ECONOMICS

1. Copyright 2006 John Wiley & Sons, Inc.
Beni Asllani
University of Tennessee at Chattanooga
Operations and Competitiveness
Operations Management - 5th Edition
Chapter 1
Roberta Russell & Bernard W. Taylor, III

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Lecture Outline
 What Do Operations Managers Do?
 Operations Function
 Evolution of Operations Management
 Operations Management and E–business
 Globalization and Competitiveness
 Primary Topics in Operations Management
 Learning Objectives for this Course

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

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

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INPUT
•Material
•Machines
•Labor
•Management
•Capital
TRANSFORMATION
PROCESS
OUTPUT
•Goods
•Services
Feedback
Operations as a
Transformation Process

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

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

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

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

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 Scientific management
 systematic analysis of work methods
 Mass production
 high-volume production of a standardized
product for a mass market
 Lean production
 adaptation of mass production that prizes
quality and flexibility
Evolution of Operations
Management (cont.)

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

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

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

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

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Continuum from Goods
to Services
Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff,
Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.

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Operations Management
and E-Business
Categories of E-Commerce
Business
Consumer
Business Consumer
B2B
Commerceone.com
B2C
Amazon.com
C2B
Priceline.com
C2C
eBay.com

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An Integrated Value Chain
 Value chain: set of activities that create and
deliver products to customer
Manufacturer Supplier
Customer
Flow of information (customer order)
Manufacturer Supplier
Customer
Flow of information (customer order)
Flow of product (order fulfillment)

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Impact of E-Business on
Operations Management
 Comparison shopping
by customers
 Direct contact with
customers
 Business processes
conducted online
 Customer expectations escalate;
quality must be maintained and
costs lowered
 No more guessing about demand
is necessary; inventory costs go
down; product and service design
improves; build to-order products
and services is made possible
 Transaction costs are lower;
customer support costs decrease;
e-procurement saves big bucks
Benefits of E-Business Impact on Operations

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

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

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

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Globalization and
Competitiveness
 Favorable cost
 Access to international
markets
 Response to changes in
demand
 Reliable sources of
supply
 14 major trade
agreements in 1990s
 Peak: 26% in 2000
World Trade Compared to World GDP
Source: “Real GDP and Trade Growth of OECD Countries, 2001–03,”
International Trade Statistics 2003, World Trade Organization,
www.wto.org

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Globalization and
Competitiveness (cont.)
Hourly Wage Rates for Selected Countries
Source: “International Comparisons of Hourly Compensation Costs for Production Workers in
Manufacturing,” Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003.
Germany: $26.18
USA: $21.33
Taiwan: $5.41
Mexico: $2.38
China: $0.50

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Globalization and
Competitiveness (cont.)
Trade with China: Percent of each country‘s trade
Source: “Share of China in Exports and Imports of Major Traders, 2000 and 2002,”
International Trade Statistics 2003, World Trade Organization, www.wto.org

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

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

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Measures of Productivity
Competitiveness and
Productivity (cont.)

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Changes in Productivity
for Select Countries
Internet-enabled
productivity
- Dot com bust
- 9/11 terrorist attacks
Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor
Statistics, U.S. Department of Labor, September 2003. U.S. figures for 2002–2003 from “Major Sector Productivity and
Costs Index,” Bureau of Labor Statistics, U.S. Department of Labor, March 2004

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

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Competitiveness and
Productivity
Productivity as a Function of Inputs and Outputs, 2001–2002
Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor
Statistics, U.S. Department of Labor, September 2003
Breakthrough
Performance
More Efficient
Retrench

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

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 Economies of Scale
 Capital Investment
 Access to Supply and Distribution
Channels
 Learning Curve
Operations–oriented
Barriers to Entry

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Primary Topics in
Operations Management

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Primary Topics in Operations
Management (cont.)

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Operations Strategy
 Strategy: Chapter 2
 Maintaining an operations strategy to support firm’s
competitive advantage
 Quality: Chapters 3 and 4
 Focusing on quality in operational decision making
 Product and Services: Chapter 5
 Designing quality products and services
 Processes, Technologies, and Capacity: Chapter 6
 Setting up process so that it works smoothly and
efficiently

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 Facilities: Chapter 7
 Setting up facility so that it works
smoothly and efficiently
 Human Resources: Chapter 8
 Designing jobs and work to produce
quality products
 Project Management: Chapter 9
 Managing complex projects
Operations Strategy
(cont.)

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Supply Chain
Management
 Supply Chain: Chapter 10
 Managing supply chain
 Forecasting: Chapter 11
 Predicting customer demand
 Aggregate Planning: Chapter 12
 How much to produce and when to
produce it
 Inventory Management: Chapter 13
 How much to order and when to order

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Supply Chain
Management (cont.)
 Resource Planning: Chapter 14
 Planning capacity and other resources
 Lean Production: Chapter 15
 Designing efficient production lines
 Scheduling: Chapter 16
 Job and task assignments
 Waiting Lines: Chapter 17
 Minimizing waiting time of customers and
products

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Learning Objectives of
this Course
 Gain an appreciation of strategic importance
of operations in a global business
environment
 Understand how operations relates to other
business functions
 Develop a working knowledge of concepts
and methods related to designing and
managing operations
 Develop a skill set for quality and process
improvement

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Copyright 2006 John Wiley & Sons, Inc.
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