3. 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
4. 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.
5. 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
7. 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:
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.
8. 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.
9. 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
11. 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 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
12. 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
13. 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
14. 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
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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
15. 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.
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Countless organiza�ons u�lize Microso� so�ware because
it can
dras�cally increase user produc�vity and improve job
performance.
16. 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
17. 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
18. 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.
19. 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
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Evalua�on of Ford's Computer Aided Engineering:
Technological Development in Business
New Product Technology Outcome
An�lock brakes Microprocessor Safer automobiles
20. Lasik eye surgery Laser Faster recovery
Fewer complica�ons
Online banking services Smart devices, Internet, and
telecommunica�ons Convenient, 24-hour service from
anywhere
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
21. 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,
22. 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
24. commitment to con�nuous improvement.
Ted S. Warren/ASSOCIATED PRESS/AP Images
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 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
25. 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.
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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
26. 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
27. 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
28. 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
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1.4 Systems Approach to Operations
Substan�al interdependencies exist between func�onal
areas within organiza�ons, between organiza�ons that must
cooperate to create and deliver innova�ve
products to customers, and between organiza�ons and
government agencies. Within organiza�ons, func�onal
29. 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.
30. 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.
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1.5 The Organization as Part of the Economic and Government
System
Organiza�ons operate in an environment that includes
31. 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,
32. 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.
33. 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
34. 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
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Due to low wages, unsafe working condi�ons, and long
hours,
employees rallied together in the 1930s to establish labor
36. 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
37. 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
38. 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
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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
bankruptcy, Owens Corning had record earnings, which
were dwarfed by the
size of the resul�ng se�lement.
39. 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.
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.
40. 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.
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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
42. 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
43. 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.
44. 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
45. 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
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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.
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
46. 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
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
47. 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.
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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.
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
48. 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
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
49. 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
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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
50. 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.
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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
51. 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
52. 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
53. 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.
54. 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.
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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.
55. Flick's engineers also believe this method will provide a
be�er-quality product with less chance of failure in
assembly at customers' plants and a�er the dishwasher is
purchased for home use.
Prepare a report that addresses the following:
1. List the benefits and costs that will result if this change is
implemented. Do not limit your search for benefits to Flick's
opera�ons.
2. What are the risks to Flick if it proceeds with this process
improvement? What are the risks if it does not?
3. If Flick produces 2 million sets of parts in 1 year, can it
recover the total investment in 5 years? (Consider only those
savings internal to Flick.)
4. With the costs and benefits given in the case, how long will it
take Flick to pay for the investment? (Hint: How many units
have to be sold to earn back the ini�al
$125,000 investment?)
5. Why is it important to understand the systems concept to
work effec�vely within the organiza�on?
6. How should Flick consider the savings generated for its
customers?
Discussion Ques�ons
Click on each ques�on to reveal the answer.
1. What is the role of opera�ons in an organiza�on?
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Opera�ons are the processes by which people, capital, and
material are combined to produce the services we
56. 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?
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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
57. 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?
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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).
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58. 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?
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62. become.
6. What is meant by the systems approach to opera�ons?
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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?
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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.
63. 8. What is the basic framework for opera�ons management
presented in this chapter?
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Opera�ons management can be organized into building
compe��ve capabili�es to compete globally, designing the
system so it is consistent with achieving
these compe��ve capabili�es, and planning and managing
opera�ons. Understanding customer requirements and
achieving compe��ve advantage in our
global environment requires that managers understand
flexibility, produc�vity, quality, and �me. It also requires
that managers understand how to redesign
business processes to cope with a rapidly changing
environment.
9. How do ethical issues impact organiza�ons and opera�ons?
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In the past, managers o�en made decisions that were in
the best interest of the stockholders without considering
their long-term impact. As a result,
organiza�ons face a staggering array of problems related
to labor rela�ons and worker safety, environmental
pollu�on, and product safety. Many of these legal
and ethical issues are becoming central themes in the
management of organiza�ons. Organiza�ons are looking to
recycling to cope with pressure from
consumer groups and in some cases as a means to reduce
costs. Designers are paying more a�en�on to customer
safety and comfort by adding air bags and
64. other safety features to cars and other products.
Management is responding to labor and government
concerns for a safer working environment by focusing
a�en�on on a detailed design of the workplace.
Ini�ally, management fought these changes because it felt
these would add costs but have no benefits. A�er further
review, it appears that most of these
efforts have significant benefits and that in many cases
the benefits exceed the costs. For example, recycling has
been used to enhance a firm's marke�ng
effort by claiming that the firm's product will not harm
the environment. Concerns for worker safety o�en leads to
solu�ons that cause less fa�gue and
greater produc�vity. Designing safe and comfortable
products adds value to customers.
10. How is a business process different from a business
func�on?
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A business func�on is a group of people with similar
training such as accountants that focus on solving
problems that relate to that func�on or discipline. So,
accountant might a�empt to improve the payroll or
accounts payable system. A business process is a set work
ac�vi�es with a preferred order, an iden�fiable
beginning and end, inputs, and clearly defined outputs that
add value to the customer. Business processes generally
cross-func�onal boundaries. Organizing by
processes requires teams of individuals from different
disciplines working to solve customer-focused problems. A
cross-func�onal process team might a�empt
to design a new product to meet a specific customer
65. need.
Key Terms
Click on each key term to see the defini�on.
business process
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A set of work ac�vi�es with a preferred order, an
iden�fiable beginning and end, inputs, and clearly defined
outputs that add value to the customer. A business
process is usually cross-func�onal.
ethics
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A sense of what is right and wrong that guides behavior.
This set of standards is o�en more stringent than legal
standards.
func�onal areas
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The parts or subsystems of an organiza�on such as
accoun�ng, marke�ng, finance, and engineering.
