operation chapter 1
Lean Systems
"Managing Lean Systems," represents the application of all the aforementioned process-related concepts in ways that maximize the overall productivity of the operation. A lean operation produces maximum levels of efficiency and effectiveness using a minimal amount of resources.
process
A system of activities that transforms inputs into valuable outputs. reiteration Operations management is a process-oriented discipline. What, then, is a process? It is a system of activities that transforms inputs into valuable outputs. Processes use resources (workers, machines, money, and knowledge) to transform inputs (such as materials, energy, money, people, and data) into outputs (goods and services). For example, one uses a grill (a resource) and heat (an input) to convert a raw hamburger patty (an input) into a cooked hamburger (an output). Processes can also transform information, or even people (customers), from one condition into another. In decision making, for example, managers transform data into actionable information and decisions. Think about how you are "transformed" by going to a movie—this is a process in which you are both an input and an output! Other processes transform things by transporting them from one location to another, or by storing them (e.g., a warehouse stores finished goods). Finally, some activities check or inspect work to make sure that it meets standards for quality, quantity, or timeliness.
An Example of Functional Relationships in a Supply Chain see page 14 first tier second tier
Actual supply chains usually involve many processes including planning, sourcing, making, servicing, delivering, and so on. For example, consider the supply chain of a movie production company depicted in Figure 1-3. Boxes in the figure represent organizations or individuals; arrows represent flows of material, information, or people. To keep things simple, the figure shows only some of the major parties in the supply chain. You can probably easily think of other ones that are not included. a movie production company's operations managers interact with many suppliers of goods and services that can be considered as either product-related or resource-related inputs. Accordingly, Figure 1-3 indicates stages of a product supply chain in the horizontal dimension, and stages of a resource/technology supply chain in the vertical dimension. Whether a supplier is a "product" supplier or a "resource" supplier is not always clear. Often, a single supplier may fit in both categories. For example, the director of a movie could be considered a resource in the sense that she brings creativity and knowledge to the moviemaking process. At the same time, her time and effort are consumed by the process of making the movie, and these could be considered to be product inputs. Usually, a product supplier provides an input that is fully consumed in the creation of a product or becomes part of the product (e.g., energy, raw materials, components). On the other hand, a resource or technology supplier provides an input that can be used again and again to create multiple products (e.g., information, product and process specifications, equipment, worker skills). In a supply chain, each upstream stage of supply is known as a tier. The tier number refers to how directly the supplier works with the firm. tier 1 A first-tier supplier provides goods and services directly to the firm. For example, the stock film wholesaler is a first-tier supplier to the movie production company. A second-tier supplier provides inputs to the first-tier supplier, and so on. Each tier of the upstream supply chain could involve multiple suppliers for the same items or services. Also, a single supplier might provide inputs for multiple tiers of the supply chain. For example, the director in Figure 1-3 provides inputs to both the casting company and the movie production company.
why shift from operations management, supply chain management Advances in Technology and Infrastructure
Advances in communications, computers, and transportation technologies have enabled extensive connectivity and the growth of supply chain partnerships. With easier information transactions, there is less of a need to include all operations at one location or within one organizational boundary. Constant information sharing between supply chain partners improves efficiency in planning, in material movements, and in the transfer of funds At the same time, growing transportation technologies and infrastructures have made the shipping of goods and people faster, more reliable, and more economical than in decades past. Transportation infrastructure (airports, train tracks, shipping docks, and highways) continues to be built in developing countries. This growing infrastructure improves reliability of deliveries to remote places, thus opening opportunities to work with new suppliers and to serve new markets.
total product experience
All the goods and services that are combined to define a customer's complete consumption experience. reiteration Because most firms deliver products that involve both goods and services, operations managers recognize the importance of delivering a total product experience. This term refers to all of the outputs of an operation, both goods and services, that are combined to define a customer's complete consumption experience. The experience includes all aspects of purchasing, consuming, and disposing of the product.
Functional Activities That Connect Operations Managers
As shown in Figure 1-2, customer management, supply management, and logistics management activities serve to connect operational managers as they manage flows of materials and information throughout their firm, and ultimately throughout the entire supply chain. Processes within each of these functional areas may be independent or highly integrated, yet because of the divisional organizational structure that most firms use, most business managers tend to think of operations management in these functional terms.
Why You Need to Study Operations Management
Because it matters to people: Operations management plays an important role in determining the quality of life for people around the world. New operational practices and technologies continue to radically improve the effectiveness of governments, not-for-profit institutions, and businesses in providing goods and services. Operations management also directly impacts sustainability issues including the environment, fair treatment of people, and safety. In doing so, operations management affects social systems and cultural norms, as well as the basic economic prosperity of people everywhere. Consider how your own life is affected. The speed with which organizations provide services to you determines the amount of leisure time you have. In an emergency, the speed and efficiency of a relief organization might even save your life. The cost and quality of products you consume affects your disposable income, your health, even your outlook on life. You can probably think of a good service experience that put a smile on your face, or a bad one that ruined your day! As an operations manager, you may someday have the opportunity and responsibility to positively affect your organization's success. In doing so, you may also be improving the quality of life of the firm's employees, its customers, and even society as a whole. Because it matters to organizations: Every product or service offering is a promise of some kind of benefit for someone. Organizations are successful only when they can consistently deliver upon the promises that they make. Operations management determines how well such promises are fulfilled. Research shows that operationally excellent organizations consistently outperform their rivals in financial and other terms. For example, a recent study1 showed that companies possessing excellent supply chain operations outperformed their nearest competitors in the following ways: • 50 percent higher net profit margins • 20 percent lower sales, general & administration (SG&A) expenses • 12 percent lower average inventories • 30 percent less working capital expenses • Twice the return on assets (ROA) • Twice the return on equity (ROE) • 44 percent higher economic value added • Twice the returns on stock prices • 2.4 times the risk-weighted stock returns • 46 percent greater market-value-to-assets ratio These differences in performance are truly stunning, and highlight the important contributions that operations management makes to the financial well-being of a firm.
collaborative network
Collaborative Networks As firms become more reliant on their suppliers, the greatest improvements in product value are usually achieved through better coordination with these partners. However, when firms concentrate only on their immediate relationships, they address only a small portion of the total opportunity to improve the overall effectiveness of the system. For example, uncertainties in the availability of raw materials at a supplier's supplier can severely limit a firm's ability to deliver products to its customers. Problems like this are best avoided when partners across a supply chain network share their plans and capabilities, and work together to develop improvements. In addition, the creation of partnerships in integrated networks opens up opportunities to take advantage of complementary cost structures, the respective partners' technical expertise, market knowledge, and brand equities (reputations). By combining such assets, companies are able to make stronger product offerings together than they could individually.
Every organization can be described as a bundle of processes that connect different organizational groups. design processes strategic planning processes production processes evaluation process
Every organization can be described as a bundle of processes that connect different organizational groups. • For example, companies use design processes to develop new goods and services and strategic planning processes to determine how the firm should compete. • They use production processes to plan and execute the supply, manufacture, and delivery of goods and services to customers • . Finally, companies use evaluation processes to measure and report how well they are meeting their goals or using their resources.
stakeholders
Groups of people who have a financial or other interest in the well-being of an operation. In addition to customers and suppliers, other groups of people also have an interest in the well-being (financial and otherwise) of an operation. Stakeholders include employees and unions, the local community, social groups (such as animals' rights or environmental concerns), government, and financial investors. sustainability Why differentiate between customers, suppliers, and stakeholders? Stakeholders' demands often differ from the demands of customers or suppliers. For example, customers might care most about the price and quality of products, whereas some stakeholders might care most about environmental concerns. Like customers and suppliers, stakeholders can significantly affect how a firm operates.
Reduction in Governmental Barriers to Trade global
In recent years we have witnessed incredible changes in governments and social systems around the world. More and more nations have moved away from centrally controlled economies to pursue free market systems. Russia, India, and China represent a few important examples. These falling political barriers have opened up new opportunities to develop global supply chains. While these global supply chains can offer improved product costs and quality, they can also be more complex and risky. Today, operations managers must often manage long pipelines of inventories that cross multiple country borders.
examples
It is valuable to think about operations as sets of processes and subprocesses with many interrelationships and linkages. Consider the operations of an airport. There are flight-scheduling processes, ticketing processes, facilities-management processes, security processes, vendor-management processes, and on and on. The structure governing how these processes work together determines the ability of the airport to serve its customers. We all have experienced organizations with complex, bureaucratic processes that seem incapable of providing a desired service in a timely manner. The design of a process should reflect what customers want. If customers want quick response, for example, then the process should be designed to be fast and flexible. In this case operations managers must identify and eliminate unnecessary or redundant steps, reduce distances between steps or activities, and diminish the time needed to complete each step. This connection between the process design and customers' desires must be maintained. If customers' desires change, then processes may also have to change.
function of operation, management
Operations management includes the planning and execution of tasks that may be long-term (yearly) or short-term (daily) in nature. Operations managers interact with managers in other business functions, both inside and outside the operations managers' own company. Operations management thus spans the boundaries of any single firm, bringing together the activities of internal operations (i.e., internal to a given company) with the operations of customers, suppliers, and other partners around the world. In the future, operations located around the globe will be even more tightly interconnected than they are today. The supply chain concept can be used to describe connections among business partners.
Operations Management Partners Across the Supply Chain
Operations managers interact with three important groups that are external to the firm: (1) customers, (2) suppliers, and (3) stakeholders. Figure 1-2illustrates how operations management links internal operational processes with the operational processes of customers and suppliers. The figure also identifies some of the points of interaction between operational groups and other business functional groups within the firm.
customers internal customer, intermediate customer, final customer critical customer
Parties that use or consume the products of operations management processes Customers Customers include anyone (individuals or organizations) that uses or consumes the products of operations management processes. The firm cannot structure an effective or efficient operations management function unless it has clearly identified its customers. Types of customers can include internal customers, intermediate customers, and final customers. For example, consider a car manufacturer. A company-owned distribution center might be considered an internal customer of the manufacturing group; a dealership is an intermediate customer; and people who buy the car and drive it off the dealer's lot are the final customers, or consumers. While each of these customer groups is important, it is beneficial for operations managers to identify critical customers. Critical customers have the greatest impact on product designs, sales, and future growth opportunities.
operations managers must coordinate a system of activities both inside and outside the network of organizations that contains this system of activities is often referred to as a supply chain. So how then is "supply chain management" different from "operations management"?heir firm's boundaries. Th
Supply chain management is the design and execution of relationships and flows that connect the parties and processes across a supply chain. Recall that our definition of operations management is the management of processes used to design, supply, produce, and deliver valuable goods and services to customers. • Operations management focuses on managing processes(design, supply, production, delivery); • supply chain management focuses on managing relationships and flows (flows of information, materials, energy, money, and people). • Think of supply chain management as a way of viewing operations management. You can also think of the supply chain as a network of organizations in which operations activities are conducted.
The Changing Nature of Supply Chains sustainability Don't need to know
Supply chains are complex. Ultimately, all firms in an industry are connected to one another through links of sourcing, making, servicing, and delivery for different products in various markets. Adding to the complexity is the fact that the structures of supply chains are constantly changing in order to accommodate changes in the business environment. New suppliers emerge and old ones die out. Regulations, laws, and societal pressures change. Markets and technologies evolve. Consider, for example, the technological changes that are sweeping through the moviemaking industry. One could argue that the resource-technology supply chain is really the most important one for moviemakers to manage. The importance of the upstream product supply chain, which provides the medium upon which the movie is delivered, is diminishing rapidly as digital movie production and distribution are rapidly replacing film-based media. In other businesses, where standardized products are produced many times over, the product supply chain plays a more prominent role in a company's strategy. Most of us are aware of the increasing concerns of societies and governments over environmental issues such as pollution, global warming, and hazardous wastes. Expectations are also rising for business firms to behave in more socially responsible ways regarding their labor practices, involvement in communities, and promotion of the general welfare. These increasing pressures act as tremendously important drivers of change in supply chains today. For example, some operations managers who formerly procured supplies from faraway sources are now sourcing them locally in order to reduce the carbon dioxide pollution created by transportation of goods over long distances. This is such an important topic that we have dedicated an entire chapter to it (Chapter 16: Sustainable Operations Management). Additionally, you will encounter numerous examples addressing these issues throughout the book.
supply chain
The global network of organizations and activities involved in designing, transforming, consuming, and disposing of goods and services. reiteration A supply chain is the global network of organizations and activities involved in (1) designing a set of goods and services and their related processes, (2) transforming inputs into goods and services, (3) consuming these goods and services, and (4) disposing of these goods and services.
operations management
The management of processes used to design, supply, produce, and deliver valuable goods and services to customers
supply chain management
The supply chain management is the design and execution of relationships and flows that connect the parties and processes across a supply chain
Other terms sometimes substituted for supply chain include what?
Think about all the different organizations located in different companies that are involved in converting raw materials into a delivered finished product. Dozens of organizations are involved in producing and delivering even a simple product like bottled water. Together, supply chain organizations perform all the value-creating activities required to innovate, plan, source, make, deliver, and return or dispose of a given set of products and services. Other terms sometimes substituted for supply chain include • demand chain, • extended enterprise, • supply network, or supply web. • All of these terms reflect the idea that a supply chain involves connections and relationships among organizations that play various roles for a given set of products.
Levels of Operational Planning Across the Supply Chain strategic planning
To keep up with changes in supply chains and the business environment, the functional groups in operations management must periodically work together to plan out their actions. These plans include forecasts and decisions about what the demands on the system will be, what resources and inputs will be needed, how to deploy those resources, and how to process those inputs. Figure 1-4 on page 18 strategic planning, which includes high-level product and resource design decisions that define the overall operations objectives and capabilities for the firm and its partners For example, strategic planning decisions would include what new products to develop, where to locate new plants, and what new technologies to buy. These types of decisions take a long time to implement, and the choices made put limits on the capacities and capabilities governing operational processes.
Suppliers Figure 1-2 identifies important types of suppliers in the supply chain. Suppliers provide inputs to operational processes. horizontal dimension The horizontal dimension of Figure 1-2 illustrates the flow of materials, information, and money related to the sourcing, making, and delivery of products. vertical dimension The vertical dimension of Figure 1-2 depicts suppliers of technologies and support services. From a single firm's perspective, there are multiple types of suppliers: upstream product supplier Downstream product supplier Resource and technologies applies aftermarket supplier
Upstream product suppliers typically provide raw materials, components, and services directly related to manufacturing or service production processes. Downstream product suppliers typically provide enhancements to finished goods such as assembly, packaging, storage, and transportation services. Resource and technology suppliers provide equipment, labor, product and process designs, and other resources needed to support a firm's processes. Aftermarket suppliers provide product service and support such as maintenance, repair, disposal, or recycling.
Cross-Functional Relationships in Operations Management
We have already noted that operations managers must work closely with other functions in the firm. Managers making any operating decision should consider the decision's effects on other functions, including engineering, finance, marketing, human resources, and others. As shown in Figure 1-2, operations managers who work at the boundaries of the firm often work very closely with other functional groups. • For example, an operations manager who works in supply management might work closely with finance managers to determine the most effective contract terms when purchasing equipment. • Some operations managers are primarily concerned with internal operations, such as manufacturing. These managers are always thinking about what operational capabilities are needed, and how to improve the cost, quality, and delivery of the products that the firm supplies to its customers. • Other operations management groups work to integrate the internal operations of the firm with the external operations of supply chain partners.
Important Decisions in Supply Chain Operations Management Describe the major decisions that operations managers typically make. Operations managers get involved in answering certain questions, namely: what, how, who, where Infrastructural decisions affect the workforce, production planning and control, process innovation, and organization. Structural decisions affect physical resources such as capacity, facilities, technology, and the supply chain network
What? • What types of activities and what types of goods or services are to be delivered by the system? • What product features do our intended customers care about? • What activities and resources are needed, and how should they be developed, allocated, and controlled? How? • How is the good or service to be designed, made, and delivered? • How much should our transformation process be able to deliver (and under what conditions)? • How should we measure and assess performance? When? • When should products be made, activities be carried out, services be delivered, or capacities/facilities come on line? Where and Who? • Where should certain activities be done, and who should do them: suppliers, partners, or the firm? Operations managers answer these questions by defining both the structural and infrastructural aspects of the operations management system. Structural decisions affect physical resources such as capacity, facilities, technology, and the supply chain network. Once made, decisions in these areas determine what the operations management system can and cannot do well. Altering these decisions often requires significant investments and lots of time—often years. Infrastructural decisions affect the workforce, production planning and control, process innovation, and organization. Decisions in these areas determine what is done, when it is done, and who does it. Decisions in all of these areas are interrelated, making operations management a complex and cross-functional activity.
Focus on Core Capabilities
core capabilities are A unique set of skills that confers competitive advantages to a firm, because rival firms cannot easily duplicate them. With new technologies and global sources of supply, firms are now able to focus attention on their core capabilities—that is, things they do well. A core capability is a unique set of skills that confers competitive advantages to a firm, because rival firms cannot easily duplicate them. A focus on core capabilities leads a firm to concentrate on those few skills and areas of knowledge that make the firm distinct and competitive. The firm would then likely outsource other, noncore activities to suppliers who have advantages due to better skills or higher scale of operations. For example, Honda was one of the first companies to outsource many noncore activities such as component manufacturing, logistics, and other services. This allowed Honda to concentrate on design and assembly of motors and engines, its core capabilities. relationships The result of the core capabilities approach is supply chains in which each of the partnering organizations focuses on what it does best. The overall effect is to produce greater product value through higher quality and greater efficiencies. However, it also makes supply chain partners more interdependent.
customer management supply management Logistic management
customer management Customer management is the management of the customer interface, including all aspects of order processing and fulfillment. Functional groups directly concerned with customer management have names such as distribution, sales, order fulfillment, and customer service. Managers in these functions are always thinking about ways to improve customer satisfaction in efficient ways. supply management Supply management is the management of processes used to identify, acquire, and administer inputs to the firm. Related functional groups are called by names such as purchasing, sourcing, and procurement. Managers in these functions are always thinking about insourcing and outsourcing opportunities, and ways to improve supply transactions and relationships. logistic management Logistics management is the management of the movement of materials and information within, into, and out of the firm. Logistics functions go by names including transportation/traffic management, warehousing, materials managers, and so on. Managers in these functions are always thinking about ways to optimize these flows through better scheduling and the use of alternative transportation, storage, and information technologies.
echelons.
echelons. Downstream stages of the supply chain are made up of layers of partners and customers commonly referred to as echelons. A single echelon might contain partners in locations all over the world. For example, there are usually many distributors for a given movie. These distributors can be thought of as suppliers of distribution services to the movie production company. The downstream supply chain can also be broken into different channels of distribution; theaters, direct/home delivery, and retail DVD/Blu-Ray sales are three channels shown in Figure 1-3. Many different types of operations managers are needed in a movie production company. Supply managers help to identify and negotiate contracts with supply sources such as casting companies, directors, producers, equipment suppliers, film suppliers and so on. Internal production managers are needed to schedule all moviemaking activities such as casting, shooting, and editing. Sales and distribution managers identify and negotiate terms with worldwide distributors of the film. Other logistics managers work out the means for transporting actors and crew and storing film and equipment throughout the various locations involved in making the film. Page 16 Similar roles are filled by operations managers at all kinds of firms. The Get Real box on the next page provides some examples of operations management job descriptions for undergraduate and graduate students. Operations managers' responsibilities can be quite exciting, as they are absolutely integral to the success of any organization.
Differences in Goods and Services Operations Operational activities exist in order to produce tangible goods and intangible services. Books, cars, and televisions are all tangible goods. In contrast, services like health care, banking, and entertainment are largely experiential or informational. For example, at a hair salon, you consume the expertise and labor of the hair stylist as part of the experience of getting a haircut. The experiences and information you receive at school form a service called education. Table 1-1 summarizes some of the important differences between goods and services.
goods Tangible Can be inventoried Little customer contact Long lead time Often capital-intensive Quality easily assured Material is transformed Services Intangible Cannot be inventoried Extensive customer contact Short lead time Often labor intensive Quality harder to assess Information or customer is transformed
key structural differences in operational processes
here are key structural differences in operational processes designed to provide mostly goods versus mostly services. • First, goods can be produced in advance and stored in inventory until a customer buys or consumes them. Since services are intangible, they cannot be stored. The production and consumption of a service usually occur at the same time. While goods-manufacturing operations can use inventory to smooth out imbalances between production capacity and customer demand, a producer of services must maintain enough capacity to meet demand during peak periods; otherwise, it must postpone (backlog) the demand. For example, when you go into a restaurant during its busy time and the greeter asks you to wait in the lounge, you become part of a backlog of demand. Service operations managers often use reservation and appointment systems to help customers avoid long wait times. In services, customers frequently can observe the operational processes directly. In fact, the customer may take part in producing and consuming the service at the same time (think of your roles as codesigner and quality inspector in getting a haircut). On the other hand, the production of goods may require little contact with the customer. • Finally, operations managers can easily establish measurable quality standards for tangible goods to evaluate whether they work adequately, how they appear, and so on. Quality control is more difficult for services, as it is not always easy to objectively measure a service product's attributes. Service operations managers often evaluate both methods of delivery and customer perceptions. For example, a quality control inspector for a movie theater might study how workers interact with customers as they sell tickets or food to customers. In addition, they may periodically survey customers to gauge their levels of satisfaction. In reality, there are very few pure goods and pure services. Most manufactured products also include services. When you buy a new car, for example, you may also buy financing, maintenance, and repair services. Many service products also include tangible items. A hospital, for example, provides medicines and bandages along with intangible diagnostic and treatment services.
why study operations management?
operations management involves using resources and managing organization. All relationships. When done well, effective operation. Management can • Use resources more efficiently • improve business processes, effectiveness • improve relationship between business entities • help meet strategic goals • increase customer service
tactical and operational planning. These types of planning occur more frequently than strategic planning does.
tactile planning A type of planning that addresses intermediate-term decisions to target aggregate product demands and to establish how operational capacities will be used to meet them. operational planning A type of planning that establishes short-term priorities and schedules to guide operational resource allocations. reiteration Chapters in Part 4 of this book address tactical and operational planning. These types of planning occur more frequently than strategic planning does. Tactical planning such as sales and operations planning seeks to identify and target customer demands for aggregate product families, and to establish the inventory and capacity plans needed to satisfy these overall demands. At the operational planning level, inventory and requirements planning activities address demands, materials, and capacities at the individual product level. Tactical planning usually spans months, whereas operational planning usually addresses weeks or days of activity. The chapters in Part 4 in this book also discuss planning approaches and technologies used in tactical and operational planning
tier. A first-tier supplier A second-tier supplier
tier. In a supply chain, each upstream stage of supply is known as a tier. The tier number refers to how directly the supplier works with the firm. A first-tier supplier provides goods and services directly to the firm. For example, the stock film wholesaler is a first-tier supplier to the movie production company. A second-tier supplier provides inputs to the first-tier supplier, and so on. Each tier of the upstream supply chain could involve multiple suppliers for the same items or services. Also, a single supplier might provide inputs for multiple tiers of the supply chain. For example, the director in Figure 1-3 provides inputs to both the casting company and the movie production company.
Operations management activities located throughout a supply chain create and enhance the value of goods and services by increasing their economic value (e.g., lowering delivered cost), functional value (e.g., improving product quality or convenience), and psychosocial value (e.g., improving product aesthetics and desirability). The following statements help define and describe operations management:
• Operations management is mainly concerned with how resources will be developed and used to accomplish business goals. • Operations management is about designing, executing, and improving business processes. • Operations management deals with processes that transform inputs including materials, information, energy, money, and even people into goods and services. • Within a supply chain context, operations management brings together four major sets of players: the firm, customers, suppliers, and stakeholders. • To be effective, operations management must be consistent with the strategic goals of the firm. • Operations management is dynamic because of changes in customers' demands, resources, competition, and technologies.