Chapter 1

Operations and Competitiveness

Operations Management - 5th Edition

Roberta Russell & Bernard W. Taylor, III

Beni Asllani
Copyright 2006 John Wiley & Sons, Inc. University of Tennessee at Chattanooga
 Lecture Outline

 What Do Operations Managers Do?

 Operations Function
 Evolution of Operations Management
 Operations Management and E–business
 Globalization and Competitiveness
 Primary Topics in Operations
Management
 Learning Objectives for this Course

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 What Do Operations
Managers Do?
 What is Operations?
 a function or system that transforms inputs into outputs of
greater value
 What is a Transformation Process?
 a series of activities along a value chain extending from
supplier to customer.
 activities that do not add value are superfluous and
should be eliminated
 What is Operations Management?
 design, operation, and improvement of productive
systems

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 Operations Management

 The food you eat, the movies you watch, the stores in which
you shop, and the books you read are provided to you by
the people in operations. Operations managers are found in
banks, hospitals, factories, and government. They design
systems, ensure quality, produce products, and deliver
services. They work with customers and suppliers, the latest
technology, and global partners. They solve problems,
reengineer processes, innovate, and integrate. Operations
is more than planning and controlling; it’s doing. Whether
it’s superior quality, speed-to-market, customization, or low
cost, excellence in operations is critical to a firm’s success.

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 Transformation Process

 Physical: as in manufacturing operations

 Locational: as in transportation operations
 Exchange: as in retail operations
 Physiological: as in health care
 Psychological: as in entertainment
 Informational: as in communication

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 Operations as a
Transformation Process

INPUT
•Material
OUTPUT
•Machines TRANSFORMATION
•Goods
•Labor PROCESS
•Services
•Management
•Capital

Feedback

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 Operations Function

 Operations
 Marketing
 Finance and
Accounting
 Human
Resources
 Outside
Suppliers

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 How is Operations Relevant to my
Major?
 “As an auditor you must
 Accounting understand the fundamentals of
operations management.”
 Information  “IT is a tool, and there’s no better
Technology place to apply it than in
operations.”
 “We use so many things you
 Management learn in an operations class—
scheduling, lean production,
theory of constraints, and tons of
quality tools.”
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 How is Operations Relevant to my
Major?
 “It’s all about processes. I live
 Economics by flowcharts and Pareto
analysis.”
 Marketing  “How can you do a good job
marketing a product if you’re
unsure of its quality or delivery
status?”
 Finance  “Most of our capital budgeting
requests are from operations,
and most of our cost savings,
too.”

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 Evolution of Operations
Management
 Craft production
 process of handcrafting products or
services for individual customers
 Division of labor
 dividing a job into a series of small tasks
each performed by a different worker
 Interchangeable parts
 standardization of parts initially as
replacement parts; enabled mass
production

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 Evolution of Operations
Management (cont.)

 Scientific management
 systematic analysis of work methods
 Mass production
 high-volume production of a standardized
product for a mass market
 Lean production
 adaptation of mass production that prizes
quality and flexibility

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 Historical Events in
Operations Management
Era Events/Concepts Dates Originator
Steam engine 1769 James Watt
Industrial
Division of labor 1776 Adam Smith
Revolution
Interchangeable parts 1790 Eli Whitney
Principles of scientific
1911 Frederick W. Taylor
management
Frank and Lillian
Scientific Time and motion studies 1911 Gilbreth
Management Activity scheduling chart 1912 Henry Gantt
Moving assembly line 1913 Henry Ford

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 Historical Events in
Operations Management (cont.)
Era Events/Concepts Dates Originator
Hawthorne studies 1930 Elton Mayo
Human 1940s Abraham Maslow
Relations Motivation theories 1950s Frederick Herzberg
1960s Douglas McGregor
Linear programming 1947 George Dantzig
Digital computer 1951 Remington Rand
Simulation, waiting
Operations Operations research
line theory, decision 1950s
Research groups
theory, PERT/CPM
1960s, Joseph Orlicky, IBM
MRP, EDI, EFT, CIM
1970s and others

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 Evolution of Operations
Management (cont.)

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 Abbreviations

 MRP – Material Requirements Planning

 EDI - Electronic
Data Interchange
 EFT – Earliest Finish Time
 CIM – Computer Integrated
Manufacturing

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 Historical Events in
Operations Management (cont.)
Era Events/Concepts Dates Originator
JIT (just-in-time) 1970s Taiichi Ohno (Toyota)
TQM (total quality W. Edwards Deming,
1980s
management) Joseph Juran
Quality
Strategy and Wickham Skinner,
Revolution 1990s
operations Robert Hayes
Business process Michael Hammer,
1990s
reengineering James Champy

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 Historical Events in
Operations Management (cont.)
Era Events/Concepts Dates Originator
Globalization WTO, European Union, 1990s Numerous countries
and other trade 2000s and companies
agreements
Internet Internet, WWW, ERP, 1990s ARPANET, Tim
Revolution supply chain Berners-Lee SAP,
management i2 Technologies,
ORACLE,
PeopleSoft
E-commerce 2000s Amazon, Yahoo,
eBay, and others

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 Continuum from Goods
to Services

Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff,

Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.

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 Operations Management
and E-Business
Business Consumer
Business

B2B B2C
Commerceone.com Amazon.com
Consumer

C2B C2C
Priceline.com eBay.com

Categories of E-Commerce

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 An Integrated Value Chain
 Value chain: set of activities that create and
deliver products to customer

Customer Manufacturer Supplier

Flow of information (customer order)

Flow of product (order fulfillment)
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 Impact of E-Business on
Operations Management
Benefits of E-Business
 Comparison shopping
by customers
 Direct contact with
customers
 Business processes
conducted online
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Impact on Operations
 Customer expectations escalate;
quality must be maintained and
costs lowered
 No more guessing about demand
is necessary; inventory costs go
down; product and service design
improves; build to-order products
and services is made possible
 Transaction costs are lower;
customer support costs decrease;
e-procurement saves big bucks
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 Impact of E-Business on
Operations Management (cont.)
Benefits of E-Business Impact on Operations
 Access to customers  Demand increases; order fulfillment
and logistics become major issues;
worldwide production moves overseas
 Logistics change from delivering to a
store or distribution center to
 Middlemen are delivering to individual homes;
eliminated consumer demand is more erratic and
unpredictable than business demand
 Outsourcing increases; more alliances
 Access to suppliers and partnerships among firms are
worldwide formed; supply is less certain; global
supply chain issues arise

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 Impact of E-Business on
Operations Management (cont.)
Benefits of E-Business
 Online auctions and e-
marketplaces
 Better and faster
decision making
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Impact on Operations
 Competitive bidding lowers cost
of materials; supply needs can be
found in one location
 More timely information is
available with immediate access
by all stakeholders in decision-
making process; customer orders
and product designs can be
clarified electronically; electronic
meetings can be held;
collaborative planning is
facilitated
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 Impact of E-Business on
Operations Management (cont.)
Benefits of E-Business Impact on Operations
 IT synergy  Productivity increases as
information can be shared more
efficiently internally and
between trading partners
 Order fulfillment, logistics,
 Expanded supply warehousing, transportation and
chains delivery become focus of
operations management; risk is
spread out; trade barriers fall

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 Globalization and
Competitiveness
 Favorable cost
 Access to international
markets
 Response to changes in
demand
 Reliable sources of
supply
 14 major trade
agreements in 1990s
 Peak: 26% in 2000
World Trade Compared to World GDP
Source: “Real GDP and Trade Growth of OECD Countries, 2001–03,”
International Trade Statistics 2003, World Trade Organization,
www.wto.org
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 Globalization and
Competitiveness (cont.)
Germany: $26.18

USA: $21.33

Taiwan: $5.41

Mexico: $2.38

Hourly Wage Rates for Selected Countries

Source: “International Comparisons of Hourly Compensation Costs for Production Workers in
Manufacturing,” Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003. China: $0.50

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 Globalization and
Competitiveness (cont.)

Trade with China: Percent of each country‘s trade

Source: “Share of China in Exports and Imports of Major Traders, 2000 and 2002,”
International Trade Statistics 2003, World Trade Organization, www.wto.org
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 Risks of Globalization

 Cultural differences
 Supply chain logistics
 Safety, security, and
stability
 Quality problems
 Corporate image
 Loss of capabilities

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 Competitiveness and
Productivity
 Competitiveness
 degree to which a nation can produce goods and
services that meet the test of international
markets
 Productivity
 ratio of output to input
 Output
 sales made, products produced, customers
served, meals delivered, or calls answered
 Input
 labor hours, investment in equipment, material
usage, or square footage

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 Competitiveness and
Productivity (cont.)

Measures of Productivity

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 Changes in Productivity
for Select Countries
Internet-enabled
productivity

- Dot com bust

- 9/11 terrorist attacks

Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor
Statistics, U.S. Department of Labor, September 2003. U.S. figures for 2002–2003 from “Major Sector Productivity and
Costs Index,” Bureau of Labor Statistics, U.S. Department of Labor, March 2004

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 Dot-com bust
 An organization that offers its services exclusively on
the Internet, either via the user's Web browser or a
client program that must be installed in the user's
computer. Amazon.com, Yahoo!, Google and eBay are
examples of dot-com companies. Telecom companies
that offer voice or video services over the Internet also
fit into the dot-com company umbrella.
 The years 2000 to 2002, when the bottom fell out of
the dot-com industry and hundreds of Internet-based
companies went bankrupt. Many of the organizations
that did survive the dot-com bust lost a huge amount of
stock valuation.
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 Productivity Increase

 Become efficient
 output increases with little or no increase in input
 Expand
 both output and input grow with output growing
more rapidly
 Achieve breakthroughs
 output increases while input decreases
 Downsize
 output remains the same and input is reduced
 Retrench
 both output and input decrease, with input
decreasing at a faster rate

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 Competitiveness and
Productivity

Breakthrough
Performance

More Efficient

Retrench

Productivity as a Function of Inputs and Outputs, 2001–2002

Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor
Statistics, U.S. Department of Labor, September 2003

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 Global Competitiveness
Ranking
1. Finland
2. United States
3. Sweden
4. Denmark
5. Taiwan
6. Singapore
7. Switzerland
8. Iceland
9. Norway Source: Global Competitiveness Report
2003–2004, World Economic Forum,
10. Australia January 2004, www.weforum.org

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 Operations–oriented
Barriers to Entry

 Economies of Scale
 Capital Investment
 Access to Supply and Distribution
Channels
 Learning Curve

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 Primary Topics in
Operations Management

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 Primary Topics in Operations
Management (cont.)

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 Operations Strategy
 Strategy: Chapter 2
 Maintaining an operations strategy to support firm’s
competitive advantage
 Quality: Chapters 3 and 4
 Focusing on quality in operational decision making
 Product and Services: Chapter 5
 Designing quality products and services
 Processes, Technologies, and Capacity: Chapter 6
 Setting up process so that it works smoothly and
efficiently

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 Operations Strategy
(cont.)
 Facilities: Chapter 7
 Setting up facility so that it works
smoothly and efficiently
 Human Resources: Chapter 8
 Designing jobs and work to produce
quality products
 Project Management: Chapter 9
 Managing complex projects

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 Supply Chain
Management
 Supply Chain: Chapter 10
 Managing supply chain
 Forecasting: Chapter 11
 Predicting customer demand
 Aggregate Planning: Chapter 12
 How much to produce and when to
produce it
 Inventory Management: Chapter 13
 How much to order and when to order

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 Supply Chain
Management (cont.)
 Resource Planning: Chapter 14
 Planning capacity and other resources
 Lean Production: Chapter 15
 Designing efficient production lines
 Scheduling: Chapter 16
 Job and task assignments
 Waiting Lines: Chapter 17
 Minimizing waiting time of customers and
products

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 Learning Objectives of
this Course
 Gain an appreciation of strategic importance
of operations in a global business
environment
 Understand how operations relates to other
business functions
 Develop a working knowledge of concepts
and methods related to designing and
managing operations
 Develop a skill set for quality and process
improvement
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 Questions
 1-1. What activities are involved in the
operations function? How does operations
interact with other functional areas?
 1-2. What constitutes “operations” at (a) a
bank, (b) a retail store, (c) a hospital, (d) a TV
company?
 1-3. Briefly describe how operations has
evolved from the Industrial Revolution to the
Internet Revolution.

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