Managing the Value Chain, Web 2.

0, and E-Business  147

APPENDIX

MANAGING THE VALUE CHAIN, WEB 2.0, AND E-BUSINESS

CHAPTER OUTLINE

Which Side of Your Brain Do You Use?

I. The Organization as a Value Chain
A. Service and Manufacturing Operations
B. Supply Chain Management
II. Facilities Layout
A. Process Layout
B. Product Layout
C. Cellular Layout
D. Fixed-Position Layout
III. Technology Automation
A. Radio-Frequency Identification (RFID)
B. Digital Manufacturing Systems
C. Lean Thinking
IV. Inventory Management
A. The Importance of Inventory
B. Just-in-Time Inventory
V. Information Technology has Transformed Management
A. Boundaries Dissolve; Collaboration Reigns
B. Knowledge Management and Web 2.0
C. Enterprise Resource Planning Systems
VI. The Internet and E-Business
A. E-Business Strategy: Market Expansion
B. E-Business Strategy: Increasing Efficiency

LECTURE OUTLINE

WHICH SIDE OF YOUR BRAIN DO YOU USE?

People have two thinking processes–one visual and intuitive, which is often referred to as right-
brained thinking, and the other verbal and analytical, referred to as left-brained thinking. The
thinking process you prefer predisposes you to certain types of knowledge and information –
visual charts and operations dashboards vs. written reports, intuitive suggestions vs. quantitative
data – as effective input to your thinking and decision making. New managers typically need
left-brain processing to handle data and to justify decisions. At middle and upper management
levels, right-brain processing enables visionary thinking and strategic insights. This exercise

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helps students whether they typically engage in more left-brain processing or right-brain
processing.

I. THE ORGANIZATION AS A VALUE CHAIN Exhibit A.1

In Chapter 1, the organization was described as a system used for transforming inputs into
outputs. At the center of this transformation process lies the technical core, the heart of the
organization’s production of its product or service. The organization can the thought of as a
value chain that receives inputs to the technical core from the environment such as raw
materials and other resources, and adds value by transforming them into products and
services, which are the outputs from the technical core.

Operations management refers to using various tools and techniques to ensure that goods
and services are delivered successfully to customers or clients. Operations managers are
concerned with activities that convert inputs into outputs, including decisions about locating
facilities and installing equipment. These managers must instill the necessary attitudes, such
as concern for quality and a desire to innovate.

A. Service and Manufacturing Operations Exhibit A.2

1. The term operations management applies to both manufacturing and service

organizations. More than half of all businesses today are service organizations, and
two-thirds of the U.S. workforce is employed in services.

a. Manufacturing organizations are those that produce physical goods such as

cars, video games, television sets, or smartphones.

b. Service organizations produce nonphysical outputs such as medical, educational,

communication, and transportation services for customers. Services also include
the sale of merchandise. Services differ from manufacturing in two ways: the
service customer is involved in the production process; and service outputs are
intangible and cannot be stored. The service must be created and provided for the
customer when he or she wants it – a hairstylist cannot style someone’s hair
without that person being physically present.

2. Although manufacturing and service firms differ, they face similar operational
problems. Both kinds organizations are concerned with scheduling, both must obtain
materials and supplies, and both must be concerned with quality and productivity.
Operations management tools and techniques can, and should, be applied to service
organizations as readily as to manufacturing.

Discussion Question #1: What are the major differences between manufacturing and service
organizations? Give examples of how each type might benefit from using Web 2.0 tools such as
microblogging and social networks.

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 Managing the Value Chain, Web 2.0, and E-Business  149

NOTES________________________________________________________________________
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B. Supply Chain Management Exhibit A.3

1. Supply chain management is the term for managing the sequence of suppliers and
purchasers covering all stages of processing from obtaining raw materials to
distributing finished goods to final consumers.

2. The most recent advances in supply chain management involve using Internet
technologies to achieve the right balance of low inventory levels and customer
responsiveness. An e-supply chain creates a seamless, integrated link that stretches
from customers to suppliers, by establishing electronic linkages for the sharing and
exchange of data.

3. Enterprise integration through the use of electronic linkages is creating a level of

cooperation not previously imaginable for many organizations. Supplier relationships
used to be based on an arm’s length approach; but with integration, more companies
are opting for a partnership approach to supply chain management.

II. FACILITIES LAYOUT Exhibit A.4

A. Process Layout

1. In a process layout, all machines that perform a similar function are grouped
together. The advantage this layout has is its potential for economies of scale and
reduced costs. A disadvantage is that the actual path a product or service takes can be
long and complicated. A product may require several different processes and must
travel through many different areas before production is complete.

B. Product Layout

1. In a product layout, machines and tasks are arranged according to the progressive
steps in producing a single product. The product layout is efficient when the
organization produces large volumes of identical products. It is only economical on
high volume specialized products.

C. Cellular Layout

1. A cellular layout is based on group-technology principles in which machines

dedicated to sequences of operations are grouped into cells. Grouping technology
into cells provides the efficiencies of both process and product layouts. An advantage
is that workers work in clusters that facilitate teamwork and joint problem solving.

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150  Appendix

Staffing flexibility is enhanced because each team member can operate all the
machines or complete all the tasks in the cell.

D. Fixed-Position Layout

1. In a fixed-position layout, the product remains in one location and employees and
equipment are brought to it. This layout is used to create a product or service that is
large or one of a kind, such as ships or buildings. It is not appropriate for high
volume products or services, but is necessary for bulky products and custom orders.

III. TECHNOLOGY AUTOMATION

A. Radio-Frequency Identification (RFID)

1. Radio-Frequency Identification (RFID) uses electronic tags that can identify and
track individual items such as books, jugs of laundry detergent, automobiles, or even
people. One of the best-known uses of RFID is OnStar, which is a satellite-based
RFID system used in automobiles. RFID tags emit radio signals that can be read
remotely by electronic readers and provide precise, real-time information about the
location of specific items. Service firms also use RFID, such as New York’s E-Z Pass
and California’s FasTrak that use RFID to speed cars through toll booths, and
amusement parks that use RFID tags in children’s wristbands so they can be quickly
located if they become separated from their parents.

B. Digital Manufacturing Systems

1. The ultimate automated factories are referred to as digital factories. They are also
called flexible manufacturing systems, computer integrated manufacturing, smart
factories, advanced manufacturing technology, or agile manufacturing. The
machinery uses sophisticated computer technology to coordinate and integrate the
machines. The computer can instruct the machines to change parts, machining, and
tools when a new product must be produced. Human operators make adjustments to
the computer rather than changing the production machinery itself, dramatically
cutting the time and expense of making changes.

2. Digital manufacturing also enables mass customization, a process by which products

are produced cost-effectively in high volume but are customized to meet individual
needs.

C. Lean Thinking

1. Lean thinking basically means combining advanced technology and innovative

management processes and using highly trained employees to solve problems, cut
waste, improve the productivity, quality, and efficiency of products and services, and
increase customer value. Lean thinking is based on the principles of lean

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 Managing the Value Chain, Web 2.0, and E-Business  151

manufacturing in which technology plays a key role as companies make full use of
flexible manufacturing systems and equipment is often designed to stop automatically
so that a defect can be fixed. A lean manufacturing system combines techniques,
systems, and management philosophy, such as commitment to employee
empowerment and a creative culture.

IV. INVENTORY MANAGEMENT

A large portion of the operations manager’s job consists of inventory management.

Inventory is the goods the organization keeps on hand for use in the production process and
generally consists of three types.

Finished-goods inventory—items that have passed through the entire production process but
have not been sold. Finished-goods inventory is expensive since the organization has
invested labor and other costs to make the finished product.

Work-in-process inventory—materials moving through the stages of the production process

that are not yet a completed product.

Raw materials inventory—the basic inputs to the organization’s production process. This
inventory is of least value because the organization has not yet invested labor and other
holding and processing costs.

A. The Importance of Inventory Exhibit A.5

1. Inventory management is vitally important to organizations because idle inventory

costs money. Inventory is recognized as an unproductive asset in cost-conscious
firms. Dollars not tied up in inventory can be used in investments and other
productive ventures. Keeping inventory low in high-tech firms is especially
important because their products lose value so quickly.

2. When inventories are reduced, the problems of poorly designed and poorly managed
operations processes are revealed. When inventory can be kept at a minimum,
operations management is considered excellent. Techniques for inventory
management include economic order quantity, material requirements planning, just-
in-time inventory, and distribution management.

B. Just-in-Time Inventory

1. Just-in-time (JIT) inventory systems are designed to reduce the level of an

organization’s inventory and its associated costs, aiming to push to zero the amount of
time that raw materials and finished products are sitting in the factory, being
inspected, or in transit. JIT is sometimes referred to as stockless systems, zero
inventory systems, or kanban systems.

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152  Appendix

2. In JIT, suppliers deliver materials only at the exact moment needed, thereby reducing
raw material inventory to zero. Work-in-process inventory is kept to a minimum as
goods are produced only as needed to service the next stage of production.
Finished-goods inventory is minimized by matching them exactly to sales demand.
An important advantage of JIT inventory systems is that the reduced inventory level
frees productive capital for other company uses.

3. The coordination required by JIT demands that information be shared among everyone
in the supply chain. Just-in-time inventory systems require excellent employee
motivation and cooperation. Workers are expected to perform at their best because
they are entrusted with the responsibility and authority to make the zero inventory
system work. Workers experience the satisfaction of being in charge of the system
and making useful improvements in the company’s operations.

V. INFORMATION TECHNOLOGY HAS TRANSFORMED MANAGEMENT

Information technology (IT) consists of the hardware, software, telecommunications,

database management, and other technologies used to store data and make it available in the
form of information for organizational decision making. Information technology and e-
business can enable managers to be better connected with employees, the environment, and
each other. Information technology allows for enhanced collaboration, improved employee
effectiveness, increased efficiency, empowered employees, and potential information
overload.

A. Boundaries Dissolve; Collaboration Reigns

1. Information technology enhances collaboration both within the organization and with
customers, suppliers, and partners. Intranets and other networks, knowledge
management systems, and groupware can connect employees around the world for
sharing and exchange of information and ideas. Time, distance, and other boundaries
between individuals, departments, and organizations are irrelevant in today’s business
world. Value is being created more and more by horizontal collaboration through
information technology systems.

B. Knowledge Management and Web 2.0

1. Knowledge management refers to the efforts to systematically gather knowledge,

organize it, make it widely available throughout the organization, and foster a culture
of continuous learning and knowledge sharing. Business intelligence software
analyzes data and extracts useful insights, patterns, and relationships that may be
significant.

2. Expert-locator systems identify and catalog experts in a searchable database so

people can quickly identify who has knowledge they can use. Many organizations
use groupware, also called collaborative work systems. Groupware is software that

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 Managing the Value Chain, Web 2.0, and E-Business  153

works on a computer network or via the Internet to link people or workgroups across
a room or around the globe.

3. Many of today’s companies also incorporate the use of new technologies collectively
referred to as Web 2.0 to support knowledge sharing. Web 2.0 encompasses a range
of tools, the most commonly used being blogs, wikis, and social networks. A blog is
a running Web log that allows an individual to post opinions and ideas. A wiki is
similar to a blog and uses software to create a Web site that allows people to create,
share, and edit content through a browser-based interface.

C. Enterprise Resource Planning Systems Exhibit A.6

1. Another key IT component for many companies is an approach to information

management called enterprise resource planning. Enterprise resource planning
(ERP) systems integrate and optimize all the various business processes across the
entire firm. An enterprise resource planning system can become the backbone of an
organization’s operations. It collects, processes, and provides information about an
organization’s entire enterprise, including orders, product design, production,
purchasing, inventory, distribution, human resources, receipt of payments, and
forecasting of future demand.

2. The system replicates organizational processes in software, guides employees through

the processes step-by-step, and automates as many of them as possible. ERP can cut
costs, shorten cycle time, enhance productivity, and improve relationships with
customers and suppliers.

VI. THE INTERNET AND E-BUSINESS Exhibit A.7

E-business can be defined as any business that takes place by digital processes over a
computer network rather than in physical space. E-commerce is a more limited term that
refers specifically to business exchanges or transactions that occur electronically. Today, e-
commerce is transforming into m-commerce, which simply means the ability to conduct
business transactions through a mobile device.

An intranet is an internal communications system that uses the technology and standards of
the Internet, but is accessible only to people within the company. An extranet is an external
communications system that uses the Internet and is shared by two or more organizations.
Each company using an extranet moves certain data outside of its private intranet, but makes
the data available only to the other companies sharing the extranet.

A. E-Business Strategy: Market Expansion Exhibit A.8, Exhibit A.9

1. An in-house Internet division offers direct links to customers and allows a company
to expand into new markets. The organization can provide access around the clock to
a worldwide market and thus reach new customers. An e-business division also

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enables customization of offerings at significantly lower costs than traditional

distribution channels.

a. The market expansion strategy is competitively sustainable because the e-business

division works in conjunction with the established bricks-and-mortar company.

B. E-Business Strategy: Increasing Efficiency

1. With this approach, the e-business initiative is seen as a way to improve the bottom
line by increasing productivity and cutting costs. An automaker might use e-business
to reduce the cost of ordering and tracking parts and supplies and to implement just-
in-time manufacturing. Even small companies can realize gains; rather than buying
parts from a local supplier, a small firm can access a global market to find the best
price. Service firms can benefit too.

Answers to End-of-Chapter Discussion Questions

1. What are the major differences between manufacturing and service organizations? Give
examples of how each type might benefit from using Web 2.0 tools such as wikis and social
networks.

Manufacturing organizations produce physical goods such as automobiles, toys, or clothing.

Service organizations produce nonphysical goods such as medical, educational, or
transportation services. Services differ from manufacturing organizations in two other ways.
The service customer is involved in the actual production process, and services cannot be
stored in inventory. Because the service is intangible, it is consumed at the time it is
produced; hence, there is no inventory. This also means that the service organization’s
employees must interact directly with customers. The patient actually visits a doctor to
receive medical service, or a barber or beautician to receive a haircut. The service is
provided directly to the customer, so the customer becomes involved in the production
process.

Despite the differences between manufacturing and service organizations, they both need
operations management. As services have become more prominent in recent years,
operations management has found many applications. Service organizations need to be
concerned with scheduling, they must obtain materials and supplies, and they must control
service quality and productivity. These same issues are relevant to operations managers in
manufacturing organizations.

Internal blogs can serve as superb horizontal and bottom-up communication tools, enabling
people to get a better picture of what’s going on in a firm. Blogs contribute to collaboration
and knowledge sharing as well. The simplicity of blogs makes them an easy and comfortable
medium for people to share ideas. An entire industry is springing up to help companies
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 Managing the Value Chain, Web 2.0, and E-Business  155

navigate the new world of blogs, such as monitoring what is being said about the company,
implementing damage control strategies, and tracking what the majority of the world is
thinking, minute by minute, to help the organization respond to emerging trends and
opportunities.

Sites such as MySpace, Facebook, and Friendster provide an unprecedented peer-to-peer

communication channel where people interact in an online community producing and sharing
all sorts of information and opinions or unifying activists and raising funds.

2. Boeing’s 787 Dreamliner was seriously delayed because of slow deliveries from suppliers
who were responsible for large chunks of the jet. Outsourcing has become an important
aspect of supply chain management as companies strive to cut costs, yet the practice gives
managers less control, as at Boeing, and may decrease speed and flexibility. As an
operations manager, how would you decide if a multinational supply chain is a better
approach than trying to manufacture as much as possible in-house?

Some of the factors to be considered include differences between the multinational supply
chain and in-house manufacturing with regard to cost, quality, accessibility, timeliness of
shipping, and other control abilities.

3. What type of production layout do you think would work best in a car dealership? What type
would work best for an insurance company that provides customers with auto, home, health,
and life insurance products? Discuss reasons for your answers.

The process layout would work best for a car dealership by grouping sales people in one
area, service or body shop in another area, and the parts department in another area. A
cellular layout would be best suited for an insurance company where people and equipment
are grouped into cells that perform all the tasks needed to serve a particular client.

4. What are the three types of inventory? Which of these is most likely to be affected by the JIT
inventory system? Explain.

The three types of inventory are raw materials inventory, work-in-process inventory, and
finished-goods inventory. Raw material inventory includes basic inputs such as steel, wire,
or glass that have not been worked on. Work-in-process inventory includes materials moving
through the stages of the production process. Finished-goods inventory consists of items that
have passed through the entire production process but have not been sold.

Theoretically, all three types of inventory should be reduced by just-in-time inventory

systems. First, the organization receives raw materials only as they are needed to begin the
production process. At each stage of the production process, materials are completed only as
they are needed for the next stage, hence the designation, “demand pull.” Finally, the entire
production sequence is started only when there is an actual order for the product, which
reduces finished-goods inventory.

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As a practical matter, coordinating the sequence so that there is no inventory of any kind is
very difficult. Most organizations seem to have success in reducing raw materials and work-
in-process inventory. The reason is that once management decides on the amount of
production, it can coordinate the inflow of raw materials and the movement of work-in-
process inventory. However, when production cannot be tailored exclusively to customer
orders, goods must be produced for finished inventory and sold at a later date. This means
that finished-goods inventory will often be somewhat larger than the other two types.

5. Some companies are using both lean manufacturing and Six Sigma (discussed in Chapter 19)
methods simultaneously to improve their operations. How do you think the two approaches
might complement or conflict with each other? Explain.

The two approaches would probably complement each other quite will. Lean manufacturing
uses highly trained employees at every stage of the production process who take a
painstaking approach to details and problem solving to cut waste and improve quality and
productivity. These are precisely the qualities that are desirable for employees using Six
Sigma. Six Sigma is a highly ambitious quality standard that takes nothing for granted and
emphasizes a disciplined and relentless pursuit of higher quality and lower costs. It is based
on a five-step methodology referred to as DMAIC (Define, Measure, Analyze, Improve, and
Control, pronounced “de-May-ick” for short) that provides a structured way for organizations
to approach and solve problems. The two approaches should work very well together, since
Six Sigma is a highly effective tool employees could use in implementing the lean
manufacturing approach.

6. Critics argue that RFID can potentially jeopardize consumer privacy by making it possible to
link purchases to individuals or even to track the movements of individuals. Should this
concern prevent companies from adopting RFIDs? Explain.

It’s probably a little late to be worrying about companies linking purchases to individuals or
their movements. Companies have been linking purchases to individuals for some time,
though perhaps not linking distinct items to individuals. The same technology that generated
RFIDs can also come up with a rather simple way to “scramble” or destroy the RFID at the
point of purchase, but 1) suspicious consumers are unlikely to believe that the RFID has truly
been destroyed, and 2) such a procedure would make customer returns a nightmare for the
seller. Realistically, there’s not much information about individuals that companies don’t
already have or can’t get elsewhere, so the concerns of these critics should probably not stop
companies from achieving the enormous efficiencies to be gained by using RFIDs.

1. How might the organizers of an upcoming Olympics use an extranet to get all the elements of
the event up and running on schedule?

The organizers of an upcoming Olympics event would use the extranet to permit users at a
variety of locations to participate with whatever computers and operating systems they have.
They are also an efficient way to create a network that links people on an international scale.
In creating this linkage, events and activities can be scheduled more precisely in different
geographic areas.

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 Managing the Value Chain, Web 2.0, and E-Business  157

2. Do you think it makes sense for a company such as Sears Holdings Corp., which has
numerous shabby Sears and Kmart stores in need of makeovers, to focus resources on
building the online business at the expense of its bricks-and-mortar business? Discuss.

Sears and Kmart may be able to attract younger customers who have not traditionally
shopped at those stores by bringing them in online, with the hope that eventually those
younger customers will also shop at the bricks-and-mortar stores – a strategy that has worked
well for JCPenney and other retailers. The online business is substantially cheaper, and may
also eventually produce the revenue necessary to upgrade the bricks-and-mortar stores.

3. The openness of wikis is both their strength and their weakness. As a business owner, why
might you want to take advantage of this new technology? How might you guard against its
potential problems, such as vulnerability to mistakes, pranks, self-serving posts, and
cybervandalism?

A wiki might be a useful tool to give employees voice in the organization, especially in
allowing them to access and edit ideas for improvement in processes and products or
services.

The only way to prevent problems from mistakes, pranks, inaccurate and self-serving posts,
and cybervandalism with regard to the use of wikis is to constantly monitor the content and
remove anything that could be damaging to the company. Some wikis include a notice to
users that false, inaccurate, or offensive information will be removed. The trick here is to
maintain credibility by not creating the perception that the wiki is simply a propaganda tool
of the company where postings are so tightly regulated that the “openness” of the wiki
becomes an obvious charade.

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