Operations Management Mark A. Vonderembse The Uni.docx

Operations Management
Mark A. Vonderembse
The University of Toledo
Gregory P. White
Southern Illinois University—Carbondale
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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/gdpindn
ewsrelease.htm
(h�p://www.bea.gov/newsreleases/industry/gdpindustry/gdpind
newsrelease.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/gdpindn
ewsrelease.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
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
Evaluation of Ford's
Computer Aided
Engineering
From Title:
Technological Development in Business
(https://fod.infobase.com/PortalPlaylists.aspx?
wID=100753&xtid=33536)
https://fod.infobase.com/PortalPlaylists.aspx?wID=100753&xtid
=33536
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
http://video.msnbc.msn.com/rock-center/46198559#46198559
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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ooks/AUBUS644
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?
ooks/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?
ooks/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).
ooks/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?

ooks/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?
ooks/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?
ooks/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.
https://content.ashford.edu/books/AUBUS644.13.2/sections/cov
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44.13.2/sections/cover/books/AUBUS644.13.2/sections/cover#

8. What is the basic framework for opera�ons management
presented in this chapter?
ooks/AUBUS644
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?
ooks/AUBUS644
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?
ooks/AUBUS644
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
ooks/AUBUS644.13.2/
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
ooks/AUBUS644.13.2/
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
ooks/AUBUS644.13.2/
The parts or subsystems of an organiza�on such as
accoun�ng, marke�ng, finance, and engineering.
goods
ooks/AUBUS644.13.2/
Physical products.
key policies
ooks/AUBUS644.13.2/

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