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Operations Management/Ch. 1 Introduction to Operations Management

2007 Thomson South-Western 1

Introduction to Operations

Management

CHAPTER 1

OPERATIONS

MANAGEMENTAn Integrated Goods and Services

Approach

JAMES R. EVANS

AND

DAVID A. COLLIER

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2007 Thomson South-Western

Chapter 1 Introduction to Operations Management

Operations management (OM)is thescience and art of ensuring that goods andservices are created and deliveredsuccessfully to customers.

The principles of OM help one to view abusiness enterprise as a total system, inwhich all activities are coordinated not

only vertically throughout the organization,but also horizontally across multiplefunctions.

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Chapter 1 Learning Objectives

1. To understand the nature of typical OM activitiesin business, what operations managers do, andhow everyone uses OM principles in their work,no matter what their functional job is.

2. To understand the nature of goods and services,their similarities and differences, the concept of

a customer benefit package, and why they areimportant for managing operations.

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3. To understand the concept of a process and

value chain, and how they are used in operationsto support the creation of goods and services.

4. To understand the role of quantitative methods in

operations management and how models can beused to assist in making OM decisions.

5. To be able to identify the key themes that haveevolved over the last half-century andunderstand their impact on goods, services, andoperations.

Chapter 1 Learning Objectives

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OM Spotlight: Ferguson Metals

Ferguson Metals, located in Hamilton, Ohio, is a supplierof stainless steel and high temperature alloys for thespecialty metal market.

Fergusons primary production operations include slittingcoil stock and cutting sheet steel to customerspecifications with rapid turnaround times from order todelivery (see Exhibit 1.1).

Bob Vogel is the Vice President of Operations atFerguson. He is involved in a variety of daily activitiesthat draw upon knowledge of not only OM andengineering, but also finance, accounting, organizational

behavior, and other subjects.

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Exhibit 1.1 Operations Management at Ferguson Metals

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OM Spotlight: Ferguson Metals

While understanding specialty metals iscertainly a vital part of Mr. Vogels job, theability to understand customer needs,

apply approaches to continuousimprovement, understand and motivatepeople, work cross-functionally across the

business, and integrate processes andtechnology within the value chain defineScotts job as an operations manager.

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Example of What Operations Managers Do?

Brooke Wilson is a Process Managerfor J.P.Morgan Chase in the Credit Card Division.

Among his OM-related activities are

Planning and budgetingrepresenting theplastic card production area in all meetings,

developing annual budgets and staffing plans,and watching technology that might affect theproduction of plastic credit cards.

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Inventory managementoverseeing themanagement of inventory for items such as plasticblank cards, inserts such as advertisements,

envelops, postage, and credit card rules anddisclosure inserts.

Scheduling and capacitydaily to annual

scheduling of all resources (equipment, people,inventory) necessary to issue new credit cards andreissue cards that are up for renewal, replace old ordamaged cards, and one's that are stolen.

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Chapter 1 Introduction to OperationsManagement


Brooke Wilson is a Process Managerfor J.P.Morgan Chase in the Credit Card Division.

Among his OM-related activities are

Qualityembossing the card with accuratecustomer information and quickly getting thecard in the hands of the customer.

Brooke was an accounting majorin college.

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Understanding Goods and Services

A good is a physical product that you can see,touch, or possibly consume. Examples of goodsinclude: oranges, flowers, televisions, soap,

airplanes, fish, furniture, coal, lumber, personalcomputers, paper, and industrial machines.

A durable good is a product that typically lasts

at least three years. Vehicles, dishwashers, andfurniture are some examples of durable goods.

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A non-durable goodis perishable andgenerally lasts for less than three years.

Examples are toothpaste, software, shoes,and fruit.

A serviceis any primary or complementary

activity that does not directly produce aphysical product.

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Service managementintegratesmarketing, human resource, and operationsfunctions to plan, create, and deliver goods

and services, and their associated serviceencounters.

Aservice encounteris an interaction

between the customer and the serviceprovider.

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A broader definition is Service encountersconsist of one or more

moments of truth any episodes, transactions,or experiences in which a customer comes intocontact with any aspect of the delivery system,however remote, and thereby has an opportunity toform an impression.

Here, a service encounter includes the impressionan empty parking lot has on whether the customergoes into a facility or the interaction with othercustomers such as while waiting in line.

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15Operations Management/Ch. 1 Introduction to Operations Management



Similarities Between Goods and Services

1. Goods and services provide value andsatisfaction to customers who purchaseand use them.

2. They both can be standardized orcustomized to individual wants andneeds.

3. A process creates and delivers each goodor service, and therefore, OM is a criticalskill.

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Differences Between Goods and Services

1. Goods are tangible while services are intangible.2. Customers participate in many service processes,

activities, and transactions.3. The demand for services is more difficult to

predict than the demand for goods.4. Services cannot be stored as physical inventory.5. Service management skills are paramount to a

successful service encounter.6. Service facilities typically need to be in closeproximity to the customer.

7. Patents do not protect services.

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Exhibit 1.2 How Goods and Services AffectOperations Management Activities

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Exhibit 1.3 Examples of Goods and Service Content

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Customer Benefit Packages

A customer benefit package (CBP)is aclearly defined set of tangible (goods-content)and intangible (service-content) features thatthe customer recognizes, pays for, uses, or

experiences.

In simple terms, a CBP is some combination ofgoods and services configured in a certain way

to provide value to customers.

A CBP consists of a primary good or service,coupled with peripheral goods and/or services.

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Aprimary good or serviceis the coreoffering that attracts customers and respondsto their basic needs. For example, theprimary service of a personal checking

account is the capability to do convenientfinancial transactions.

Examples of a primary good or service:

an airline flight, a personal digital assistance(PDA) device, a checking account, a briefcase, a football game, tax preparation advice,and so on.

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Aperipheral goods or servicesare those thatare not essential to the primary good or service,but enhance it.

Examples of peripheral goods or services fora personal checking account: on-line accessand bill payment, debit card, designer checks,paper or electronic account statement, etc.

Remember each primary or peripheral good orservice requires aprocessto create and deliver itto customers.

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A variantis a CBP attribute that departs fromthe standard CBP and is normally location or firmspecific.

A variant allows for adding unique goods orservices such as a fishing pond or pool at anautomobile dealership where kids can fish while

the parents shop for vehicles. Once a variant is incorporated and standardized

into all CBP delivery sites on a continuous basis itbecomes a permanent peripheral good or service.

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Exhibit 1.4 A CBP Example for Purchasing a Vehicle

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Exhibit 1.5 Operations Management and theCustomer Benefit Package

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Exhibit 1.6 Customer Wants and Needs, CBP Definition,

and Process Design Automobile Example

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It is very importantthat you understand Exhibits1.5 and 1.6 and the difference between customerwants and needsversus the CBP featuresselected by management to fulfill those needs.

Processes create CBP featuressuch as the (a)physical vehicle itself or (b) a leasing package thatfits what the customer can afford. These CBPfeatures fulfill certain customers wants and needssuch as (a) physical transportation from point A toB, or (b) how can I pay for the vehicle?

Another Example of Consumer Benefit Package

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Another Example of Consumer Benefit Package

E hibi 1 S S l d

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Exhibit 1.7 How Primary, Support, Supplier, andManagement Processes Are Related

E hibit 1 8 O i i b F i P

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Exhibit 1.8 Organization by Function versus Process

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OM Spotlight: Pals Sudden Service

Pals Sudden Service is a small chain ofmostly drive-through quick servicerestaurants located in Northeast Tennessee

and Southwest Virginia.

Pals competes against major national chainsand outperforms all of them by focusing on

important customer requirements such asspeed, accuracy, friendly service, correctingredients and amounts, proper foodtemperature, and safety.

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Pals uses extensive market research to fullyunderstand customer requirements:convenience; ease of driving in and out; easy-to-

read menu, simple, accurate order-system; fastservice; wholesome food; and reasonable price.

Every processis flowcharted and analyzed for

opportunities for error, and then mistake-proofedif at all possible.

E hibit 1 9 P l S dd S i V l Ch i

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32Operations Management/Ch. 1 Introduction to Operations Management2007 Thomson South-Western

Exhibit 1.9 Pals Sudden Service Value Chain

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Entry-level employeesmostly high schoolstudents in their first jobreceive 120 hours oftraining on precise work procedures and processstandards in unique self-teaching, classroom,

and on-the-job settings, and reinforced by aCaught Doing Good program that providesrecognition for meeting quality standards andhigh performance expectations.

Pals collect performance measuressuch ascomplaints, profitability, employee turnover,safety, and productivity.

E hibit 1 10

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Exhibit 1.10 Satisfaction Data and Linear Trend Chart

h d

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Break-Even Model

The amount of sales at which the net profit is zeroor equivalently, the point where total cost equalstotal revenue is called thebreak-even point.

The equation for total cost is Total cost = Fixedcost + Variable cost. If 10,000 units were producedand sold, the total cost would be

Total cost = 100,000 + 12(10,000) = $220,000.

Ch 1 I d i O i M

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Break-Even Model

The revenue received from selling 10,000 unitswould be 20(10,000) = $200,000, so at thisproduction level, the firm would incur a loss of$220,000 - $200,000 = $20,000.

However, if 13,000 units were produced and sold,

the projected profit would be 20(13,000) -100,000 - 12(13,000) = $4,000.

Ch t 1 I t d ti t O ti M t

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Breakeven Model

We can find the break-even point by developing a simplemathematical model. Let x be the sales volume at thebreak-even point. Then

Total cost = 100,000 + 12x

Total revenue = 20x.Setting the total revenue equal to total cost we have20x = 100,000 + 12x

and hencex = 12,500.

If sales are less than 12,500 units, the firm will incur aloss; if sales are more than 12,500, a profit will berealized.

Exhibit 1 11 Spreadsheet Model for Break Even

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Exhibit 1.11 Spreadsheet Model for Break-EvenAnalysis (Break Even Model.xls)

Exhibit 1 12 Sensitivity Analysis of Variable Cost

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Exhibit 1.12 Sensitivity Analysis of Variable Costfor the Break-Even Model

Exhibit 1 13 Five Eras of Operations Management

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Exhibit 1.13 Five Eras of Operations Management

Exhibit 1 14 U S 2001 Employment and Projected Change

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Exhibit 1.14 U.S. 2001 Employment and Projected Changeby Major Industry (slide 1)

* Durable goods are items such as instruments, vehicles, aircraft, computer and office equipment, machinery,furniture, glass, metals, and appliances.

** Nondurable goods are items such as textiles, apparel, paper, food, coal, oil, leather, plastics, chemicals, and books.

Source:United States Bureau of Labor Statistics, October 2001, http://www.bls.gov/EMP

Exhibit 1 14 U S 2001 Employment and Projected Change

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Exhibit 1.14 U.S. 2001 Employment and Projected Changeby Major Industry (slide 2)

U.S. Economy Structure and Service Related Jobs

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Goods-producing industries (manufacturing,

construction, fishing, forestry, mining, andagriculture) account for 20 percentof the jobs inthe U.S. economy.

Service-providing industries account for 80percentof the jobs in the U.S. economy.

One-half of those jobs in goods-producingindustries involve service processes such as humanresource management, accounting, and financial.


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y

Therefore, more than 90 percent of the jobsinthe U.S. economy involve designing andmanaging service-, information- orentertainment-intensive processes.

Most people in the United States are working inthe service sector or service processes or inservice-related aspects of manufacturing firms.

Exhibit 1 15 Case: Dietary Department Organizational Chart

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Exhibit 1.15 Case: Dietary Department Organizational Chart

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