Session 1 Student

Session 1
Business Operations and Logistics:

Introduction to operations management
Operations strategy
Assistant Professor Sakda Siriphattrasophon, Ph.D.
April 2015
Activity - Session 1
2014 Pearson Education, Inc.
1-2
Outline
What Is Operations Management?
Organizing to Produce Goods and Services
Why Study OM?
The Heritage of Operations Management
Operations for Goods and Services
The Productivity Challenge

Productivity Measurement
Productivity Variables
Productivity and the Service Sector
1-4
Outline - Continued
Strategy and Strategic Process
Strategies for Competitive Advantage

OMs Contribution to Strategy
New Challenges in Operations
Management
Ethics, Social Responsibility, and
Sustainability
1-5
Learning Objectives
When you complete this session
you should be able to:
1. Define operations management
2. Understand and explain OMs ten strategic
decisions
3. Explain the distinction between goods and
services
4. Explain the difference between production
and productivity
5. Identify and explain three strategic
approaches to competitive advantage
What Is Operations
Management?
Production is the creation of
goods and services
Operations management (OM) is
the set of activities that create
value in the form of goods and
services by transforming inputs
into outputs
1-7
Organizing to Produce
Goods and Services
Essential functions:
1. Marketing generates demand
2. Production/operations creates
the product
3. Finance/accounting tracks how
well the organization is doing, pays
bills, collects the money
1-8
Organizational Charts
Figure 1.1
strong room
1-9
Figure 1.1

1 - 10
Figure 1.1
1 - 11
The Supply Chain

A global network of organizations and
activities that supply a firm with goods and
services
Members of the supply chain collaborate
to achieve high levels of customer
satisfaction, efficiency and competitive
advantage.
Figure 1.2
Farmer
Syrup
producer
Bottler
Distributor
Retailer
1 - 12
Why Study OM?

1. OM is one of three major functions of any
organization, we want to study how people
organize themselves for productive
enterprise
2. We want (and need) to know how goods
and services are produced
3. We want to understand what operations
managers do
4. OM is such a costly part of an organization
1 - 13
Options for Increasing

Contribution
TABLE 1.1
MARKETING
OPTION
FINANCE
/ACCOUNTING
OPTION
OM OPTION
CURRENT
INCREASE
SALES
REVENUE 50%
REDUCE
FINANCE
COSTS 50%
REDUCE
PRODUCTION
COSTS 20%
$100,000
$150,000
$100,000
$100,000
Cost of goods
80,000
120,000
80,000
64,000
Gross margin
20,000
30,000
20,000
36,000
Finance costs
6,000
6,000
3,000
6,000
Subtotal
14,000
24,000
17,000
30,000
Taxes at 25%
3,500
6,000
4,200
7,500
Contribution
$ 10,500
$ 18,000
$ 12,750
$ 22,500
Sales
Increases
71%
Increases
21%
Increases
114%1 - 14
Ten Strategic OM Decisions

TABLE1.2
What Operations Managers Do
DECISION
CHAPTER(S)
1.Designofgoodsandservices
5,Supplement5
2.Managingquality
6,Supplement6
3.Processandcapacity design
7,Supplement7
4.Locationstrategy
5.Layoutstrategy
6.Humanresourcesand jobdesign
10
7.Supplychainmanagement
11,Supplement11
8.Inventory management
12,14,16
9. Scheduling
13,15
10.Maintenance
17
1 - 15
The Strategic Decisions

1. Design of goods and services
What good or service should we offer?
How should we design these products
and services?
2. Managing quality (session 5)

How do we define quality?
Who is responsible for quality?
Table 1.2 (cont.)
1 - 16

3. Process and capacity design (S.2-4)
What process and what capacity will these
products require?
What equipment and technology is necessary
for these processes?
4. Location strategy
Where should we put the facility?
On what criteria should we base the location
decision?
Table 1.2 (cont.)
1 - 17

5. Layout strategy
How should we arrange the facility and material
flow?
How large must the facility be to meet our plan?
6. Human resources and job design

How do we provide a reasonable work
environment?
How much can we expect our employees to
produce?
Table 1.2 (cont.)

1 - 18

7. Supply-chain management (Session 7)
Should we make or buy this component?
Who are our suppliers and who can integrate into
our e-commerce program?
8. Inventory management (Session 6)

How much inventory of each item should we have?
When do we re-order?
Table 1.2 (cont.)

1 - 19

9.
Scheduling (Session 9)
Are we better off keeping people on the payroll
during slowdowns?
Which jobs do we perform next?
10. Maintenance
Who is responsible for maintenance?
When do we do maintenance?
Table 1.2 (cont.)

1 - 20
Significant Events in OM
Figure 1.4
Operations for
Goods and Services
Manufacturers produce tangible product,
services often intangible
Operations activities often very similar
Distinction not always clear
Few pure services
1 - 22
Characteristics of Goods
Tangible product
Consistent product
definition
Production usually
separate from
consumption
Can be inventoried
Low customer
interaction
1 - 23
Characteristics of Service
Intangible product
Produced and consumed
at same time
Often unique
High customer interaction
Inconsistent product
definition
Often knowledge-based
Frequently dispersed
1 - 24
Goods and Services

Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100%
75
50
25
25
50
75
100%
Percent of Product that is a Good
Percent of Product that is a Service
Differences Between Goods and

Services
TABLE1.3
CHARACTERISTICSOFSERVICES
CHARACTERISTICSOFGOODS
Intangible:Rideinanairlineseat
Tangible:Theseatitself
Producedandconsumedsimultaneously:Beautysalon Productcanusuallybekeptininventory(beautycare
producesahaircutthatisconsumedasitisproduced products)
Unique:Yourinvestmentsandmedicalcareareunique Similarproductsproduced(iPods)
Highcustomerinteraction:Oftenwhatthecustomeris Limitedcustomerinvolvementinproduction
payingfor(consulting,education)
Inconsistentproductdefinition:AutoInsurance
changeswithageandtypeofcar
Productstandardized(iPhone)
Oftenknowledgebased:Legal,education,andmedical Standardtangibleproducttendstomakeautomation
servicesarehardtoautomate
feasible
Servicesdispersed:Servicemayoccuratretailstore,
localoffice,housecall,orviainternet.
Producttypicallyproducedatafixedfacility
Qualitymaybehardtoevaluate:Consulting,
education,andmedicalservices
Manyaspectsofqualityfortangibleproductsareeasy
toevaluate(strengthofabolt)
Resellingisunusual:Musicalconcertormedicalcare
Productoftenhassomeresidualvalue
1 - 26
Growth of Services
U.S. Agriculture, Manufacturing, and Service Employment
Figure 1.5
100
Percent of Workforce
80
60
40
20
0 |
1800
|
1825
|
1850
Agriculture
|
1875
1900
1925
Services
|
1950
1975
2000
2025 (est.)
Manufacturing
1 - 27
Productivity Challenge
Productivity is the ratio of outputs (goods
and services) divided by the inputs
(resources such as labor and capital)
The objective is to improve productivity!
Productivity is important because it determines our
standard of living
1 - 28
The Economic System

Inputs
Labor,
capital,
management
Transformation
The U.S. economic system
transforms inputs to outputs at
about an annual 2.5% increase
in productivity per year.
The productivity increase is the
result of a mix of (i) capital
(38% of 2.5%), (ii) labor (10%
of 2.5%), and (iii)
management (52% of 2.5%).
Outputs
Goods
and
services
Figure 1.6
Feedback loop
1 - 29
Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Stop requiring signatures
on credit card purchases
under $25
Saved 8 seconds
per transaction
Change the size of the ice

scoop
Saved 14 seconds
per drink
New espresso machines
Saved 12 seconds
per shot
, , Syn. lower, reduce,
Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Operations improvements have

helped StarbucksSaved
increase
yearly
Stop requiring signatures
8 seconds
revenue per outlet
bytransaction
$250,000 to
on credit card purchases
per
$1,000,000 in seven years.
under $25
27%, or
Change the size Productivity
of the ice has improved
Saved 14by
seconds
about 4.5% per year.
scoop
per drink
New espresso machines
Saved 12 seconds
per shot
1 - 31
Productivity Measurement
Productivity =
Units produced
Input used
Measure of process improvement

Represents output relative to input
Only through productivity increases
can our standard of living improve
1 - 32
Productivity Calculations
Example: if units produced = 1,000 and labor-hours used is 250, then:
Labor Productivity
Productivity =
Units produced
Labor-hours used
1,000
=
= 4 units/labor-hour
250
One resource input single-factor productivity

1 - 33
Multi-Factor Productivity
Productivity =
Output
Labor + Material + Energy +
Capital + Miscellaneous
Also known as total factor productivity

Output and inputs are often expressed in
dollars
Multiple resource inputs multi-factor productivity

1 - 34
Collins Title (Labor) Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day
8 titles/day
Overhead = $400/day
8 titles/day
Old labor
=
productivity
32 labor-hrs
1 - 35
Collins Title Productivity

Old System:
8 titles/day
Overhead = $400/day
8 titles/day
Old labor
=
= .25 titles/labor-hr
productivity
32 labor-hrs
1 - 36

Old System:
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old labor
=
productivity
32 labor-hrs
14 titles/day
New labor
=
productivity
32 labor-hrs
1 - 37

Old System:
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old labor
=
productivity
32 labor-hrs
14 titles/day
New labor
=
productivity
32 labor-hrs
1 - 38
Collins Title (Multifactor) Productivity

Old System:
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old multifactor
=
productivity
$640 + 400
1 - 39

Old System:
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old multifactor
=
= .0077 titles/dollar
productivity
$640 + 400
1 - 40

Old System:
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old multifactor
=
productivity
$640 + 400
14 titles/day
New multifactor
=
productivity
$640 + 800
1 - 41

Old System:
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old multifactor
=
productivity
$640 + 400
14 titles/day
New multifactor
=
productivity
$640 + 800
1 - 42
Conclusion
Labor Productivity:
Labor productivity has increased from .25

to .4375.
The change is (.4375-.25) /.25 = 0.75, or
75% increase in labor productivity.
Multifactor Productivity:
Multifactor productivity has increased from

.0077 to .0097.
The change is (.0097-..0077) /.0077 = 0.26
or 26% increase in multifactor productivity.
The computerized system can improve the companys productivity.

Which measure can provide a better solution of the increase? Why?
1 - 43
Productivity and the

Service Sector
1. Typically labor intensive (counseling, teaching)
2. Frequently focused on unique individual
attributes or desires (investment advice)
3. Often an intellectual task performed by
professionals (medical diagnosis)
4. Often difficult to mechanize and automate
(haircut)
5. Often difficult to evaluate for quality

(performance of a law firm)
1 - 44
Strategy
Action plan to
achieve mission
Functional areas have
strategies
Strategies exploit
opportunities and
strengths, neutralize
threats, and avoid
weaknesses
1 - 45
Strategic Process
Organizations
Mission
Functional Area
Missions
Marketing
Operations
Finance/
Accounting
Functional areas have their own missions and strategies, which usually
are based on higher-level missions and strategies in the organization.
1 - 46
Strategies for Competitive

Advantage
1. Differentiation
better, or at least
different
2. Cost leadership
cheaper
3. Response
more responsive
1 - 47
Competing on Differentiation
Uniqueness can go beyond both the
physical characteristics and service
attributes to encompass everything that
impacts customers perception of value
Walt Disney Magic Kingdom

experience differentiation
Hard Rock Cafe dining experience
1 - 48
Competing on Cost
Provide the maximum value as perceived
by customer. Does not imply low quality.
Southwest Airlines secondary

airports, no frills service, efficient
utilization of equipment
Walmart small overhead, shrinkage,
and distribution costs => superstores
open 24 hours
1 - 49
Competing on Response
Flexibility is matching market changes in
design innovation and volumes
A way of life at Hewlett-Packard
Reliability is meeting schedules

German machine industry
Timeliness is quickness
in design, production,
and delivery
Johnson Electric,
Pizza Hut
1 - 50
OMs Contribution to Strategy

10 Operations
Decisions
Product
Quality
Process
Location
Layout
Human
resource
Strategy
DIFFERENTIATION:
Innovative design
Broad product line
After-sales service
Experience
Example
Safeskins innovative gloves
Fidelity Securitys mutual funds
Caterpillars heavy equipment
service
Hard Rock Cafs dining
experience
COST LEADERSHIP:
Low overhead
Franz-Colruyts warehouse-type
stores
Effective capacity Southwest Airlines
use
aircraft utilization
Inventory
management
Inventory
Reliability
Scheduling
Quickness
Maintenance
Differentiation
(better)
Walmarts sophisticated
distribution system
Supply chain
RESPONSE:
Flexibility
Competitive
Advantage
Hewlett-Packards response to
volatile world market
FedExs absolutely, positively,
on time
Pizza Huts 5-minute guarantee
at lunchtime
Response
(faster)
Cost
leadership
(cheaper)
Figure 2.4
1 - 51
New Challenges in OM
Global focus
Supply-chain partnering
Sustainability
Rapid product development
Mass customization
Just-in-time performance
Empowered employees
1 - 52
New Trends in OM
Past
Causes
Future
Local or
national focus
Low-cost, reliable worldwide

communication and
transportation networks
Global focus
Batch (large)
shipments
Short product life cycles and

cost of capital put pressure on
reducing inventory
Just-in-time
performance
Low-bid
purchasing
Quality emphasis requires

that suppliers be engaged in
product improvement
Supply-chain
partners,
Enterprise
Resource
Planning,
e-commerce
Figure 11.6
- 53
New Trends in OM
Past
Causes
Future
Lengthy
product
development
Shorter life cycles, Internet,

rapid international
communication, computeraided design, and
international collaboration
Rapid product
development,
alliances,
collaborative
designs
Standardized
products
Affluence and worldwide

markets; increasingly flexible
production processes
Mass
customization
with added
emphasis on
quality
Job
specialization
Changing socioculture
milieu; increasingly a
knowledge and information
society
Empowered
employees,
teams, and
lean production
Figure 11.6
- 54
New Trends in OM
Past
Low-cost
focus
Causes
Environmental issues, ISO
14000, increasing disposal
costs
Future
Sustainability:
environmentally
sensitive
production, green
manufacturing,
recycled
materials,
remanufacturing
Figure 11.6
- 55
Ethics, Social Responsibility,

and Sustainability
Challenges facing operations managers:
Develop and produce safe, high-quality
green products
Train, retrain, and motivate employees
in a safe workplace
Honor stakeholder commitments
1 - 56
VDO Case Study

Frito-Lay: OM in manufacturing
Hard Rock Cafe: OM in services
Identify how each of 10 OM strategy decisions is applied at

Frito-Lay and Hard Rock Caf. How are they different?
pp.59-60
Hard Rock Cafe:

OM in services
1 - 58
Suggested Reflective Report

Select one business that you are familiar
with.
Summarize the business operations.
Identify how each of 10 OM strategy
decisions is applied at selected
company.
750 words for each report.
1 - 59
pp.59-60
Suggested Group Case Study

1. Document current profile and operations in one selected organization
2. Detail OM activities
Carefully and in depth, tell how the operations activities are performed in the firm. You should
explain the operations activities and technology for the firm. Specifically, the various inputs,
transformation processes, and several outputs must be identified.
3. Identify a problem
For each of the activities discussed in 2, identify at least one operating problem in the firm.
Document this problem. Describe the problem as you best understand it as which you want to
solve it or improve it.
4. Propose a solution with the analysis (before/after comparison)
Suggest one or more tentative solutions to the problem. Provide enough explanation that a reader
will gain a basic understanding of what you are proposing. Supporting with the relevant
literature of operation theories , concepts and models .
5. Prepare a written report with recommendations
Report your findings (2,500 words for each report).

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Session 1

Business Operations and Logistics:

Assistant Professor Sakda Siriphattrasophon, Ph.D.

2014 Pearson Education, Inc.

The Productivity Challenge

Strategies for Competitive Advantage

2014 Pearson Education, Inc.

2014 Pearson Education, Inc.

The Supply Chain

2014 Pearson Education, Inc.

Why Study OM?

Options for Increasing

2014 Pearson Education, Inc.

Ten Strategic OM Decisions

What Operations Managers Do

2014 Pearson Education, Inc.

The Strategic Decisions

2. Managing quality (session 5)

The Strategic Decisions

The Strategic Decisions

6. Human resources and job design

Table 1.2 (cont.)

The Strategic Decisions

8. Inventory management (Session 6)

Table 1.2 (cont.)

The Strategic Decisions

Table 1.2 (cont.)

2014 Pearson Education, Inc.

Goods and Services

Percent of Product that is a Good

Percent of Product that is a Service

Differences Between Goods and

2014 Pearson Education, Inc.

2014 Pearson Education, Inc.

The Economic System

2014 Pearson Education, Inc.

Change the size of the ice

New espresso machines

, , Syn. lower, reduce,

Operations improvements have

2014 Pearson Education, Inc.

Measure of process improvement

One resource input single-factor productivity

Also known as total factor productivity

Multiple resource inputs multi-factor productivity

Collins Title (Labor) Productivity

2014 Pearson Education, Inc.

Collins Title Productivity

2014 Pearson Education, Inc.

Collins Title Productivity

Collins Title Productivity

Collins Title (Multifactor) Productivity

2014 Pearson Education, Inc.

Collins Title Productivity

2014 Pearson Education, Inc.

Collins Title Productivity

Collins Title Productivity

Labor productivity has increased from .25

Multifactor productivity has increased from

The computerized system can improve the companys productivity.

Productivity and the

5. Often difficult to evaluate for quality

2014 Pearson Education, Inc.

2014 Pearson Education, Inc.