priceline.com or Boeing. B2C refers to transac�ons between an
organiza�on and its final customer, such as Amazon.com selling books or music to consumers via the Internet.

Supply Chain Management

Supply chains encompass all ac�vi�es associated with the flow and transfer of goods and services, from raw
material extrac�on, through use by the organiza�on that sells to the final consumer. In oil refining, that includes
everything from loca�ng and pumping crude oil, to the sale of gasoline at the service sta�on. Informa�on flows
in both direc�ons along the supply chain while materials flow, at least ideally, in a consistent and orderly fashion
toward the final consumer. Service providers play an essen�al role in helping organiza�ons design, plan, and
manage these informa�on and material flows so that efficiency, speed, and on-�me delivery are achieved.
Engineering firms design and install material handling systems, transporta�on companies move materials
between facili�es, and computer-based companies design and implement informa�on systems to help manage
these ac�vi�es.

Supply chain management is the integra�on of these ac�vi�es through improved supplier rela�onships to
achieve a sustainable compe��ve advantage for all members in the supply chain. It is an essen�al ingredient for

compe��on. Progressive organiza�ons have recognized that compe��on is no longer between individual firms, such as between Toyota and Ford, or between GM and Volkswagen,
rather it is between their respec�ve supply chains. The development, design, produc�on, marke�ng, and delivery of a new car should be a coordinated effort that begins with
extrac�ng raw materials from the earth, con�nues through design, fabrica�on, and assembly, and ends with fit and finish in the dealer’s showroom. When a customer purchases a
car from Ford, for example, the customer chooses the output of the en�re supply chain and pays all the par�cipants in that chain. To be successful, Ford must develop methods to
manage the supply chain beginning with basic materials, such as iron ore, sand, and crude oil, and ending with the dealer. That does not necessarily mean ownership or even direct

control, but it does imply mechanisms that influence decision making and impact performance. These rela�onships should work to the benefit of all the par�cipants. The impacts of
supply chain and supply chain management are evident in two recent examples.

Highlight: Supply Chains Are Keys to Success

When Chrysler and General Motors faced bankruptcy in late-2008 and 2009, there was grave concern for what would happen to the supply chain. Many of Chrysler’s and
General Motors’ suppliers were also suppliers to Ford, Honda, Toyota, and other assembly plants in the United States. Bankruptcy of Chrysler and General Motors would most
likely lead to bankruptcy of key suppliers, which could create problems with the en�re automobile industry in the United States. To resolve this issue, the bankruptcies were
orchestrated so the two automakers and their suppliers con�nued business. The automakers exited bankruptcy stronger and more likely to succeed. The recent successes of
Chrysler and General Motors, as well as Ford (which did not file for bankruptcy) illustrate the success of these efforts.

The tsunami that hit Japan in 2011 created significant damage to key automo�ve suppliers in Japan, and forced Toyota to scale back produc�on. Many of these suppliers were
located in the vicinity of the tsunami, and product facili�es were damaged and buildings were without power, making cleanup and produc�on difficult. Despite the
comprehensive and effec�ve con�ngency plans in place, the magnitude of the disaster was so large that Toyota could not maintain worldwide produc�on.

Customer Rela�onship Management

Customer rela�onship management (CRM) is a process to create, maintain, and enhance strong, value-laden associa�ons with customers (both individuals and organiza�ons) that
purchase products. CRM moves beyond short-term transac�ons to build long-term rela�onships with valued customers, distributors, and dealers. Firms using CRM a�empt to build
strong economic and social connec�ons by promising and delivering high-quality goods and services at a fair price and in a �mely manner. Increasingly, firms are focusing on
building mutually beneficial rela�onships with customers, distributors, and dealers instead of working to maximize the profit on any individual transac�on. Firms can use the
following ideas to develop stronger rela�onships with customers.

Financial benefits—Firms can build value and sa�sfac�on by adding financial benefits. For example, airlines offer frequent flyer programs, hotels provide room upgrades to guests
with a certain number of visits, and supermarkets give preferred customers discounts on items.
Social benefits—Firms can build allegiance by increasing their social bonds with customers by learning individual needs and then personalizing service. Ritz-Carlton hotel
employees treat customers as individuals by a�emp�ng to learn and use their names. The hotel records specific informa�on about customer preferences in a database, and other
Ritz-Carlton hotels around the world use this informa�on. Customers with a special request in one hotel should find that request met the next �me they stay at a Ritz-Carlton
hotel, even if it is in another city or country.
Structural �es—Firms can add value by crea�ng addi�onal support services that make it easier to buy products from them. A business might supply customers with special
equipment or online links that help them manage their orders. For example, Dell creates personalized websites for its large commercial customers that provide most of the
informa�on and support the customer may need. In addi�on to handling purchases, the site also supplies tailored technical support, diagnos�c tools, and other features designed
for the customer.

Real World Scenarios: Amazon Makes It Easy

Amazon.com started as an online bookseller about 20 years ago, sta�ng that its goal was to become the largest bookseller in the world. The company grew rapidly for several
years before it encountered very challenging �mes when the dot-com bubble burst. Amazon understood that its compe��ve advantage was access to a large, growing, loyal
customer base, so it expanded its services to include a wide variety of products. Amazon also decided to provide brokerage services to other companies, so its customers could
have access to a wider selec�on of products. Items found on Amazon’s website may be owned, warehoused, and shipped by Amazon’s partner company. Amazon receives a
por�on of the selling price without any associated costs except lis�ng the items on its website. Amazon is o�en the first place that many online shoppers search when buying
almost any product. This growth in business has driven Amazon’s stock price from single digits a�er the dot-com bust to nearly $200/share. It also has driven many brick and
mortar book stores out of business and nearly forced others into bankruptcy.

The lunar landing required a coopera�ve effort of several teams. This
feat would have been impossible to achieve if only one team had been
working toward this goal.

AP Photo/NASA/Neil A. Armstrong

Control Brand; The Entrepreneurs, Part 2: TOMS
Shoes and Frontera Foods

2.4 Designing Business Processes That Build Competitive Capabilities

Organiza�ons do not control customer sa�sfac�on directly. When a customer purchases a product, it is through
the consump�on of the product that customer sa�sfac�on is achieved. As shown in Figure 2.1, focusing on
business processes is a cri�cal factor in achieving compe��ve capabili�es, which leads to customer sa�sfac�on,
which, in turn, leads to organiza�onal success. An organiza�on may have several different processes and many
sub-processes within each process. The discussion here is limited to four key processes that most organiza�ons
have, and that are substan�ally impacted by opera�ons: strategy development, product development,
development of systems to produce services and goods, and order fulfillment.

Strategy Development

As described in Chapter 1, strategy should drive an organiza�on toward its ul�mate objec�ve. A strategy
considers the threats and opportuni�es in the environment, and it measures the strengths and weaknesses of
the organiza�on. Strengths, weaknesses, opportuni�es, and threats represent inputs to strategy development.
The strategic planning process provides a path toward the organiza�on’s objec�ves. This path includes se�ng
goals, developing ac�on plans for achieving the goals, and determining resource requirements. Developing a
strategy requires a team with specialized knowledge from different func�onal areas or disciplines. When
opera�onal plans are linked to financial, marke�ng, engineering, and informa�on systems development plans,
synergy can result. Synergy involves coopera�ve ac�ons (teamwork) in which the total effect of the ac�ons is
greater than the sum of the individual effects (i.e., the whole is greater than the sum of its parts). For example,
pu�ng a man on the moon is a feat that required a coopera�ve effort no single part of the team could have
achieved, no ma�er how long and hard it worked. A brief descrip�on of the process for strategy development is
provided later in this chapter.

Product Development

Product development is a teamwork-oriented process that begins with the organiza�on’s strategy and analysis
of the markets as inputs. The team develops a product concept, generates a product design, and provides a
process design for producing the service or good, which are the outputs. Knowledge regarding customer
preferences, technology, opera�ng capabili�es, financial constraints, distribu�on systems, and so on, should be
available from specialists in accoun�ng, finance, marke�ng, research and development, engineering, informa�on
systems, and opera�ons.

Developing Systems to Produce Services and Goods

Developing systems to produce the services and goods designed in the product development process requires
firms to assemble resources—people, facili�es and equipment, and material and energy. These resources may
be part of the organiza�on, or they may be contracted by another firm. Important knowledge inputs needed to
develop an effec�ve produc�on system are the product and process designs created in the product
development process. These designs help to guide decision making.

Tradi�onally, these topics are included in opera�ons management, but organiza�ons that want to ensure
success recognize the interdisciplinary nature of these tasks. Accoun�ng and financial informa�on is necessary
for decision making, and human resources are necessary to make the system work. Engineering principles,
especially industrial engineering, are an important founda�on of this design for both services and goods. More
is covered on this topic later in the book.

Order Fulfillment

This process involves all the steps required to sa�sfy a customer’s order, from obtaining an order and entering it into the organiza�on’s informa�on system, to delivering the order.
The primary inputs are from the customer, marke�ng, and the people responsible for designing the facility that will produce the service or good. The desired output is a sa�sfied
customer, not the delivered product. While this difference may seem small, it is important to remember that an organiza�on is only successful when customers are sa�sfied. Order
fulfillment should be a highly integra�ve teamwork-oriented process that includes many disciplines and ac�vi�es, such as sales, credit verifica�on, analysis of working capital needs,
and selec�ng shipping routes and transporta�on alterna�ves. Producing the services and goods intended to sa�sfy customer requirements is an important part of order fulfillment.
This execu�on is dependent upon the organiza�on’s ability to plan and manage opera�ons, including produc�on planning, scheduling, inventory control, purchasing and material
management, and project management. These ac�vi�es influence and are affected by ac�vi�es carried out in other parts of the order fulfillment process. Details of the order
fulfillment process from the opera�ons management perspec�ve are provided later in the book.

Product
Development
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2.5 Strategy Development and Operations

Strategy begins with the organiza�on’s goals and includes the key policies that are established to direct ac�ons toward mee�ng those goals. As an organiza�on defines its corporate
strategy, a framework is created that enables the firm to develop a set of func�onal strategies consistent with and integrated to the corporate objec�ves. Research and
development, marke�ng, engineering, opera�ons, and other func�onal areas need to develop objec�ves, plans, and programs that are consistent with corporate goals.

An advantage that can be achieved by improving opera�ons should be pursued because it fits the organiza�on’s overall goals, not because it fits a narrowly defined opera�ng
objec�ve, such as minimizing transporta�on costs. Minimizing transporta�on costs, for example, may not be in the best interests of an organiza�on if inventory holdings or other
costs would increase too much, or if product quality or on-�me delivery would be nega�vely affected. Opera�onal goals should be important only when they help the organiza�on
reach its objec�ves. The following sec�ons describe how corporate strategy is linked to opera�ng strategy.

Linking Corporate Strategy to Operations

Corporate strategy and opera�ng strategy must be carefully linked. Opera�ons can become a posi�ve factor contribu�ng to organiza�onal success, rather than a nega�ve or neutral
factor. To make this happen, facili�es, equipment, and training should be viewed as a means to achieve organiza�onal, rather than opera�onal, objec�ves.

Real World Scenarios: Midas and Genoa Ford, Same Service but Not Compe�tors

A typical Midas shop and the service center at a dealership such as Genoa Ford provide the same service, but are they really compe�tors? Each has adopted different strategies
and tailored their opera�ons to fit those strategies.

Midas is in the automo�ve repair business. Its strategy is to provide a narrow range of services at low cost. Na�onal adver�sing is used to develop wide geographical coverage.
The company is not a full service repair shop, but concentrates on muffler repair, brakes, and shock absorbers. It is successful because it quickly delivers quality services at low
cost. How are opera�ons important to Midas?

1. Limited service requires a limited inventory that allows convenient storage close to where materials are needed to perform opera�ons.
2. Mul�ple shops and limited service permit careful engineering of the necessary hand tools and work procedures. These special tools and work procedures make shop employees

more efficient. Midas can apply the same tools and methods to a large number of shops, ensuring that ini�al engineering costs are easily covered.
3. Because employees have few varia�ons in service, they learn how to perform these jobs more quickly.
4. Workers’ skill levels and knowledge requirements focus on a limited area of service so they quickly become experts in a par�cular area.

As part of a Ford dealership, Genoa Ford’s Service Center provides a full line of automo�ve repairs. In contrast to Midas, this service opera�on competes without adver�sing or
na�onal appeal. It also has a different opera�ng strategy. In order to maintain the dealership, Genoa Ford must be able to sa�sfy a wide variety of customer needs. It offers
transmission work, body work, engine repairs, and other tasks in addi�on to working on brakes, shocks, and mufflers as Midas does. Genoa Ford designs its opera�ons to
match its objec�ves.

1. The facility is adaptable to changing needs. For example, on one day, a single repair stall may be used to wash a new car, repair a door lock, fix an air condi�oning leak, or tune
an engine.

2. Genoa Ford has more tools than a specialist like Midas does because Genoa Ford offers a greater variety of jobs.
3. There is some job specializa�on among workers. All employees will not be able to do everything, but employees s�ll need a wide range of skills because Genoa Ford does not

have enough of one par�cular job to allow personnel to specialize. Cross-training is necessary.
4. The workers’ skill levels and pay rates are higher than workers at Midas.
5. A significant inventory of many different parts is maintained. These parts are physically separated from the repair stalls and controlled by specialists in parts.

As a result of its strategy, Genoa Ford has higher costs and charges higher prices than Midas does for comparable work. When a car needs rou�ne exhaust system work, it can
be taken to a na�onal chain such as Midas. Generalists, such as Genoa Ford, can complete more difficult jobs and repair work that is paid for by Ford as part of its new car
warrantee program.

Analyzing, Appraising, and Designing

Management needs a strategic, top-down view of opera�ons to successfully link corporate strategy and opera�ng strategy. This process begins with analyzing the compe��ve
environment, step 1 in the list, and ends with managing and controlling opera�ons, step 7. Some important ques�ons that define the process are provided in Table 2.1.

1. Analyzing the compe��ve environment (external environment—threats and opportuni�es)
2. Appraising the organiza�on’s skills and resources (internal environment—strengths and weaknesses)
3. Formula�ng corporate strategy
4. Determining the implica�ons of corporate strategy for opera�ng strategy
5. Examining the limita�ons economics and technology place on opera�ons
6. Designing systems for opera�ons
7. Planning and managing opera�ons

Table 2.1: Analyzing, appraising, and designing

Stage of linking
strategy

Key ques�ons

Analyzing In what market(s) is the organiza�on planning to compete?
Who are the present compe�tors, and what are their strengths?
Who are the poten�al entrants?
What changes in government regula�ons or business condi�ons may alter the compe��ve environment?

Appraising What strengths does an organiza�on possess?
How may these strengths be used to take advantage of certain opportuni�es in the environment?
What technological exper�se and produc�on capabili�es are available?
What markets or channels of distribu�on are open?

Formula�ng What are the goals and objec�ves of the organiza�on?
What are the key policies for achieving goals?
What policies will be set for minimizing security risks?
How can customers be iden�fied? Who are the compe�tors?

Determining What are the strategic opera�ng decisions?
Where should the facility be located to provide rapid response to customer needs at an acceptable cost?
What process technology will be employed and at what capacity?
What is the level of product quality?
Is there a trade-off between product cost and quality?
What level of flexibility is required to produce services and goods for this market?
Is the market likely to change, making flexibility important?

Examining What are the specific limita�ons of the exis�ng opera�ons?
What resources need to be improved or obtained in order to meet organiza�onal objec�ves?
How large will a par�cular facility be?
How should the produc�on resources be distributed?
Should there be only a few large facili�es with their associated economies of scale?
Would several smaller facili�es that are easier to manage be be�er?

Designing How should opera�ons be designed in order to meet the organiza�on’s objec�ves?
How can flexibility be designed within the system to an�cipate changing needs?
What are the informa�on-processing capabili�es necessary to provide management with useful informa�on for decision making?

Planning How can the organiza�on use the resources available to meet present and projected customer needs?
How might those resources be changed through addi�onal capital expenditures to sa�sfy changing demands? How well has the opera�ons func�on
performed in mee�ng the established plans?
Has it been successful at moving the organiza�on toward its short- and long-term objec�ves?
Has opera�ons made the organiza�on stronger and given it a compe��ve advantage by making be�er quality products, providing improved service
and shorter delivery lead �mes, or reducing costs?

All organiza�ons operate within an environment that is shaped by external factors and forces over which there is limited control. These factors include the level of technology, labor
supply, social and poli�cal environment, and an array of compe�tors and poten�al compe�tors, both domes�c and interna�onal. Environmental legisla�on may drama�cally alter an
organiza�on’s cost of doing business in a way that does not affect compe�tors. New entrants into the market may possess strengths that provide a compe��ve advantage over firms
already in the market. To be successful, an organiza�on should know about the market in which it will compete as well as its environment.

Airlines and hotels use computers connected to the Internet to take
reserva�ons and to schedule flight crews and housekeeping.

Hemera/Thinkstock

2.6 The Role of Information Technology

The use of computers in service and manufacturing opera�ons is not new. In accoun�ng, computers are used to
perform payroll, accounts receivable, and accounts payable func�ons. Computers are key to monitoring inventory
levels and controlling quality. Airlines and hotels use computers to take reserva�ons and to schedule flight crews
and housekeeping. Computer technology is used to monitor flow process in papermaking and oil refining and to
control metal-cu�ng machines that shape parts needed in automobile engines and refrigerator compressors. In
these situa�ons, computers provide feedback on opera�ons and can take correc�ve ac�on.

In addi�on to these applica�ons, which have been used for many years, computer and informa�on technology is
being applied to other elements of business to create an informa�on-rich environment. In turn, these
technologies provide access to data via sophis�cated, complex databases and the wealth of informa�on on the
Internet. Worldwide travel registra�on sites Travelocity and Expedia are good examples of sophis�cated Internet
databases. A short discussion of expert systems and decision support systems provides some basic understanding
of these tools.

Expert Systems

An expert system employs human knowledge that has been stored in a computer to solve complex problems. To
be considered an expert system, the system must have: (1) a method of acquiring knowledge, (2) a knowledge
base (memory), and (3) an inference engine (brain) so it can reason. Knowledge acquisi�on is the accumula�on,
transfer, and transforma�on of problem-solving exper�se from a source, usually a human expert. The expert may
have more work than he or she can complete. The expert will eventually move on or re�re, so the idea of
capturing the person’s working knowledge in a computer-based expert system is very appealing. Knowledge
engineers help the human expert structure the job by interpre�ng and integra�ng human answers, drawing
analogies, posing examples, and iden�fying conceptual difficul�es.

The knowledge base can be thought of as a powerful database that contains facts such as the problem situa�on
and theory in the problem area, as well as special rules that direct the use of the knowledge. The inference
engine is a computer program that provides a methodology for reasoning. This component makes decisions
about how to use the knowledge in the system. The inference engine interprets rules, maintains control over the
problem, and enforces consistency as the recommended solu�on emerges. There are many poten�al applica�ons
for expert systems, from genera�ng orders for inventory, diagnosing pa�ents, troubleshoo�ng equipment failure,
advising on tax-sheltered annui�es, and scheduling produc�on.

Decision Support Systems

A decision support system (DSS) is a model-based set of procedures for processing data to assist managers in decision making. A DSS allows managers easy access to stored
informa�on and provides easy-to-use tools for analysis. With these suppor�ng tools, management has the informa�on to more easily control complicated manufacturing and service
opera�ons. A DSS is different from an expert system because an expert system has a rule base and an inference engine for decision making and a DSS does not. Once an expert
system has been constructed, it can make a decision. On the other hand, a DSS provides informa�on to help managers make decisions. In a DSS, the manager provides the logic to
structure the problem and ul�mately makes the decision.

A DSS can help a manager relate the demand for a product to the correct quan��es of materials to be ordered to make that product. If a manager has received an order for 10,000
hair dryers for next month, how does he or she know the number of electric motors, wire connectors, and plas�c parts to order? How does the order fit into the produc�on
schedule? Does the organiza�on have sufficient capacity? What are the impacts on cost and quality if the orders are processed on certain machines? It becomes necessary to link
these decisions by using the computer as a tool.

Role in Manufacturing

Computer-based control systems can be combined with manufacturing technology, such as robots, machine tools, and automated guided vehicles, to improve manufacturing
opera�ons. In this role, the computer can assist in integra�ng these technologies into a lean and efficient factory capable of compe�ng in world markets. Organiza�ons such as
Allen-Bradley, Black & Decker, and Boeing have used informa�on technology and factory automa�on to improve manufacturing opera�ons. This combina�on of informa�on
technology and factory automa�on is o�en called computer-integrated manufacturing.

Computer-integrated manufacturing (CIM) blends developments in manufacturing with informa�on technology to achieve compe��ve advantage. When properly organized, CIM
offers the opportunity to automate design, manufacturing, and produc�on planning and control.

Engineering design through computer-aided design (CAD) allows an organiza�on to rapidly make high-quality specialized designs. The designs can be tailored to meet individual
customer needs.
Flexible manufacturing systems (FMSs) can quickly produce a variety of high-quality products efficiently. A FMS also allows an organiza�on to produce highly specialized designs.
Computer-based produc�on planning and control systems allow an organiza�on to cope with the complexity of managing facili�es that produce a wide variety of specialized
products without losing efficiency.

When properly combined, these components can yield synergis�c results. An organiza�on can have more flexible and integrated opera�ons, be be�er equipped to manage complex
opera�ons, and exercise be�er control than a company that operates without CIM. To merge these components into one coordinated whole, IT staff should integrate engineering,
manufacturing, and business databases into a cross-func�onal decision support system. Once accomplished, the flexibility to respond to customer demands with low-cost, high-
quality specialized products becomes a powerful compe��ve advantage.

Several supermarkets use automated warehouses and point-of-sale
inventory systems to keep inventory costs low and product availability
high.

Dick Luria/Photodisc/Thinkstock

Role in Service Operations

Service, by its defini�on, does not have a physical component. However, many organiza�ons classified as service
providers produce both goods and services. These hybrid opera�ons include: restaurants, which sell food (a good)
and prepare it (a service); department stores, which sell products as well as provide retailing services; and shops
that sell parts and offer repair services.

Real World Scenarios: Kroger

Kroger supermarket’s automated warehousing provides its compe��ve advantage. Retail food is a compe��ve business with low profit margins. To remain price compe��ve,
Kroger must cut inventories and warehousing costs and maintain adequate supplies of thousands of products. To achieve these goals, Kroger has implemented automated
warehouses and point-of-sale inventory tracking. The process begins when a customer purchases an item. An electronic scanner reads the bar code on the product. The cash
register, which is really a computer terminal, records the sale of that item in the computer’s database. At any �me, a store manager can tabulate sales by product. In addi�on,
orders can be sent electronically to the automated warehouse. The orders are filled using automated stock pickers and shipped the next day. At the warehouse, computers help
to track shipments to individual stores and place orders to suppliers, so that inventory costs in the warehouse are low, and product availability is kept high.

For many services, the tangible part of a product is not significant. Within these opera�ons, managers cannot buffer customer demand from the produc�on process with finished-
goods inventory. Managers in service opera�ons must find other ways to provide be�er and faster customer service. Implemen�ng informa�on systems that provide up-to-date and
accurate informa�on about availability of the service and how customers can acquire it is one way to do this. Many opportuni�es exist for using computers and informa�on
technology to improve service opera�ons and to gain compe��ve advantage. In order to remain compe��ve, future managers should understand this technology and be capable of
implemen�ng it successfully. Tomorrow’s managers will be expected to be more efficient and increase the quality of their work with these tools for improvement.

Real World Scenarios: BNY Mellon and Merck & Co.

BNY Mellon bank and others are using an expert system to successfully ba�le credit card fraud, which is a mul�billion dollar problem in the United States. The computer-based
expert system examines 1.2 million accounts each day for many factors, such as an unusual number of transac�ons, charging large amounts, and changing pa�erns of
expenditures. The system iden�fies nearly 100 cases each day that require more inves�ga�on. Mellon paid approximately $1 million for the so�ware, and predicted that it will
pay for itself in 6 months.

Merck & Co., one of the largest drug companies in the world, decided to completely revamp its benefits system. To enroll more than 15,000 salaried employees using printed
forms would have required Merck to double its personnel staff. Instead, the company spent $1 million to write computer so�ware and install 24 machines (similar to the ATMs
at banks) to enroll its employees. Enrollment took only 5 weeks and not one person was added to the personnel staff. Merck is using similar systems to allow employees to
adjust withholding allowances and reallocate their investment plan without speaking to personnel in payroll. Merck’s so�ware prevents employees from selec�ng op�ons for
which they are not eligible.

Chapter Summary

Sa�sfying customer requirements means building compe��ve capabili�es, such as flexibility, produc�vity, quality, and �me.
Compe��ve capabili�es are the results of good business processes.
Opera�ons should be viewed by top management as an opportunity to develop compe��ve advantage. When properly designed, opera�ons can increase an organiza�on’s
flexibility, reduce costs, enhance quality, and improve produc�vity.
Opera�ons are strategically important to an organiza�on’s success. Without this strategic view, an organiza�on can never reach its full poten�al.
Links that connect opera�ons to an organiza�on’s strategy begin with analysis of the compe��ve environment and include an appraisal of the organiza�on’s skills, the implica�ons
of corporate strategy for opera�ons, and the economic and technological limits of opera�ons.
Computer and informa�on technology helps an organiza�on to achieve a compe��ve advantage. These systems provide informa�on to enhance decision making and improve
control by integra�ng various parts of the produc�on process.
Applying informa�on technology to service opera�ons is one way to achieve a compe��ve advantage.

Case Study

Midas

Assume that Midas is deciding whether it should add engine tune-ups to its exis�ng product line. Top management has called you in as a consultant to help it to analyze this
opportunity. The first thing the consultant asks you to do is read the Midas and Genoa Ford Feature in this chapter.

Management is concerned about the impact that this new service will have on exis�ng opera�ons. Presently, the company has a policy that customers will not wait longer than 30
minutes for muffler service. How can Midas maintain that pledge? What methods for scheduling tune-up service might make it easier for Midas to keep its pledge? If reac�on to the
new service is great, the shops may not have the capacity to sa�sfy demand. Should the company add capacity to exis�ng shops to take the extra load, or should it add more
shops? How will the shop owners react to the new proposal? Assume that most of the shops are very profitable. Will the owners want higher profits?

Midas’s management is looking for help in organizing its thinking and has asked you to respond to the following ques�ons in a two-page report. Your responses should include the
cri�cal issues raised in the previous paragraph.

1. What are the an�cipated impacts upon opera�ng efficiency? How would you a�empt to minimize the nega�ve impacts?
2. Should some opera�ng prac�ces be changed to accommodate the tune-ups?
3. Should input be gathered from the shop owners? If so, what?
4. If Midas decides to launch this new program, how should it begin?

Discussion Ques�ons

Click on each ques�on to reveal the answer.

1. To be successful, organiza�ons should focus on customer requirements. List the ways opera�ons can help sa�sfy customer requirements, and discuss each briefly.
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To be successful at building compe��ve advantage, organiza�ons should know who their customers are and what their customers want. Opera�ons can help sa�sfy customer
requirement.

a. Mee�ng specific customer needs: Customizing the product to meet specific customer requirements increases customer sa�sfac�on. Organiza�ons need to find ways to meet
these needs that do not increase cost.

b. Quick response: Having products available for customers upon request is an advantage. Late delivery may increase costs, lower customer sa�sfac�on, and create other
problems. Early delivery o�en creates storage problems, creates the poten�al for the� or damage as the item sits in inventory, and increases the need for working capital to
carry inventory.

c. Product performance and features: Organiza�ons that design high-performing services and goods are preferred by consumers. This is especially true when these features and
performance are acquired for li�le or no addi�onal costs.

d. Product Quality: A product should be able to meet customers’ expecta�ons and perform the work they want. Product quality should be broadly defined to include fitness for
use.

e. Price: Price is the other half of the value ques�on, and is an important part of the purchase decision.

f. Service: It may include equipment installa�on and a�er-sales-service such as advice on opera�ng equipment and providing repair parts. For services it could include on-line
informa�on on product availability or other forms of support.

2. How can the following a�ributes help an organiza�on achieve compe��ve advantage?
a. Flexibility
b. Produc�vity
c. Quality
d. Supply chain management
e. Customer rela�onship management
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a. Flexibility is the ability to change between products with minimal costs and delays. With the flexibility to produce a wide variety of products, marke�ng can meet customer
demand as closely as possible. Timely deliveries are possible because flexibility implies that inexpensive and quick changes can be made from one product to another.
Changeover costs are reduced, which reduces opera�ng costs. Finally, when sudden shi�s in market preference occur, the cost to redesign facili�es and equipment is reduced
because the system can more easily adapt to producing new and different products.

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b. Produc�vity improvements can provide the organiza�on with a compe��ve edge. In any situa�on there are limited resources, limits on capital and equipment, material,
energy and labor. Moreover, none of these resources are free. If an organiza�on produces more and be�er products with fewer resources, it will achieve two dis�nct
advantages. First, the unit costs of the product will decline because less labor is required, making the product more compe��ve. Second, there will be unused resources that
can be applied to develop and produce new and be�er products.

c. High quality, which can be defined as fitness for use, can be achieved at high costs and there will always be a market for these exclusive products. However, mass market
appeal requires the right blend of improved quality and lower costs. An organiza�on that produces a higher quality product than its compe��on while using fewer resources
(lower costs) will be able to quickly increase its share of the market.

d. Supply Chain Management is about ensuring that supply chains that produce the goods and provide the services are working effec�vely. Supply chains encompass all
ac�vi�es associated with the flow and transfer of goods and services from raw material extrac�on through use by the organiza�on that sells to the final consumer. Supply chain
management is the integra�on of these ac�vi�es through improved supplier rela�onships to achieve a sustainable compe��ve advantage for all members in the supply chain.

e. Customer Rela�onship Management (CRM) is a process to create, maintain, and enhance strong, associa�ons with customers, both individuals and organiza�ons. CRM
moves beyond transac�ons to build long-term rela�onships with valued customers, distributors, and dealers. Increasingly, firms are focusing on building mutually beneficial
rela�onships with customers, distributors, and dealers instead of working to maximize the profit on any individual transac�on. This can include interac�ons that involve financial
benefits, learning customer needs and working to meet those, and providing support staff to help customers.

3. Why are the following business processes important?
a. Strategy development
b. Product development
c. Systems to produce goods and services
d. Order fulfillment
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a. A strategy considers the threats and opportuni�es in the environment, and it measures the strengths and weaknesses of the organiza�on. These are inputs to strategy
development. The strategy development process provides a path to the organiza�on’s objec�ves. This path includes goals, ac�ons plans for achieving these goals, and related
resource requirements. Strategy is the overall mechanism for coordina�ng organiza�onal efforts.

b. Product development involves crea�ng the product ideas and transforming these ideas into the new products which customers desire. Without an effec�ve product
development process, an organiza�on would fail as, one-by-one, its products would be replaced by be�er products from its compe�tors.

c. Once product ideas are generated and product designs are created, it is necessary to create the systems that will produce them. This involves the acquisi�on of resources
(facili�es, equipment, and people) that enable the organiza�on to make the good or provide the service. This includes decisions about capacity, facility loca�on, and facility
layout as well as many other cri�cal decisions.

d. Order fulfillment is the process of sa�sfying a specific customer order. It involves all the steps required to sa�sfy a customer order from obtaining an order and entering it
into the company’s informa�on system to delivering the order. Order fulfillment is a highly integra�ve, teamwork-oriented process that includes many disciplines and ac�vi�es
such as sales, credit verifica�on, analysis of working capital needs, and selec�ng shipping routes and transporta�on alterna�ves.

4. How and why are opera�ons strategically important?
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Strategy begins with the organiza�on’s goals and includes the key policies that are established to provide direc�on for mee�ng those goals. Opera�ng advantages should be
pursued because they fit the organiza�on’s goals, not because they fit some narrowly defined opera�ng objec�ve. When properly used, opera�ons can be an important tool for
improving profits, increasing market share, and developing new markets. For example, increasing flexibility in opera�ons can reduce delivery lead �me and enhance the product
variety available to the customer. Process improvements can increase product quality and lower the costs of the product. When opera�onal plans are linked with organiza�onal
plans, opera�ons become part of the team that is working to reach the organiza�on’s goals. Linking opera�onal plans to the plans of other func�onal areas within an
organiza�on can have a posi�ve synergis�c effect. For example, marke�ng and opera�ons should work together to develop new products and processes for be�er mee�ng the
customer needs.

5. How can an organiza�on link corporate strategy and opera�ons? Describe the process.
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To link strategy and opera�ons, management needs a strategic, top down view of opera�ons. The steps involved in linking strategy to opera�ons are: 1) Analysis of compe��ve
situa�on (external environment); 2) Appraisal of an organiza�on’s skills and resources; 3) Formula�on of corporate strategy; 4) Implica�ons of corporate strategy for opera�ng
strategy; 5) Examina�on of the limita�ons of economics and technology on opera�ons; 6) Systems design for opera�ons; 7) Planning and managing opera�ons.

6. Describe the role of computer and informa�on technology in improving opera�ons.
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The use of computers in business is not new. Computers monitor inventory levels and help to control quality. They are also used to monitor flow processes. Computers provide
feedback and self-correct problems. Computers are also used to control metal cu�ng machines. Computers help organize incoming orders, schedule produc�on and summarize
results. Two growing areas for computer applica�ons are decision support systems and manufacturing automa�on. This new dual role for computers is o�en called Computer
Integrated Manufacturing (CIM). CIM blends recent developments in manufacturing with informa�on technology to achieve compe��ve advantage.

7. Describe some ways that manufacturing opera�ons can use computer and informa�on technology to gain compe��ve advantage.
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Computer-based control systems can be combined with manufacturing technology, such as robots, machine tools, and automated guided vehicles, to improve manufacturing
opera�ons. In this role, the computer can assist in integra�ng these technologies into a lean and efficient factory capable of compe�ng in world markets. Computer-integrated
manufacturing (CIM) blends developments in manufacturing with informa�on technology to achieve compe��ve advantage. When properly organized, CIM offers the
opportunity to automate design, manufacturing, and produc�on planning and control. An expert system uses human knowledge that has been stored in a computer to help the
manager solve complex problems. A decision support system is a model-based set of procedures (or business rules) for processing data to assist managers in decision making.

8. Describe some ways that service opera�ons can use computer and informa�on technology to gain compe��ve advantage. Why are these methods different from those used by
manufacturers?
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Many opera�ons, which are categorized as service opera�ons, actually provide a combina�on of services and goods. Restaurants and supermarkets are a good example. These
opera�ons can use some of the manufacturing technologies described in the text. For example, supermarkets can use sophis�cated computer controlled warehousing and
distribu�on systems to control inventory costs and significantly reduce the chance of a stock out.

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However, for many services the tangible por�on of their product is insignificant. In these cases, managers cannot buffer demand from the produc�on process with finished
goods inventory. This forces managers to find different approaches to smoothing differences between the organiza�on’s ability to provide the service and customer demand.

These problems have led managers of service opera�ons to implement informa�on systems that provide extremely current and accurate informa�on. With this, service
organiza�ons can provide customers with the latest informa�on about availability of service by �me and loca�ons. It also allows managers to make the best possible decisions.

Key Terms

Click on each key term to see the defini�on.

business-to-business (B2B)
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Business to business Internet transac�ons; these are supply chain transac�ons.

business-to-consumer (B2C)
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Business to consumer Internet transac�ons; these help firms manage customer rela�onships.

compe��ve advantage
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An organiza�on’s special abili�es, such as shorter delivery lead-�mes or higher quality products, which customers value and which gives the organiza�on an edge on its compe��on.

computer integrated manufacturing (CIM)
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Blends recent developments in manufacturing with informa�on technology to achieve a compe��ve advantage.

customer rela�onship management (CRM)
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A process to create, maintain, and enhance strong, value-laden associa�ons with people and organiza�ons that buy products.

decision support systems (DSS)
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Systems that allow managers to easily access informa�on stored in a database and provide easy-to-use tools for analysis.

e-business
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Involves the use of electronic pla�orms to conduct company business. It has two types of transac�ons: business-to-business and business-to-consumer.

expert system
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A computer-based approach that uses knowledge and inference procedures to solve problems that are difficult enough to require significant human exper�se for their solu�on. The
knowledge and the inference procedures are a�empts to create a model of the best prac��oners in the field.

flexibility
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The ability to modify produc�on from one product to another in response to customer demands, with minimal costs and delays.

knowledge engineer
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One who helps human experts structure the problem by interpre�ng and integra�ng human answers, drawing analogies, posing examples, and iden�fying conceptual differences.

market share
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An organiza�on’s sales in a market divided by the total sales for that market.

produc�vity
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Output from an ac�vity divided by total input to the ac�vity.

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Operations Management

Mark A. Vonderembse
The University of Toledo

Gregory P. White
Southern Illinois University—Carbondale

Bridgepoint Educa�on, Inc.

VP of Learning Resources: Beth Aguiar

AVP, Editor-in-Chief: Steve Wainwright

Director of Editorial Technology: Peter Galuardi

Sponsoring Editor: Anna Lus�g

Development Editor: Rebecca McTavish, Rebecca Paynter

Assistant Editor: Jessica Sarra

Editorial Assistant: Lauren LePera

Editorial Associate: Emma Hammack

Editorial Intern: Nicole Flewellen

Produc�on Editor: Charlo�e Dudley

Prin�ng Services: Bordeaux

Composi�on: Lachina Publishing Services

Illustra�on: Steve Zmina

Cover Image: ©Thierry Dosogne/Ge�y Images

Cover Design: Ryan Fleetwood

ISBN-10: 0985970154

ISBN-13: 978-0-9859701-5-4

Published by Bridgepoint Educa�on, Inc., 13500 Evening Creek Drive North, Suite 600, San Diego, CA 92128.

Copyright © 2013, Bridgepoint Educa�on, Inc.

All rights reserved.

GRANT OF PERMISSION TO PRINT: Bridgepoint Educa�on, Inc., the copyright owner of this material, hereby grants the holder of this publica�on the right to print these materials
for personal use. The holder of this material may print the materials herein for personal use only. Any print, reprint, reproduc�on, or distribu�on of these materials for commercial
use without the express wri�en consent of Bridgepoint Educa�on, Inc. cons�tutes a viola�on of the Copyright Law of the United States of 1976 (P.L. 94-553).

About the Authors

Mark A. Vonderembse

Mark A. Vonderembse is a Professor of Informa�on Opera�ons and Technology Management at The University
of Toledo (UT). He earned a Bachelor of Science in Civil Engineering from The University of Toledo (1971), and a
M.B.A. from The University of Pennsylvania in (1973). His Ph.D. is from The University of Michigan (1979). He
has held many administra�ve posi�ons at UT including Founding Director of the Intermodal Transporta�on
Ins�tute, Ph.D. Program Director, Director of the School of Healthcare Business Innova�on and Excellence,
Chairman of Informa�on Opera�ons and Technology Management, and Chairman of Finance. He has been the
Principal Inves�gator on more than four million dollars in research grants and contracts. He has published in
academic and professional journals including Management Science, Journal of Opera�ons Management, Decision
Sciences, Interna�onal Journal of Produc�on Research, and Industrial Engineering Transac�ons. His research
interests are manufacturing strategy, supply chain management, and healthcare delivery.

Gregory P. White

Gregory P. White is Professor Emeritus of Opera�ons Management at Southern Illinois University Carbondale
(SIUC). He earned Bachelor of Science in Mechanical Engineering (1970), M.B.A. (1971), and Ph.D. (1976) degrees
from the University of Cincinna�. He has held several administra�ve posi�ons during his academic career, including
Chair, Department of Management, Associate Dean, Interim Dean, and Director of the M.B.A. Program in the
College of Business at SIUC. He also served as Director of the Pon�kes Center for Management of Informa�on. He
has served on the Editorial Review Board of the Journal of Opera�ons Management and has published in such
academic and professional journals as Journal of Opera�ons Management, Interna�onal Journal of Opera�ons and
Produc�on Management, and Management Science. His research interests have included opera�ons strategy,
quality management, and lean opera�ons.

Acknowledgments

From Mark A. Vonderembse:

Wri�ng is always a team effort. My wife Gayle has supported and encouraged me throughout my career, and this project was no excep�on. She helped by providing edi�ng, ideas,
and mo�va�on to meet all of the deadlines. Greg White, co-author and friend, created earlier versions of several chapters. A special thanks to Anna Lus�g, sponsoring editor for
coordina�ng the project and shepherding the manuscript through produc�on.

Gra�tude to the following peer reviewers for their feedback and helpful guidance:

Ronald Beach, Ashford University

Kelly Bruning, Ashford University

Kimball Bullington, Middle Tennessee State University

Mark Hanna, Georgia Southern University

James Keyes, University of Wisconsin-Stout

Kevin Kuznia, Ashford University

Omar Parks, Ashford University

Pedro Reyes, Baylor University

Sco� Shaw, Ashford University

Thank you also to the editorial team for making my life easier: Rebecca McTavish and Rebecca Paynter, Development Editors, Jessica Sarra, Assistant Editor, Lauren LePera, Editorial
Assistant, Emma Hammack, Editorial Intern, Charlo�e Dudley, Produc�on Editor, and Kelly Lydick, Copyeditor.

Finally, any errors or misstatements in the manuscript are my responsibility.

Dedication

From Mark A. Vonderembse:

To my wonderful wife, life companion, and best friend, Gayle

In memory of our parents Paul Edward Vonderembse, Ruth Mary Vonderembse, and Robert L. Bauer

To Gayle’s mother: Pauline M. Bauer

To our children: Leisje, Tosje, Anthony, Vanessa, Talia, Elaine, and Maryke

To our grandchildren: Jack, Ava, Lillia, Logan, Trevor, Stella, and Aubriella

Love to all.

1

©Peter Cade/Iconica/Ge�y Images

Introduction to Operations Management in a
Global Environment

Learning Objec�ves
A�er comple�ng this chapter, you should be able to:

Discuss the role of opera�ons in an organiza�on.
Describe the differences and similari�es between producers of services and producers of goods.
Explain why the approach to designing, planning, and managing opera�ons should grow from an
organiza�on’s goals.
Discuss the impact of global compe��on upon organiza�ons and their opera�ons.
Understand key ethical issues that impact organiza�ons and opera�ons.
Define the systems approach to opera�ons and discuss the rela�onships between opera�ons and the other
func�onal areas within an organiza�on.

Organiza�ons exist to provide u�li�es, health care, financial services and numerous other goods and
services because individuals alone lack the necessary skills and resources to provide goods and
services on a large scale.

©Ge�y Images/Jupiterimages/Comstock/Thinkstock

Opera�ons Management: A Hotel Case Study

1.1 Defining Operations Management

People who study business are o�en overwhelmed by details and terminologies
such as the amount of the adver�sing or the defini�on of income statement. They
seldom consider the purpose of organiza�ons and why they exist. Organiza�ons
exist to meet the demands of society in a way that people working alone cannot.
With the coordina�on mechanisms and the concentra�on of resources that
organiza�ons provide, they can produce the vast array of services and goods in the
large quan��es that are consumed each day. Automobiles, flat screen televisions,
banking, health care, online shopping, fire protec�on, police protec�on, and
housing are just a few of the goods and services that organiza�ons provide.
Individuals working alone could not produce these services and products because
individuals do not have the skills or access to the equipment and technology
necessary to complete so many dis�nct jobs quickly and efficiently.

Opera�ons plays a cri�cal role in organiza�ons because they provide the means
through which organiza�ons produce thousands of commercial aircra�, millions of
so�ware programs, billions of bank transac�ons, and all other services and goods
consumed in the global economy. Opera�ons for a hospital involves determining
the size of the facility, deciding the type and quan�ty of equipment to purchase,
arranging the facility and equipment for efficiency, determining staffing levels and
schedules to provide quality care, and managing inventories of medicines and
bedding. Opera�ons, therefore, refers to the processes within organiza�ons that
acquire inputs and transform them into outputs that the public can consume, as

shown in Figure 1.1. Inputs include people, capital, materials, and energy, and outputs are services or goods. Opera�ons employs labor and management (people) and uses facili�es
and equipment (capital) to change materials (steel and plas�cs) into finished goods (diesel locomo�ves) or to provide services (health care). Long-term success requires that the
outputs of the opera�on be worth more to the consumer than the total cost of the inputs. In this way, organiza�ons create wealth for society.

Figure 1.1: Opera�ons

Opera�ons is part of both private-sector and public-sector organiza�ons. Services are intangible products, and goods are tangible products. According to classifica�ons used by the
U.S. Department of Commerce, the service sector includes transporta�on, u�li�es, lodging, entertainment, health care, legal services, educa�on, communica�ons, wholesale and
retail trade, banking and finance, public administra�on, insurance, and real estate. Goods are defined as ar�cles of trade, merchandise, or wares. Manufacturing is a specific term
referring to the produc�on of goods. Throughout the text, the term product is used to refer to either services or goods. Table 1.1 lists many services and goods produced by private
and public-sector organiza�ons. Service opera�ons currently represent about 88% of the U.S. economy, and this percentage is growing (U.S. Department of Commerce, Bureau of
Economic Analysis, h�p://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm (h�p://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm) ). The
service sector is also an important and growing segment of the global economy.

Table 1.1: Examples of goods and services produced by organiza�ons

Goods Services

Profit Not-for-Profit Profit Not-for-Profit

Starter motors
Gasoline
Air condi�oners
Appliances
Hair dryers
Furniture

Highways
Dams
Flood control projects
Fabrica�on and
assembly completed
in workshops for the
handicapped

Banking
Health care
Stock brokerage
Telephone services
Educa�on
Retailing

Police protec�on
Health care
Public welfare
Parks and recrea�on
Fire protec�on
Educa�on

Opera�ons is part of the total organiza�on, which may also include special�es such as accoun�ng, finance, marke�ng, informa�on systems, engineering, and human resource
management. When rela�onships between opera�ons, marke�ng, and engineering are strong, it is possible to design high-quality products that are well liked by customers and are
cheaper and easier to produce. These capabili�es enhance the compe��veness of organiza�ons. Understanding the links among func�ons in an organiza�on is cri�cal to an
employee’s advancement beyond an entry-level posi�on because middle and upper-level managers have broad responsibili�es and interact with many business func�ons.

Opera�ons management refers to decision-making processes for the design, planning, and management of the
many factors that affect opera�ons. Decisions can include which products to produce, how large a facility to
build, how many people to hire, and what methods to use to improve quality and efficiency. Opera�ons
managers apply ideas and knowledge to:

http://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm

In addi�on to providing installa�on and repair services, automo�ve
repair centers sell tangible items in the form of replacement
components.

©

Stockbyte/Thinkstock

Decrease produc�on �me.
Increase the speed of bringing new services and goods to market.
Improve flexibility to meet rapidly changing customer needs.
Enhance product quality.
Improve customer service.
Increase produc�vity.
Reduce costs.

An organiza�on that can achieve these benefits through opera�ons will have an advantage over its compe�tors.

Much has been wri�en regarding the rela�ve importance of the service sector versus the manufacturing sector.
Trying to isolate the impact of the service sector from the manufacturing sector is not produc�ve because one
depends upon the other in so many ways. For example, in transporta�on, a trucking company purchases goods
—tractors and trailers—from manufacturers that, in turn, buy services from consultants. Trucking companies run
their tractors and trailers on public roads built by construc�on companies. Trucks carry goods; therefore,
without a strong manufacturing sector, trucking companies and other forms of transporta�on would be severely
hurt. The value chain of services and goods that brings products to customers is �ghtly linked.

In keeping with the close rela�onship between services and goods, most of the topics covered in this book can
be applied equally to service opera�ons and manufacturing opera�ons. Examples from both service and manufacturing opera�ons will be used to illustrate key points. When there
are important differences between the service sector and the manufacturing sector, these differences are clearly explained.

Similarities in Service Providers and Goods Producers

The dis�nc�on between services and goods is not necessarily as clear as the U.S. Department of Commerce list
indicates. Some opera�ons classified as “services” actually provide both services and goods. For example,
automo�ve repair facili�es sell and install replacement parts, so customers are purchasing something tangible as
well as the labor to install them. Addi�onally, the person installing a muffler on an automobile is classified as a
service worker. The person who installed the original equipment muffler at the automo�ve assembly plant is
classified as a manufacturing worker. Is there a difference?

At a restaurant, customers purchase not only the food they order, but also the prepara�on of that food. It is
difficult to iden�fy a substan�al difference between installing a muffler and pu�ng together a pizza in terms of
goods versus services. In both cases, the ingredients or parts should be easily available for the worker, proper
tools should be provided to make the job fast and easy, training should be given, and a sequence of steps to
achieve a final output should be established.

When goods are purchased, services are part of the transac�on; when services are purchased, goods are o�en
involved, either directly or indirectly. When a consumer buys a dishwasher, the purchase price includes

payments for retail services and audits of the manufacturer’s books. When consumers pay for a taxicab or bus ride, a por�on of the money is used to pay for the purchase of
vehicles. A thriving economy and an increasing standard of living depend upon strong and efficient service providers and manufacturers.

Real World Scenarios: Lima Fire Department and Trane Air Condi�oner Manufacturing

Service-producing organiza�ons and goods-producing organiza�ons have many similari�es. Consider the Lima Fire Department, which provides fire protec�on, and Trane, which
produces air condi�oning units and other items for the home. Both are concerned with product improvements. For a fire department, product improvements are measured by
response �me, the quality of its fire-preven�on program, and the dependability of the service. For Trane, improvements are measured by the air condi�oning unit’s cooling
power, energy efficiency, and special features.

Managers at the Lima Fire Department address many ques�ons directly related to opera�ons. What is the maximum �me that should elapse between a fire signal and the
arrival of the fire equipment? How many fire sta�ons are required? Where should these sta�ons be located to maximize effec�veness? What type and quan�ty of equipment
should be purchased? How many firefighters are required at each sta�on? What qualifica�ons are necessary, and how will they be trained? The answers to these ques�ons
shape the services provided and determine the capital required to build facili�es, purchase equipment, and train personnel. Opera�ng decisions also determine the costs of
providing the service.

Managers at Trane must answer a similar set of ques�ons. How are its products designed? How do the products perform? What special features—thermostat control, mul�ple-
speed blower, and others—are available? How many air condi�oners should be produced each year? How can energy consump�on be reduced? What type and quan�ty of
equipment is needed for efficient produc�on? How many employees are required? What type of training will they receive? How many facili�es are needed, and where will they
be located? Answers to these ques�ons have a significant impact on the company’s ability to compete within the marketplace.

Differences Between Service Providers and Goods Producers

Although opera�ng decisions for services and goods have many similari�es, one important difference must be noted: A good is tangible, and a service is not. This difference has two
important consequences. First, a service business cannot account for inventory of finished products because a service is intangible and is performed on demand. Most service
organiza�ons, however, do have suppor�ng inventory in the form of supplies. Hospitals have linens, drugs, and food; banks have forms and paper; cellular telephone providers have
equipment and spare parts. Second, because a good is tangible, the product designer must deal with physical characteris�cs (height, strength, durability, etc.). This requires

Operations Management: A Hotel Case Study

© Infobase. All Rights Reserved. Length: 27:32



 0:000:00 / 27:32 / 27:32 1x1x

Banks provide ATMs and online banking services to increase customer sa�sfac�on, provide addi�onal
service loca�ons, and make it easier for consumers to manage their funds.

©iStockphoto/Thinkstock

engineering talent to ensure the finished good is the right shape, has enough power, and is strong enough to perform its intended func�on. For an intangible service, such as health
care, other skills are needed, including knowledge of anatomy, physiology, and chemistry.

Managing Service Opera�ons Without Finished Goods Inventory

Not having inventory might appear to be an advantage because inventory is expensive to maintain and �me consuming to manage. However, the inability of service organiza�ons to
maintain an inventory of finished goods can be a disadvantage as well. Service organiza�ons cannot separate produc�on from consump�on. A customer can purchase a car on
Saturday even though the assembly plant is closed because a dealer can sell a vehicle from inventory. This is not how services such as banking and telephone communica�ons are
performed, however. The telephone company cannot provide services in an�cipa�on of demand because it has no finished goods inventory. Banks cannot perform transac�ons
before a request is made. Customers of service organiza�ons must do without the service or wait un�l it can be performed.

Banks have installed automated teller machines (ATMs) to provide consumers with access to funds, and now provide online banking services for account access 24/7. These ac�ons
extend service hours and relieve pressure on bank branches. Supermarkets may offer discounts to senior ci�zens who shop on slow business days, and movie theaters offer
discounts to pictures shown on weekdays in the a�ernoon. In contrast, Trane can build air condi�oners Monday through Friday, a typical produc�on schedule, but the dealers can
install them in customer’s homes any�me, including weekends and holidays because the air condi�oners can be held in inventory. In addi�on, Trane can build the units in the slow
winter months to offset demand in the spring and summer.

Clearly, then, the planning implica�ons for businesses without finished goods inventory
can be significant. For example, during the morning rush, if 70 people want to ride a
public hybrid bus that has only a capacity of 50, then 20 must wait for the next pickup
or be turned away. The possible solu�on of adding another bus may not be cost
effec�ve because the extra bus will not be heavily used. Turning customers away can
result in the short-term loss of revenue and, poten�ally, long-term loss of customers
because of dissa�sfac�on with the service.

Many bus lines try to relieve the capacity problem by shi�ing demand to off-peak
periods. Discounts are o�en given to riders during late-morning and early-a�ernoon
hours. The use of public transporta�on by high school students is scheduled so it will
not conflict with the morning or a�ernoon demand peaks. Thus, when managers of
service opera�ons consider capacity, they should focus on maximum demand and
variability in demand, not average demand. Managers cannot use inventory to alleviate
peak demand—including those peaks that occur from hour to hour.

To further complicate these challenges, some organiza�ons that are classified as service
providers act more like manufacturers. For example, restaurants sell a service, food
prepara�on, and a good—the food itself. A restaurant has raw materials, work in
progress, and finished goods. In many retail and wholesale opera�ons, investments in
inventory are substan�al, and inventory management is a cri�cal success factor.
Restaurants, retail stores, and wholesale opera�ons are classified by the U.S.
Departments of Commerce and Labor as service opera�ons, but have many points in common with producers of goods. These points are discussed in the chapters on capacity,
material and resource planning, and inventory management.

Designing Products for Goods and Services

Designing goods requires considera�on of physical proper�es because goods are tangible and services are not. Usually, designing goods requires training in engineering because
strength, durability, and performance are important. A high-speed color laser printer should consistently produce high-quality documents with limited maintenance and few, if any,
breakdowns. The size and shape of products o�en influence the customers’ percep�on of style and beauty. For example, a laser printer’s size or the style of an automobile may
influence the purchase decision.

When a service involves selling a good, such as food sold by a restaurant, the physical dimensions of the good are s�ll present. Designing a hamburger may not require an engineer,
and, obviously, a hamburger need not be strong or durable. However, size and shape, as well as other physical elements, are s�ll important.

When a service, such as selling life insurance, does not provide a tangible good, the other elements of design become important. The amount of the insurance payout compared
with the premiums paid for the policy is based upon sta�s�cal analysis of mortality rates and the age of the person when the policy is purchased. In some cases, lifestyle, such as
smoking or career choice, is also considered. These decisions are evaluated by an actuary rather than by an engineer. Lawyers frame the policy as a contract so it is legally valid.

The design of a medical procedure may require the medical doctors, equipment designers, pharmacist, and other medical professionals to work together to ensure that any new
treatment or procedure is both safe and effec�ve. The development of a surgical procedure to place stents in coronary arteries is a good example. Medical researchers and doctors
worked closely with equipment manufacturers to design equipment and a process to insert the stent by passing it through the artery and placing it at the point of the blockage.

Countless organiza�ons u�lize Microso� so�ware because it can
dras�cally increase user produc�vity and improve job performance.

Steven Senne/ASSOCIATED PRESS/AP Images

1.2 Understanding Operations

If an organiza�on can produce and deliver high-quality, low-cost products that meet customer needs in a �mely manner, its probability of success is greatly increased. Opera�ons
employees and managers play an important role in achieving these objec�ves because their effec�veness in designing, planning, and managing opera�ons shapes the firm’s
compe��veness. What factors influence the buying decision for most consumers? For most services and goods, price, quality, product features and performance, product variety,
and availability of the product are important. All these factors are substan�ally influenced by ac�ons taken in opera�ons. When produc�vity increases, product costs decline and
product price can be reduced or profit margins increased. For example, produc�vity improvements in the produc�on of televisions have helped lower costs. As improved methods
are developed for manufacturing the product, quality and variety may increase.

Linking opera�ons and opera�ng strategy with an organiza�on’s overall strategy (including financial, marke�ng, human resource management, and informa�on system strategies) can
result in synergy between departments. Opera�ons becomes a posi�ve factor when facili�es, equipment, and employee training are viewed as a means of achieving organiza�onal
rather than narrowly defined departmental objec�ves. In the past, the primary criterion for judging opera�ons was cost control, which is a narrowly defined opera�ng objec�ve.
Controlling cost is s�ll important, but now organiza�ons are including other performance measures, such as product performance and variety, product quality, delivery �me, and
customer service. When flexibility is inherent in opera�ons, an organiza�on is able to respond rapidly and inexpensively to changing customer needs.

To understand opera�ons and how it can contribute to the success of an organiza�on, it is important to understand:

The value-added nature of opera�ons.
The impact that technology can have upon performance.
The importance of teamwork in achieving opera�ng and organiza�onal objec�ves.

Operations Add Value

The effects of well-run opera�ons add value when consumers are willing to pay more for the finished good or service than the total cost of the inputs required to make the good or
service. In the private sector, the difference between the price a consumer pays for a good or service and the cost to produce it is profit that can be reinvested to build new and
be�er products, thus crea�ng wealth for society.

Without profits, a company cannot raise capital to con�nue its opera�ons and will eventually become a casualty
of compe��on. With profits, technology-based companies, such as Google and Facebook, and more tradi�onal
companies, such as Ci�bank and Toyota, are able to invest in new technology and new facili�es, which lead to
improved opera�ons and lower prices. More efficient produc�on of services and goods allows resources (people,
capital, and materials) to be used for new product development and innova�on—which makes an organiza�on
stronger and more compe��ve.

In not-for-profit organiza�ons, the value added to products represents improved wealth to society. For example,
fire protec�on saves more money in damages than the cost of the service. The wealth created or preserved by
value-added opera�ons contributes to economic growth and makes more resources available for other
wealthcrea�ng ac�vi�es. This ul�mately improves the living standard because more wealth is created than
consumed.

Microso� creates the so�ware that drives the majority of computers in the world. Microso�’s global presence is
the result of designing and developing so�ware that drama�cally increases the user’s produc�vity. The people
and companies using Microso�’s so�ware see value in the so�ware and are willing to pay more for it than the
cost of its development. In total, both sides of the producer or user transac�on gain. Microso�, its founders,
managers, employees, and stockholders gain through earnings and stock apprecia�on; so�ware users gain by

becoming more produc�ve, which can lead to be�er job performance and more leisure �me.

Technology

Technology is the applica�on of knowledge, usually in the form of recently developed tools, processes, and procedures, to solve problems. Advances in technology make it possible
to design and build be�er products using fewer resources.

Product design is the determina�on of the characteris�cs, features, and performance of the product. Product technology is the applica�on of knowledge to improve the product.
The change from compact disks to digital online music is an example of using product technology to improve product design and enhance product performance. New products like
digital video recorder (DVR) units are changing the way people enjoy television while Ne�lix streaming services are changing the way people view videos and movies. In the future,
these technologies will be replaced by new product technology that will provide be�er sound quality, more features, and a lower price, as has already occurred when casse�e
players replaced record players, CD players replaced casse�e players, and iPods replaced CD players. There are many other examples of product design improvements that can make
life be�er, as shown in Table 1.2.

Table 1.2: Product design and technology

New Product Technology Outcome

An�lock brakes Microprocessor Safer automobiles

Lasik eye surgery Laser Faster recovery
Fewer complica�ons

Online banking services Smart devices, Internet, and telecommunica�ons Convenient, 24-hour service from anywhere

Evalua�on of Ford’s Computer Aided Engineering:
Technological Development in Business

Ted S. Warren/ASSOCIATED PRESS/AP Images

Na�onwide reserva�on system Large-scale database, for hotels, airlines, etc. Make reserva�ons from the Internet anywhere in the
world

Plas�c bo�les versus glass bo�les Injec�on molding containers Cheaper, lighter cost less to ship

Another major area to which technology can be applied is process. A process describes how to accomplish a task. Process design describes how a product is made. Process
technology is the applica�on of knowledge to improve a process. Process technology affects how a product is produced but may have li�le, if any, impact on the product’s features
and func�on. Frying is one process for cooking a hamburger, and grilling over an open flame is another. Both processes yield a cooked piece of ground beef. By contrast, a change in
product design would directly affect the way a product func�ons. Adding a second pa�y of ground beef, subs�tu�ng ground turkey for ground beef, or adding bacon would involve a
different product design. There are many examples of process improvements that are making life be�er (see Table 1.3). In each case the product is the same, but the way the
product is produced is different.

Table 1.3: Process design and technology

New Process Technology Outcome

Wri�ng using Microso� Word Computer Easy to change text and tables; Many fonts; Easy
storage and retrieval of documents

Punching a hole in a steel plate versus drilling a hole Punch press Takes less �me

Using PowerPoint so�ware for presenta�ons versus an
overhead projector

Computer and video graphics Ability to deliver informa�on with words and pictures;
Inexpensive to update and distribute

Product design and process design are not always independent. A product design decision may dictate the
process that should be used. For example, when a bride gives a wedding planner a menu that specifies broiled
cod and boiled potatoes, then the processes for cooking the fish and the potato are determined. In many
industries, managers prefer that product design and process design be completed simultaneously by the same
group of people working in close collabora�on. This approach, some�mes called concurrent engineering, has
become more and more popular as organiza�ons a�empt to develop new high-quality designs quickly.

Technology can be important when developing new ideas and successfully implemen�ng them. For example,
eBay took an old process, the auc�on, and married it to new technology, the Internet, to create a new
business model that is highly successful. An auc�on creates a market by bringing together buyers and sellers.
Internet technology provides easy access to millions, and eventually billions, of people around the world. It
allows sellers to provide detailed descrip�ons and pictures of the products to be sold. A wide variety of goods
and services, as well as collec�bles, are available for auc�on on eBay. With eBay’s approach, large amounts of
informa�on are easily and inexpensively available, transac�on costs are low, and buyers and sellers can easily
and quickly close a transac�on.

Teamwork

In the late-19th and early-20th centuries, labor and management groups in the United States treated one
another as adversaries. Management and labor believed that a gain by one group meant a loss to the other.
More recently, a new era of coopera�on between labor and management has been established. The need for
coopera�on was accelerated by efforts to expand global trade through free-trade agreements, which created
worldwide compe��on for labor. As a result, management and labor are working together to solve quality and

produc�vity problems with each group contribu�ng to the solu�on. Labor forces once opposed produc�vity improvements because they believed produc�vity increases would result
in fewer jobs. Now labor o�en supports and encourages higher produc�vity because it provides job security due to the global nature of the labor market. Managers who were once
reluctant to accept sugges�ons from employees (labor) are now more likely to listen and learn from personnel. Well-managed, teamwork-oriented opera�ons provide services and
goods of high quality at prices that consumers can afford. This is good for the organiza�on, labor, consumers, and management in the following ways:

For the organiza�on, the ability to meet the increasing demand for high-quality,
low-cost products can lead to greater success in compe��ve world markets.
For labor, well-managed opera�ons provide con�nuing job opportuni�es. An
inefficient opera�on drives prices up and makes services or goods subject to
compe��ve pressure from efficient producers, both foreign and domes�c.
Increases in efficiency allow non-infla�onary increases in wages, which leads to
growth in purchasing power.
For consumers, a lower price means that more people will be able to buy the
product. In addi�on, consumers will have more money remaining for other
purchases. This provides the opportunity to design, produce, and sell new goods
and services.
For management, lower produc�on costs can lead to increased sales and higher
profit.

There may be no be�er example of teamwork between labor and management than
Southwest Airlines. Many tradi�onal airlines have lost money and gone out of business
(Eastern Air Lines), have sought mergers (Delta and Northwest), or acquired bankruptcy

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Southwest Airlines is, arguably, one of the most successful airlines in the world because of posi�ve
employee-management rela�onships and commitment to con�nuous improvement.

protec�on (United, which recently merged with US Airways). Many people regard
Southwest as the most successful airline in the United States—and possibly the world.
Southwest focuses on the basics of air travel, and has an effec�ve strategy and planning
process. Its success is due to the quality with which its employees work. Employees do
the extras that help passengers enjoy a nicer trip. They work in ways that make company processes faster and more efficient. Planes are on �me, baggage is rarely lost, and
passengers appreciate low fares and no cost for the first checked bag. Southwest employees own a part of the company, which drives employees and, in turn, is one reason for the
company’s success.

1.3 Global Trade and Competition

It is impossible to ignore the impact of the global marketplace and free trade on organiza�ons and their opera�ons. The North American Free Trade Agreement (NAFTA) and the
General Agreement on Tariffs and Trade (GATT) were designed to reduce or eliminate tariffs and other trade restric�ons. Since these have been enacted, several others have been
approved, including recent agreements between the United States and Korea, Colombia, and Panama. These agreements increase the opportuni�es for countries to focus on areas
of trade and commerce in which they have a rela�ve advantage. Free trade can lead to mergers and acquisi�ons that bridge rela�ons between na�ons and con�nents.

Relative Advantage

A country that wants to enhance the living standard of its people will engage in global trade. The country imports goods and services that are not available locally, or cost more to
make at home than their foreign-made counterparts. When a country is the most efficient producer of all goods and services, it would be beneficial for that country to engage in
global trade because the rela�ve advantage in one product—for example, pitchforks—is greater than its rela�ve advantage in another product—for example, furniture. Rela�ve
advantage is defined as the difference between the lowest cost producer and the next-lowest cost producer. The country with the pitchfork produc�on advantage should produce
pitchforks for the global market and may import to meet some or all of its furniture needs.

As barriers to trade (such as import quotas and tariffs) decline and countries be�er understand the benefits of interna�onal trade, trade between na�ons will con�nue to increase.
Recently, global trade in goods and services reported by governments outpaced growth in the world’s total produc�on (U.S. Department of Commerce, Bureau of Economic Analysis,
h�p://www.bea.gov/interna�onal/index.htm (h�p://www.bea.gov/interna�onal/index.htm) ). When growth in global trade outpaces world produc�on, the percentage of world
produc�on moving between na�ons must be increasing.

Creating Global Markets

Markets for many items, such as those produced by the electronics, steel, automo�ve, tex�le, and photographic equipment industries, are world markets dominated by mul�na�onal
firms. In order for firms to compete, they must be among the best in the world, not simply the best in their na�on. These firms must compete with firms from other countries
where the labor costs, material costs, material availability, culture, and sociopoli�cal environment are substan�ally different. These differences can make a manager’s job more
challenging.

Real World Scenarios: Ford Motor Company’s Rebound

A�er World War II and un�l the late 1970s, when Ford Motor Company’s primary compe�tors were General Motors and Chrysler, Ford had the same workforce and labor cost
per hour, nearly the same material costs, and the same set of government regula�ons as its compe�tors. In many cases, execu�ves from one firm had also worked at the other
firms; therefore, each company had similar ideas and approaches to management. More recently, Ford has faced global compe�tors that have substan�ally different cost factors
and management styles. Organiza�ons that are successful in the 21st century will develop an understanding of global marke�ng, distribu�on systems, financial and capital
markets, accoun�ng, and opera�ons, rather than na�onal strategies. Global compe��on has had, and will con�nue to have, a tremendous impact upon opera�ons and
opera�ons managers. Product performance, product quality, efficiency, and delivery lead �me are all elements of compe��on affected by opera�ons. Ford has risen to the
challenge by designing and building new products that are high quality and cost compe��ve. These products have been designed using resources and ideas from around the
world. Ford has and will con�nue to build vehicles in China, India, and other countries to sell in global markets.

Job markets are also becoming global. Before NAFTA and GATT, it was common to see blue-collar jobs move from one country to another as firms moved produc�on facili�es in
search of low-cost labor. Today, engineering, informa�on technology, and management jobs are becoming global. Companies are outsourcing product design and informa�on systems
development ac�vi�es to India and China to achieve lower costs or greater work capacity. As the cost of the workforce in India and China has increased, some of the jobs that were
once outsourced are returning to the United States, and others are moving to other low-cost countries (MSNBC News Report, h�p://video.msnbc.msn.com/rock-
center/46198559#46198559) (h�p://video.msnbc.msn.com/rock-center/46198559#46198559) .

http://www.bea.gov/international/index.htm

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1.4 Systems Approach to Operations

Substan�al interdependencies exist between func�onal areas within organiza�ons, between organiza�ons that must cooperate to create and deliver innova�ve products to
customers, and between organiza�ons and government agencies. Within organiza�ons, func�onal barriers to integra�on are eliminated as managers create cross-func�onal teams to
tackle difficult problems such as product design, produc�vity improvement, and facility design. To encourage coopera�on between organiza�ons, managers are building strategic
alliances with suppliers that increase the exchange of informa�on and ideas for the benefit of both. Organiza�ons are responding to concerns by government agencies regarding
employee rights, environmental impact, and product safety. These social, legisla�ve, ethical, and legal issues are growing in importance.

How do opera�ons fit into this systems view of the organiza�on and its environment? Opera�ons management is only one part of the organiza�on, which, in turn, is a part of the
larger economic and governmental system. A system is a group of items, events, or ac�ons in which no item, event, or ac�on occurs independently. Thus, no item studied in
isola�on will act in the same way as it would within the system. For example, a study that focuses on minimizing transporta�on costs might suggest that materials be ordered in
larger quan��es to reduce the number of trips and save transporta�on costs. However, larger shipments will require more storage capacity, and the increase in storage costs could
be greater than the decrease in transporta�on costs. When making decisions, a manager should examine each issue as it impacts system-wide and organiza�onal level outcomes.

A system can be divided into a series of parts or subsystems, and any system may be a component of a larger system. Understanding the rela�onships among the various
subsystems is an integral part of the study of opera�ons management.

Figure 1.2 illustrates that an organiza�on is part of the global economic and government system. In turn, the organiza�on is composed of several subsystems, one of which is
opera�ons. Opera�ons managers work with managers in marke�ng, finance, accoun�ng, engineering, and other departments to reach the goals set by top management. Because of
the many func�ons it encompasses, the opera�ons subsystem is divided into yet another series of subsystems. When studying the opera�ons management subsystem, it is
important to keep in mind the en�re opera�on, the organiza�on, and the external environment.

Figure 1.2 A systems view of opera�ons, the organiza�on, and
the organiza�on’s environment

In order to design, plan, and manage opera�ons effec�vely, managers should be aware that:

An organiza�on is part of the global economic and government system.
Opera�ons are an integral part of the organiza�on.
Opera�ons are composed of a series of related subsystems.

1.5 The Organization as Part of the Economic and Government System

Organiza�ons operate in an environment that includes several interest groups: stockholders, management, labor, consumers, and the general public. These groups are o�en called
stakeholders because they are affected by (or have a stake in) decisions made by the organiza�on. Business leaders have realized that to achieve long-term success and to be good
corporate neighbors, an organiza�on should serve all of these interests. Thus, leaders should be responsive to issues involving wage rates, working condi�ons, pollu�on, product
safety, and global compe��on—as well as the stockholders’ return on their investment. All of these factors are part of the larger economic and government system within which
organiza�ons operate. This larger economic and government system is broadly defined to include the legal, poli�cal, social, and educa�onal subsystems.

The importance of these broader subsystems and the factors that impact their opera�ng systems are discussed in more detail in Table 1.4.

Table 1.4: Factors, interest groups and the impact of opera�ng decisions

Factor Decisions Interest Group Impact of Opera�ng Decisions

Wage rates and working condi�ons Labor and middle management Good working condi�ons and fair wages can be
posi�ve factors in employee performance.

Pollu�on General public Well-managed opera�ons should not cause pollu�on.

Product safety Consumers When products are well designed, consumers are safer
and more sa�sfied.

Global compe��on Stockholders, labor, middle management When opera�ons are well managed, costs are not
excessive. If this is coupled with high quality, the
organiza�on becomes compe��ve.

Legal, Environmental, and Ethical Issues

Today, managers and organiza�ons are facing a staggering array of problems that their predecessors largely ignored. The managers of the past o�en viewed labor rela�ons and
worker safety, environmental pollu�on, and product safety as outside their area of concern. They o�en made decisions that were in the best interest of the organiza�on’s
stockholders but detrimental to labor, to the environment, and even to the customer. For example, organiza�ons have designed and built unsafe products and have avoided taking
correc�ve ac�on when problems with the products were apparent.

As a result of this neglect, organiza�ons face labor unions, environmental advocates, and consumer groups that have been successful in passing legisla�on to define labor
management rela�ons, regulate the safety of the workplace, shape environmental and sustainability programs, and protect consumers. In addi�on, the threat of a consumer boyco�
and the nega�ve publicity associated with poor corporate ci�zenry are causing many companies to act responsibly. Government, therefore, now plays a significant role in regula�ng
organiza�ons and their opera�ons. Companies opera�ng globally must understand the legisla�ve and ethical requirements for compe�ng in each country.

Each of these areas of concern is directly related to opera�ons. Normally, opera�ons has the highest number of workers in order to build the products that consumers purchase and
is o�en the focus of union ac�vity. Opera�ons is the most likely place where workers can be injured and has the greatest poten�al for crea�ng environmental pollu�on.

It is necessary for organiza�ons to develop a set of standards for ethical behavior that meets the expecta�ons of the community. It is also reasonable to expect those standards to
increase as the standard of living increases. Product safety issues are more prominent, be�er understood, and be�er managed in a developed country with more resources than in
an undeveloped or underdeveloped country.

Today, managers need to search for solu�ons where all of the stakeholders—stockholders, management, labor, consumers, and the general public—can benefit. Fortunately, the new
genera�on of managers has recognized the need to develop these approaches, and some impressive strides have been made.

Labor Relations

As late as the 1930s in the United States, many businesses required their produc�on employees to work long hours for rela�vely low pay. Working six days each week was
considered normal, and up to this �me, labor unions only had limited bargaining abili�es. These businesses wanted to keep costs low and increase their return on investment. In
addi�on, many manufacturing plants had poor or unsafe working condi�ons. In many cases, workers rebelled against management. They fought hard and o�en engaged in ba�les
with management for be�er pay, be�er working condi�ons, and the right to form unions. Eventually, labor was able to unionize because the federal government passed laws in the
late 1930s that permi�ed and protected unions. From these conflicts, labor unions and businesses developed an adversarial rela�onship that s�ll exists today in some organiza�ons.
It has taken almost 80 years to reduce the adversarial rela�onship between management and labor in the United States to allow all stakeholders to work together and make a firm
more compe��ve in global markets.

Both groups are learning that their security lies in coopera�ve efforts, primarily in the effort to make be�er quality products with be�er performance at a lower unit cost. Such
quality and produc�vity improvements will help secure jobs in the United States and make its products compe��ve in world markets. Organiza�ons are responding by working with
labor to develop employee involvement teams. These teams, which include both management and labor personnel, are o�en led by labor. The group’s goals are established by the
en�re group and are not vehicles through which managers can control the labor force, or set the direc�on for the group. These teams appear to work best when labor feels free to
express ideas, suggest changes, and maintain a leadership role in process implementa�on.

Environment and Sustainability

In the 1920s and 1930s, many business leaders did not consider pollu�on a problem, nor did they see the value of recycling materials. At that �me, waste from opera�ons was
something to dispose of at the least cost possible. Sustainability was not a factor to consider because easily accessible resources were inexpensive and seemingly endless. When
pollu�on problems began to arise in the 1950s and 1960s, some businesses were reluctant to change. Businesses in the United States now operate under some of the most
restric�ve environmental pollu�on laws and repor�ng procedures in the world.

Due to low wages, unsafe working condi�ons, and long hours,
employees rallied together in the 1930s to establish labor unions.
Although they can be adversaries, management and labor forces can
work together within unions to stay compe��ve in the global market.

©K.J. Historical/Corbis

Since the 1960s, concern for the environment has grown substan�ally in the United States and other developed
countries. Today, many organiza�ons take proac�ve steps to reduce emissions from facili�es and move their
opera�ons toward sustainability by reducing the consump�on of materials and energy, reusing materials
whenever possible, and recycling materials.

Companies are discovering “win-win” opportuni�es in which an organiza�on can cut costs and increase profits
by recapturing pollutants and reducing solid waste. In other cases, organiza�ons have begun to recognize that a
polished corporate image has increased sales. Fast-food restaurants have begun recycle and reuse programs,
including joining efforts to transform cooking oil into biodiesel fuel, and many have changed packaging materials
in response to concern from consumers. Being a good corporate ci�zen and protec�ng a company’s renewable
resources can be mutually beneficial. For example, most large forest product companies have major efforts
underway to replant trees that have been cut for lumber and paper.

Highlight: Making Pollu�on Preven�on Pay

Making Pollu�on Preven�on Pay (Huisingh & Bailey, 1983) has benefited many organiza�ons. These firms understand that environmental protec�on and economic progress can
go hand-in-hand. Sauder Woodworking Co. is le� with about 300 tons of sawdust each day a�er workers cra� ready-to-assemble furniture. For years, the bulk of the sawdust
was sent to a landfill at a cost to Sauder of $55 to $60 per ton. Today, Sauder operates a $15 million co-genera�on plant using that sawdust to produce enough power for
3,878 homes. The co-genera�on plant idea was established a�er Sauder and Toledo Edison Company agreed that the furniture company could supply power to the u�lity’s grid.

Companies all around the world are discovering that recycling and recapturing byproducts, scrap, and even heat can be profitable. Companies are also finding that be�er
results are achieved when environmental factors are considered during the ini�al design of a facility. Retrofi�ng facili�es with pollu�on control equipment can be an expensive
alterna�ve to though�ul analysis and careful design.

Product Safety

Because product design and produc�on are part of opera�ons, opera�ons management decisions play a significant role in determining product safety. Companies such as Black &
Decker and Procter & Gamble owe their excellent reputa�ons partly to their concern for product safety. These companies realize that high quality and safety are compa�ble with
high profits and long-term success.

If global and domes�c compe��on is not sufficient to keep out unsafe products, then consumer groups and legisla�ve ac�on will. The power of consumer advocates and efforts to
protect consumer interest, evaluate products, and educate the consumer has risen over the past 40 years. Consumer groups have challenged organiza�ons in the courts as they seek
to force companies to remove dangerous products from the market.

Toyota’s sudden accelera�on problem, silicone breast implants, and asbestos are just three examples of consumer victories over unsafe products. Toyota’s sudden accelera�on
problem is a classic case. Evidence was discovered that engineers at Toyota understood the sudden accelera�on problem as much as 18–24 months before the problem was
addressed. It is unclear why Toyota took so long to respond to the problem; it’s likely that bureaucra�c incompetence was a larger factor than callous disregard for safety. Toyota
suffered lost sales and market share as a result, and Toyota (and other companies) learned that product safety is a key compe��ve element for producing and selling cars and
trucks.

Asbestos li�ga�on has forced many companies into bankruptcy, including Owens Corning, maker of pink fiberglass insula�on. In this case, the company was unaware of the
consequences of producing asbestos. Owens Corning stopped producing asbestos more than 40 years ago, but law suits running into billions of dollars forced it into bankruptcy. A
substan�al part of Owens Corning’s liability was acquired when it purchased another firm that made asbestos. In fact, during bankruptcy, Owens Corning had record earnings, which
were dwarfed by the size of the resul�ng se�lement.

Organiza�ons must understand the implica�ons of ac�ons that are detrimental to the consumer and respond by demonstra�ng an honest concern for the customer. This approach
creates a sense of trust between the consumer and the company, which can have substan�al economic value.

When Toyota failed to address a sudden accelera�on problem in its vehicles, the company incurred
lost sales and decreased market share. Concerned consumers eventually benefi�ed when Toyota
recalled the faulty vehicles.

Design Pics/Thinkstock

Ethical Behavior

Ethics are a sense of what is right and wrong that guide behavior. This set of standards
is o�en more stringent than legal standards. For example, if a representa�ve of a
company claims that a service or good is capable of something and it is not, the
customer may have criminal or civil legal recourse. If an individual is unaware of the
true value of something, and has set an asking price that is only a small percent of its
value, the buyer faces an ethical dilemma.

Managers must use judgment to decide how far a company should go to ensure product
safety. Should a Jet Ski™ contain a warning that all riders should wear life vests? Should
a lawn tractor have a shut–off device that disables the mower if the rider weighs less
than 100 pounds? Should microwave ovens have a label that states operators should not
try to dry their cat in the oven? In product safety, what is sensible and what is silly?
These are difficult ques�ons for which no right answer exists. Managers must con�nue
to grapple with these issues as they develop a set of standards with which they feel
comfortable when making decisions.

Ethical behavior is a corporate issue that affects the company’s bo�om line. The answer
is complex, but it can be par�ally understood by reviewing earlier points on labor
rela�ons, the environment, and the customer. Some organiza�ons have a�empted to
maximize short-term earnings per share to the stockholder by cu�ng corners on plant
safety or environmental compliance. Usually, these ac�ons have separated management
from labor, the consumer, and the general public.

In the longer term, such ac�ons alienated these interest groups and forced them to take ac�on. The ac�ons, o�en legal or legisla�ve, helped to create an adversarial environment
that has forced an increase on costs and made some industries vulnerable to global compe��on. For many years, the steel industry did not respond adequately to environmental
and safety concerns. This diverted management �me and company resources away from important decisions and key investments in new technology. Over �me, compe��veness
declined, and companies suffered a decline in sales and market share. Today, the steel industry has responded to these important issues in a �mely manner. Global compe��on has
not nega�vely affected industries such as paper and oil because these industries have had a more balanced view for many years, and have focused on both long-term objec�ves and
short-term performance. Companies in these industries have made significant efforts to deal with labor, environmental, and product safety concerns as part of their ini�al planning
process rather than as problems arise.

Links between opera�ons and the rest of the organiza�on should be
built into the planning process by developing consistent opera�ons
strategies.

Stockbyte/Thinkstock

1.6 Operations as Part of the Organization

While an organiza�on is part of the larger economic and government system, it is also a system containing
subsystems such as marke�ng, finance, accoun�ng, personnel, and engineering, in addi�on to opera�ons. These
subsystems, o�en called func�onal areas or disciplines, should be linked together by common organiza�onal goals
and a means of communica�ng these goals. These common goals are part of an organiza�on’s strategy.

Strategy

consists of the organiza�onal goals and the methods for implemen�ng the goals, called key policies. Strategy
defines how the organiza�on chooses to compete within the framework dictated by the external environment.
Communica�ng and deciding how to implement a strategy typically occurs during the budge�ng and planning
process, which most organiza�ons do annually.

Selec�ng a strategy and key policies leads to the crea�on of key business (organiza�onal) processes that a firm
uses to sa�sfy customer needs. A business process is a set of work ac�vi�es with a preferred order, an iden�fiable
beginning and end, inputs, and clearly defined outputs that add value to the customer. A business process is cross-
func�onal and leads to outcomes the customer desires, such as delivering quality products that meet specific
customer needs in a �mely manner.

Strategy

Opera�ons should be linked to the rest of the organiza�on by developing strategies consistent with the
organiza�on’s overall strategy. Links between opera�ons and the rest of the organiza�on can be built into the
planning process. A plan is a list of ac�ons that management expects to take. A plan is the method for alloca�ng
the organiza�on’s resources in rela�on to opportuni�es and problems present in the environment. Resources
allocated by opera�ons managers should help the organiza�on achieve its goals.

The links between strategy and opera�ons can be illustrated by comparing a fast-food restaurant with a four-star
restaurant. Customers expect fast-food restaurants to deliver good-quality food at a low price, with a wait of only a few minutes. This implies a limited menu, some advance
prepara�on, and a service opera�on with a smooth and simple means of communica�ng orders and delivering food. The training of counter workers and cooks should emphasize
speed, efficient movement, and uniform performance of du�es.

Compare these requirements with those of a four-star restaurant with a heavy tourist trade. Here, customers expect food of excep�onal quality and variety, higher prices, and a
leisurely dinner. These expecta�ons imply a wide selec�on on the menu, comfortable and pleasant surroundings, entertainment, and li�le or no advance food prepara�on. All
opera�ons, from training cooks to food procurement, are different from those in a fast-food restaurant. Four-star restaurants do not have counter help. The emphasis is on service
to the individual customer rather than on uniformity and quick response. This comparison illustrates two different approaches to successfully opera�ng a restaurant. Success in a
fast-food restaurant is based on providing quality products at low prices and maintaining high customer volume. Success in a four-star restaurant is based on providing
entertainment and atmosphere, as well as quality food. The alloca�on of resources in the design and planning of these restaurants should reflect the differences.

Organizational Structure

The development of strategy leads to the ques�on of organiza�onal structure. Organiza�onal structure is the infrastructure of formal rela�onships among different func�ons or
subsystems, such as marke�ng, finance, and opera�ons. Organiza�onal structure defines the lines of communica�on. Many organiza�ons have substan�ally reduced their
administra�ve staffs and altered their lines of communica�on. IBM, Ford, Bank of America, and other organiza�ons have cut hundreds of thousands of white-collar workers. In a few
cases, the objec�ve is simply to cut costs. In most cases, organiza�ons are seeking a leaner, more compe��ve structure that will enable them to make be�er decisions and to
respond more quickly to opportuni�es in the environment.

Decentralizing decision making can result in fewer levels of hierarchy with more cross-func�onal teams. Elimina�ng the func�onal silos that tradi�onal organiza�ons o�en have
enables teams to share knowledge and understand the organiza�on-wide implica�ons of a decision. Decisions are made based upon corporate interests rather than narrow
func�onal interests, and they are made with more knowledge and understanding of the broad effects rather than in isola�on. In this environment, organiza�ons not only make
be�er decisions, but they can also make them more quickly because problems are uncovered early and resolved expediently. All managers, including managers of opera�ons, must
be able to work on the cri�cal cross-func�onal decisions that organiza�ons face.

Operations and Marketing Interface

One of the most important cross-func�onal rela�ons in an organiza�on is between opera�ons and marke�ng. The marke�ng func�on is responsible for inves�ga�ng and crea�ng
demand for services and goods. The opera�ons func�on is responsible for producing these services and goods and managing the supply chain that provides the incoming resources.
The opera�ons manager’s role is essen�al because without products, the organiza�on has no means of achieving its purpose.

Figure 1.3 illustrates the opera�ons and marke�ng interface. The interac�on begins with market research, which is an effort to measure customers’ needs and preferences. Market
research must iden�fy and determine new markets for exis�ng products and to discover demand for new products. Market research leads to product designs that can sa�sfy
consumers’ needs at a reasonable cost and a high level of quality. As a product is being designed, the process for making that product should also be designed. A�er the process
has been designed, it is necessary to acquire resources—material, trained people, and equipment. The produc�on of the product includes concern for quality, cost, and on-�me
comple�on. It also involves iden�fying suppliers and working with those suppliers providing goods and services to meet the needs of the organiza�on. Lastly, marke�ng and
distribu�on of the product take place. At this point, the customer’s reac�on to the product is measured, and another round of market research should occur in order to monitor
changing customer needs.

Figure 1.3: The opera�ons and marke�ng interface

The opera�ons subsystem works in a cycle. Market research informs product and process design, which leads to
resource acquisi�on and produc�on. Then, the product is marketed and distributed to the customer. Finally, more
market research is conducted to improve the product for future releases.

The role of opera�ons is to produce goods and services, while the role of marke�ng
is to inves�gate product demand and establish distribu�on chains. Links between
opera�ons and marke�ng include cost or price, schedule and delivery promise,
flexibility and customer sa�sfac�on, and high quality and repeat sales.

Figure 1.4 illustrates how decisions within opera�ons can affect marke�ng. Product cost must be covered by the market price with enough le� over to pay for overhead,
administra�ve, and selling expenses and to provide the organiza�on’s profit. Effec�ve scheduling helps the organiza�on deliver products on �me. Flexibility permits opera�ons to
deliver specially designed products at a low cost, making marke�ng’s job easier. High-quality products pay dividends in repeat sales and new customers.

Figure 1.4: Marke�ng and opera�ons are important subsystems
in an organiza�on

Processes Versus Functions

Currently, a revolu�on is taking place in the business sector. Businesses are shi�ing from organizing by business func�ons, such as opera�ons, marke�ng, finance, and informa�on
systems, to organizing by business process, such as strategy formula�on, product development, and order fulfillment. Business processes span many func�onal areas. For example,
product development requires inputs from marke�ng, engineering, finance, opera�ons, and others.

Advocates of the business process approach argue that organizing by func�ons is inappropriate for today’s fast-paced and fast-changing environment. Decision making is very slow as
complicated decisions wind through the maze of groups that exist in the func�onal organiza�on. As a result, companies that are organized by func�on can be inefficient and slow to
respond. Organizing by process tends to focus a�en�on on ac�vi�es that customers value and allows the organiza�on to make decisions quickly.

Customers are not concerned about discipline or func�on-related issues such as how accoun�ng values inventory, how financial managers analyze investments in facili�es, or
whether an opera�on has the lowest transporta�on costs. Customers are concerned about how the outputs of the organiza�on meet their needs. The customer requirements shown
in Figure 1.5 include mee�ng specific needs for product performance and features, price, and service a�er the sale. The organiza�on should develop compe��ve capabili�es to meet
these customer requirements. The capabili�es of the organiza�on are the result of processes such as strategy development, product development, design of systems to produce
services or goods, and order fulfillment. Order fulfillment ranges from order entry through produc�on to delivery and a�er-the-sale service. The processes listed here are illustra�ve
and not exhaus�ve.

Figure 1.5: Rela�onship between func�ons, processes, and
outcomes

Employees from func�onal areas such as accoun�ng, marke�ng, and engineering
complete various business processes such as product development and order
fulfillment. These processes form the company’s compe��ve capabili�es, which
serve customer requirements, including quick responses, pricing, and service.

As illustrated in Figure 1.5, business processes work across func�ons to create compe��ve capabili�es. People trained in the disciplines work on teams to design, implement, and
operate processes that produce the outcomes that customers want.

Customers don’t care whether a company is organized by func�on or discipline. They care about value. For example, an organiza�on that is the industry leader in sales and profit
may have the highest distribu�on costs in the industry because it provides the shortest �me from order to delivery. If that fast delivery adds value to the customer, then the
customer may be willing to pay more for the product or to buy more of the product. A process that reduces distribu�on costs and increases the �me from order to delivery reduces
value to the customer.

Related Subsystems Within Operations

Early sec�ons describe the rela�onships between the organiza�on and its environment. These sec�ons also describe the organiza�on as a series of related subsystems with
opera�ons as one subsystem. As illustrated earlier, in Figure 1.2, opera�ons can be divided into different parts or subsystems, including quality management, inventory, and
scheduling.

To facilitate understanding of the subsystems, and to make the rela�onships between these parts clear, an overview of opera�ons is provided in Figure 1.6. Looking forward, here is
an overview regarding how this book is organized:

1. Building Capabili�es to Compete Globally
2. Designing the System to Produce Services and Goods
3. Planning and Managing Opera�ons

The sec�on on building capabili�es covers how firms use opera�ons to gain a compe��ve advantage, including the strategic importance of opera�ons and the applica�ons of
computers and technology. This discussion also describes the importance of flexibility, �me, produc�vity, quality, and supply chain management as cri�cal dimensions of compe��on,
and explains how these capabili�es can be obtained. These topics are discussed in Chapter 2.

Figure 1.6: Overview of the systems approach to opera�ons

Later chapters on designing the system to produce services and goods discuss the ways that organiza�ons can build effec�ve opera�ons to increase produc�vity, improve quality, and
integrate ac�ons within an organiza�on and its supply chains. They describe ways to forecast demand, to select the process for producing the services and goods, to locate and
arrange facili�es, and to set capacity requirements. These decisions are interrelated because the type of product that an organiza�on chooses to produce will impact how and how
many of a product will be made. These topics are covered in Chapters 3–8.

Planning and managing opera�ons describes how an organiza�on expects to use its facili�es, people, and materials to meet demand. It includes developing and execu�ng produc�on
plans and coping with different planning horizons. The key areas of material requirements, planning, inventory management, and just-in-�me scheduling are explained. These topics
are covered in Chapters 9–12.

Chapter Summary

Opera�ons is the processes through which people, capital, and material are combined to produce the services and goods consumed by the public. Products should be value-
added; that is, the services and goods should be worth more to the customer than the cost of the inputs.
Opera�ons can be designed and used in a manner to gain compe��ve advantage.
Service opera�ons have many similari�es with and some differences from manufacturing opera�ons.
Global compe��on will strengthen organiza�ons and increase living standards worldwide.
Ethical issues are important business issues.
A system is a group of items, events, or ac�ons in which no item, event, or ac�on occurs independently. The systems approach is a central theme within this text.
The organiza�on must compete within the constraints presented by its external environment. These constraints include compe�tors, economic condi�ons, and government
regula�ons.
Successful opera�ons management requires teamwork among opera�ons and other func�onal areas (subsystems) within an organiza�on. These areas include marke�ng, finance,
accoun�ng, engineering, and informa�on systems.
Opera�ons is composed of many parts or subsystems, which should be effec�vely coordinated to build the organiza�on’s compe��ve posi�on.
Organiza�ons should design business processes to achieve compe��ve capabili�es rather than focusing on func�onal specializa�on.

Case Studies

Our Lady of Lourdes Hospital

As a management trainee for a large consul�ng firm, you are part of a team that has been assigned to study opera�ons at Our Lady of Lourdes Hospital (OLL). Recently, OLL was
purchased by a for-profit health care provider. The team is tasked with repor�ng on opera�ons and making recommenda�ons to enhance revenues and reduce expenses.

Before it was sold, OLL had begun many of the outreach programs that are common in health care. An alcohol and drug rehabilita�on center, a women’s health center, and a sleep
therapy center exist, but all have lost money. Following are summaries of key points from interviews the team had with the directors of marke�ng, opera�ons, and medicine.

Director of Marke�ng:

1. A major problem has been the lack of a budget for adver�sing these centers. These projects need large sums of up-front money for adver�sing and promo�on.
2. We are having trouble ge�ng the kind of coopera�on necessary to make these programs work. Basic opera�ons, from meal prepara�on to cleaning and maintenance, have not been

done well. Medical problems at these centers are given a lower priority by the medical staff because the pa�ents “are not really sick.”
3. What we need is �me to iden�fy problems and implement efficient solu�ons to these programs.

Director of Opera�ons:

1. I do not have any problems that could not be solved if I had an unlimited supply of money. Major renova�on efforts are needed to improve food prepara�on areas, the laundry, and
the hea�ng system. These three improvements could probably save enough to cover OLL’s annual deficit.

2. If these problems are not bad enough, my people are saddled with several new responsibili�es. These new centers require more work than the administrators think. Sufficient
opera�ng funds were not allocated to cover the expenses. Several of the centers are off the main site, making it difficult for my supervisors to do a proper job.

3. In my opinion, these centers are a drain on resources.

Director of Medicine:

1. The medical staff requires be�er support. Certain key medical equipment requires immediate replacement, and the laboratories need upda�ng. To a�ract the best doctors, we need
to purchase equipment we have never had before.

2. The new centers are taking �me away from the medical staff. We don’t get proper credit for the work we do in those centers.
3. We need to pull back and reexamine our commitment to these new efforts.

The leader for the consultants has asked each member of the team to review the interview summaries and to report on the following points by tomorrow:

1. What are the major areas of conflict that exist in the organiza�on?
2. Do you think having scarce resources is typical of most organiza�ons?
3. Are key administrators working together to make these new centers successful?
4. How would you propose to direct all parts of the organiza�on toward common goals?

Flick Fabrica�on, Inc.

Flick Fabrica�on, Inc. is responsible for providing sheet metal parts to assembly plants in the home appliance industry. One set of parts used in the door of a dishwasher passes
through a stamping department, where the metal is bent into the proper shape. Next, the welding department a�aches threaded fasteners that will accept a bolt during final
assembly at a customer’s plant.

Engineers at Flick, working to improve produc�vity and reduce manufacturing costs, have redesigned a threaded fastener so it can be used to eliminate a welding opera�on. The
new equipment will cost Flick $100,000. In addi�on, there will be a $.05 increase in material costs for each set of parts. A�aching the new threaded fastener to the sheet metal will
increase assembly costs by $.01 per unit. Also, modifica�on to the dies used in the stamping press will require an addi�onal investment of $25,000.

Savings generated by this change include a $.035 reduc�on in welding labor and a $.005 reduc�on in welding materials. Opera�ng expenses for stamping will decline by $.03 per set
of parts. Engineering es�mates that changing the fastener will allow Flick’s customers to reduce their assembly labor by $.06 because quicker loca�on and fastening techniques can
be used. Flick’s engineers also believe this method will provide a be�er-quality product with less chance of failure in assembly at customers’ plants and a�er the dishwasher is
purchased for home use.

Prepare a report that addresses the following:

1. List the benefits and costs that will result if this change is implemented. Do not limit your search for benefits to Flick’s opera�ons.
2. What are the risks to Flick if it proceeds with this process improvement? What are the risks if it does not?
3. If Flick produces 2 million sets of parts in 1 year, can it recover the total investment in 5 years? (Consider only those savings internal to Flick.)
4. With the costs and benefits given in the case, how long will it take Flick to pay for the investment? (Hint: How many units have to be sold to earn back the ini�al $125,000

investment?)
5. Why is it important to understand the systems concept to work effec�vely within the organiza�on?
6. How should Flick consider the savings generated for its customers?

Discussion Ques�ons

Click on each ques�on to reveal the answer.

1. What is the role of opera�ons in an organiza�on?
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Opera�ons are the processes by which people, capital, and material are combined to produce the services we consume. Organiza�ons exist to meet the needs of society that
people working alone cannot. It takes organiza�ons to produce the tremendous array of products in the vast quan��es we consume each year. Opera�ons are an integral part
of an organiza�on because opera�ons produce the services and goods marketed by the organiza�on. As a result, opera�ons managers should work closely with marke�ng
managers and other func�onal area managers to achieve organiza�onal goals.

2. What does value-added opera�ons mean? How would it apply to not-for-profit organiza�ons?
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Consumers should be willing to pay more for services and goods than the total cost of the inputs. The difference between input costs and value to the customer is profit to the
private sector, which can be reinvested to build new and be�er products. Reinves�ng profits enables the organiza�on to increase efficiency, which frees resources for new
product development and innova�on. This is a way to increase our standard of living. Crea�ng value-added products generates wealth for society.

In the not-for-profit sector, value-added opera�ons also create wealth for society. Services such as police and fire protec�on should produce benefits that exceed the costs of
providing the service. In not-for-profit service opera�ons, many of the benefits are not measurable in dollars, so it is o�en difficult to compare costs and benefits. However, the
efforts to do so should s�ll be made. Also the �tle, not-for-profit, is really a misnomer because the benefits that go to society should be greater than the costs of the resources
consumed. That is society’s profit.

3. Explain the major differences between producers of services and producers of goods? How do these differences affect opera�ons?
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

A good is tangible, and a service is not. This has two impacts on opera�ons. First, a service organiza�on cannot inventory finished goods because the service is intangible and is
performed on demand. Second, because a good is tangible the product design has physical characteris�cs to consider such as height, weight, strength, elas�city, durability, etc.

There is a major disadvantage in service organiza�ons not being able to store finish goods. When demand is greater than capacity for even a short period of �me, customers
must be turned away or there demands must be sa�sfied at another �me when capacity is available. Producers of goods, even with a small amount of finished goods inventory,
can cope with uneven demand by sa�sfying peak demand from inventory.

4. Agree or disagree with the following statement and support your posi�on: Study of opera�ons management issues should be narrowly focused on for-profit producers of goods,
such as Microso�, Ford, and General Electric (GE).
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Opera�ons management issues and problems should not be narrowly focused on large for-profit producers of goods. Opera�ons management problems exist in small as well as
large organiza�ons. Service organiza�ons face significant challenges in facility design, capacity planning, scheduling, and other areas within opera�ons. Many organiza�ons are a
blend of tangible and intangible products. Restaurants are a good example of organiza�ons providing both goods and services.

Whether a manager is responsible for producing services or goods, similar ques�ons are usually addressed. Ques�ons concerning which products to produce, how it should be
produced, where it should be produced, how the facility should be organized, what skills employees must possess, and what materials are needed are all involved in key
opera�ng decisions made by managers responsible for producing goods or services.

5. What impact has global compe��on had on opera�ons?
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Global compe��on is causing organiza�ons to pay more a�en�on to opera�ons. When the level of global trade is low, an organiza�on needs only be among the best in the
na�on not the best in the world. Compe�ng in na�onal markets, these firms o�en have the same labor costs, material costs, government regula�ons, and management styles.
Interna�onal compe��on increases the number of factors that affect success. It causes opera�ons to play a more central role in determining how successful an organiza�on will
become.

6. What is meant by the systems approach to opera�ons?
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

A system is a group of items, events, or ac�ons in which no item, event, or ac�on occurs independently. The systems approach to opera�ons implies that decisions made by
opera�ons managers will have an impact on other parts of the organiza�on. For example, decisions involving produc�on scheduling affect the availability of product for delivery
by marke�ng. When the systems approach is understood, the rela�onships between the organiza�on and its environment, and opera�ons and the other func�onal areas in the
organiza�on become clear. In addi�on, opera�ons, itself, is a system that can be separated into subsystems for more detailed analysis.

7. Why should an organiza�on have a strategy? Should opera�ng strategy be a part of this overall strategy?
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

An organiza�on should have a strategy because a strategy provides overall direc�on for the organiza�on. Strategy consists of the organiza�onal goals and the methods for
achieving the goals. Strategy defines how the organiza�on chooses to compete within the framework dictated by the firm’s external environment. Opera�ons should be linked
to the organiza�on by developing opera�ng strategies, which are consistent with the organiza�on’s strategy.

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8. What is the basic framework for opera�ons management presented in this chapter?
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Opera�ons management can be organized into building compe��ve capabili�es to compete globally, designing the system so it is consistent with achieving these compe��ve
capabili�es, and planning and managing opera�ons. Understanding customer requirements and achieving compe��ve advantage in our global environment requires that
managers understand flexibility, produc�vity, quality, and �me. It also requires that managers understand how to redesign business processes to cope with a rapidly changing
environment.

9. How do ethical issues impact organiza�ons and opera�ons?
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In the past, managers o�en made decisions that were in the best interest of the stockholders without considering their long-term impact. As a result, organiza�ons face a
staggering array of problems related to labor rela�ons and worker safety, environmental pollu�on, and product safety. Many of these legal and ethical issues are becoming
central themes in the management of organiza�ons. Organiza�ons are looking to recycling to cope with pressure from consumer groups and in some cases as a means to
reduce costs. Designers are paying more a�en�on to customer safety and comfort by adding air bags and other safety features to cars and other products. Management is
responding to labor and government concerns for a safer working environment by focusing a�en�on on a detailed design of the workplace.

Ini�ally, management fought these changes because it felt these would add costs but have no benefits. A�er further review, it appears that most of these efforts have
significant benefits and that in many cases the benefits exceed the costs. For example, recycling has been used to enhance a firm’s marke�ng effort by claiming that the firm’s
product will not harm the environment. Concerns for worker safety o�en leads to solu�ons that cause less fa�gue and greater produc�vity. Designing safe and comfortable
products adds value to customers.

10. How is a business process different from a business func�on?
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A business func�on is a group of people with similar training such as accountants that focus on solving problems that relate to that func�on or discipline. So, accountant might
a�empt to improve the payroll or accounts payable system. A business process is a set work ac�vi�es with a preferred order, an iden�fiable beginning and end, inputs, and
clearly defined outputs that add value to the customer. Business processes generally cross-func�onal boundaries. Organizing by processes requires teams of individuals from
different disciplines working to solve customer-focused problems. A cross-func�onal process team might a�empt to design a new product to meet a specific customer need.

Key Terms

Click on each key term to see the defini�on.

business

process
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A set of work ac�vi�es with a preferred order, an iden�fiable beginning and end, inputs, and clearly defined outputs that add value to the customer. A business process is usually
cross-func�onal.

ethics
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A sense of what is right and wrong that guides behavior. This set of standards is o�en more stringent than legal standards.

func�onal areas
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The parts or subsystems of an organiza�on such as accoun�ng, marke�ng, finance, and engineering.

goods
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Physical products.

key policies
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Methods or guidelines for achieving an organiza�on’s goals.

manufacturing
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

A produc�on process that produces goods.

market research
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The study of consumer needs so the organiza�on can determine new markets for exis�ng products and discover demand for new products.

opera�ons
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The processes by which people, capital, and material (inputs) are combined to produce the services and goods the public can consume (outputs). Opera�ons employs labor and
management (people), and uses facili�es and equipment (capital) to change materials into finished goods (farm tractors) or to provide services (computer so�ware development).

opera�ons management
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Decision making involving the many factors that affect opera�ons. Decisions that need to be made can include which products to produce, how large a facility to build, and how
many people to hire on first shi�.

organiza�onal structure
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The formal rela�onship between different func�on areas or subsystems.

process
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Describes how to accomplish a task.

process design
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Describes how a product is made.

process

technology
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The applica�on of knowledge to improve a process.

product
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Refers to either a good or a service.

product design
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The determina�on of the characteris�cs and features of a product, i.e., how does it func�on?

product technology
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The applica�on of knowledge to improve a product.

rela�ve advantage
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The difference between the lowest-cost producer and the next-lowest cost producer.

services
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Intangible products.

stakeholders
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Groups of people that are affected by a decision; that is, they have a stake in the decision. In a business organiza�on, stakeholders would include stockholders, management, labor,
consumers, and the general public.

strategy
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Consists of the organiza�onal goals and the methods for implemen�ng the goals, called key policies. Strategy defines how an organiza�on chooses to compete within the framework
dictated by the external environment.

system
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

A group of items, events, or ac�ons in which no item, event, or ac�on occurs independently of at least one other. Accordingly, no item that is studied in isola�on will act in the
same way it would in the normal environment.

technology
(h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The applica�on of knowledge, usually in the form of recently developed tools, processes, and procedures, to solve problems.

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