REVIEWER ON CH1_ Operations Management & Value Chains

Operations Management • Scheduling: determine when resources such

as employees and equipment should be assigned
 the science and art of ensuring that
to work.
goods and services are created and
delivered successfully to customers • Sustainability: decide the best way to manage
the risks associated with products and operations
Includes:
to preserve resources for future generations.
 Design of goods, services, and the processes
Goods vs Services
that create them
 Day-to-day management of processes Good: a physical product that you can see,
 Continual improvement of goods, services, touch, or possibly consume
and processes
 Durable: does not quickly wear out and
Key Activities of an Operations Manager
typically lasts at least three years

 Nondurable: no longer useful once it’s

used or lasts for less than three years

Service: any primary or complementary activity

that does not directly produce a physical product

Similarities:

1. Driven by customers and providing value and

satisfaction to customers who purchase and use
Some key activities that operations managers them.
perform include the following: 2. Standardized or customized to individuals
wants and needs.
• Forecasting: predict the future demand for 3. Created and provided to customers by some
raw materials, finished goods, and services. type of process involving people and technology.
• Supply chain management: manage the flow
of materials, information, people, and money GOODS SERVICES
from suppliers to customers. Tangible Intangible
• Facility layout and design: determine the consumed experienced
best configuration of machines, storage, offices, Do Not require direct Require direct
and departments to provide the highest levels of involvement with involvement with
efficiency and customer satisfaction. customers customers Service
Encounter: Interaction
• Technology selection: use technology to
between customers and
improve productivity and respond faster to
service providers
customers.
Demands are easier to Demands are difficult to
• Quality management: ensure that goods, predict predict
services, and processes will meet customer
Stored as physical Cannot be stored as
expectations and requirements.
inventory physical inventory
• Purchasing: coordinate the acquisition of Do not require service Require efficient service
materials, supplies, and services. management skills management skills
• Resource and capacity management: Manufacturing facilities Facilities typically need to
ensure that the right amount of resources (labor, can be located anywhere be in close proximity to
equipment, materials, and information) is in the world the customer
available when needed. Protected by patents Not protected by patents

• Process design: select the right equipment,

information, and work methods to produce high- SERVICE MANAGEMENT
quality goods and services efficiently.
Integrates marketing, human resources, and
• Job design: decide the best way to assign operations functions to:
people to work tasks and job responsibilities.

• Service encounter design: determine the  Plan

best types of interactions between service  Create
providers and customers, and how to recover  Deliver goods and services
from service upsets.  Deal with service encounters
Moments of Truth: - A network of facilities and processes
Describes the:
 episodes, transactions, or experiences
 flow of materials
in which customer encounters the
 finished goods & services information,
delivery system and forms
and
impressions  financial transactions from suppliers

VALUE through the facilities and processes that create

goods and services and those that deliver them
to the customer.
Value: the perception of the benefits associated
with a good, service, or bundle of goods and
SUPPLY CHAIN
services in relation to what buyers are willing to
- Portion of the Value Chain
pay for them
Focuses primarily on the:
Functional Form: Perceived benefits  physical movement of goods and materials
Value =Price (cost) to the customer  Supporting flows of information and financial
transactions through the supply, production,
Goal: Increase Value and distribution processes

To Increase Value: Key Business Processes

• increase perceived benefits while holding price Core

or cost constant;
• Focuses on producing or delivering an
• increase perceived benefits while reducing price organization's primary goods or services
or cost; or Support

• decrease price or cost while holding perceived • Focuses on purchasing, managing inventory,
benefits constant. installation, health benefits, technology
acquisition, day care services, and research
CUSTOMER BENEFIT PACKAGE
General management

Customer Benefit Package (CBP): a clearly • Focuses on accounting and information

defined set of tangible (goods-content) and systems, human resource management, and
intangible (service-content) features that the marketing
customer recognizes, pays for, uses, or
experiences. Value Chain Framework: Input-Output

Primary good or service

• Core offering that attracts customers and
responds to their basic needs

Peripheral goods or services

• Offerings that are not essential to the primary
good or service, but enhance it

Variant
• CBP attribute that departs from the standard
CBP and is location-or firm-specific
Value Chain Framework: Input-Output

Value Chain Framework:

VALUE CHAINS
Pre- and Postproduction Services

Value Chain Framework: Hierarchical
Supply Chain
Goods-Producing Supply Chain
 Activities include shipping finished goods
to Distribution Centers (DCs)
Distribution Centers (DCs): warehouses that
act as intermediaries between factories and
customers and ship directly to customers of to
retail stores
Inventory: raw materials, work-in-process, or
finished goods that are maintained to support
production or satisfy customer demand
OM History
Exhibit 1.11 Seven Eras of Operations
Management
Sustainability
Sustainability: refers to an organization’s ability
to strategically address current business needs
and successfully develop a long-term strategy
that embraces opportunities and manages risk for
all products, systems, supply chains, and
processes to preserve resources for future
generations.
Sustainability Perspectives
Environmental Sustainability: commitment to
the long-term quality of the environment
Social Sustainability: commitment to maintain
healthy communities and a society that improves
the quality of life
Economic Sustainability: commitment to
address current business needs and economic
vitality, and to have the agility and strategic
management to prepare successfully for future
business, markets, and operating environments.
Sustainability Practices
EXHIBIT 1.13 Examples of Sustainability
Practices
Environmental Sustainability
• Waste management: Reduce waste and
manage recycling efforts
• Energy optimization: Reduce consumption
during peak energy demand times
• Transportation optimization: Design efficient
vehicles and routes to save fuel
• Technology upgrades: Develop
improvements to save energy and clean and
reuse water in manufacturing processes
• Air quality: Reduce greenhouse gas emissions
• Sustainable product design: Design goods
whose parts can be recycled or safely disposed of
Social Sustainability
• Product safety: Ensure consumer safety in
using goods and services
• Workforce health and safety: Ensure a
healthy and safe work environment
• Ethics and governance: Ensure compliance
with legal and regulatory requirements and
transparency in management decisions
• Community: Improve the quality of life
through industry-community partnerships
Economic Sustainability
• Performance excellence: Build a high-
performing organization with a capable leadership
and workforce
• Financial management: Make sound financial
plans to ensure long-term organizational survival
• Resource management: Acquire and manage
all resources effectively and efficiently
• Emergency preparedness: Have plans in
place for business, environmental and social
emergencies
Analytics and Big Data
Used to evaluate: operations performance,
quality, order accuracy, customer satisfaction,
delivery, cost, environmental compliance, etc.

Make decisions using Business Analytics

Business Analytics: a process of transforming

data into actions through analysis and insights in
the context of organizational decision making and
problem solving

Current Challenges in OM

 Customer expectations
 Globalization
 Evolving technology
 Sustainability
 Managing workforce
 Optimizing Supply chains

Measurement
 REVIEWER ON CH2_Measuring Performance

and productivity yield Order

“How you are Measured is how you Perform” operational Equipment fulfillment time
efficiency utilization
- Act of quantifying the performance of: Sustainability Environmental Toxic waste
 Organizational units and regulatory discharge rate
 Goods and services compliance Workplace safety
 Processes
Product-related violations
 People
 Other business activities litigation Percent of
Financial audits employees with
• Provide a scorecard of performance emergency
preparedness
• Helps identify Performance Gaps training

• Makes accomplishments visible to workforce,

Financial Measures
stock market, and other stakeholders
• Minimize Cost
• Increase Revenue
Types of Performance Measures
• Financial Ratios
 Liquidity
Performance Typical Typical  Solvency
Measuremen Organizational- Operational-  Profitability
t Category Level Level • Source: Financial Statements
Performance Performance
Measures Measures Customer & Market Measures
 Provides companies with customer rating of
Financial Revenue and Labor and
specific goods and service features
profit, Return on material costs
 Indicates the relationship between customer
assets Earning Cost of quality
ratings and a customer’s likely future
per share Budget variance
buying behavior
Customer and Customer Customer claims
 Tracks trends and patterns of customer
market satisfaction and complaints
behavior
Customer Type of warrant
retention Market failure/upset
Quality
Share Sales forecast
 Measures the degree to which the output of
accuracy
a process meets customer requirements
Quality Customer ratings Defects/unit or
of goods and error/opportunity  Goods Quality: relates to the physical
services Product Service performance and characteristics of a good
recalls representative
courtesy
 Service Quality: consistently meeting or
Time Speed Reliability Flow processing exceeding customer expectations and
or cycle time service delivery system performance for
Percent of time services
meeting
promised due Five Dimensions in assessing Service
date Quality:
Flexibility Design flexibility Number of
Volume flexibility engineering 1. Reliability
2. Assurance
changes
3. Tangibles
Assembly-line 4. Empathy
changeover time 5. Responsiveness
Innovation and New product Number of
learning development patent Service failures/upsets: errors in service
creation and delivery
rates Employee applications
satisfaction Number of
Time Two Types of Performance Measures:
Employee improvement 1. Speed of performing a task - measured by
turnover suggestions processing time and queue time
implemented 2. Variability of processes - measured using
Percent of standard deviation or mean absolute deviation
workers trained
on statistical Flexibility
process control
Productivity Labor Manufacturing
• The ability to adapt quickly and effectively to
changing requirements
• Goods and Service Design Flexibility –
Ability to develop a wide range of customized
goods or services to meet different or changing
customer needs
• Volume Flexibility – Ability to respond quickly
to changes in the volume and type of demand
Innovation and Learning
Innovation
• Ability to create new and unique goods and
services that delight customers and create
competitive advantage
Learning
 Creating, acquiring, and transferring
knowledge
 Modifying behavior of employees in response
to internal and external change
Productivity & Operational Efficiency
• Productivity: ratio of the output of a process
to the input
• Operational Efficiency: ability to provide
goods and services to customers with minimum
waste and maximum utilization of resources
Productivity Example
Consider a division of Miller Chemicals that
produces water purification crystals for swimming
pools. The major inputs used in the production
process are labor, raw materials, and energy. For
Year 1, labor costs are $180,000; raw materials
cost $30,000; and energy costs amount to
$5,000. Labor costs for Year 2 are $350,000; raw
materials cost $40,000; and energy costs amount
to $6,000. Miller Chemicals produced 100,000
pounds of crystals in Year 1 and 150,000 pounds
of crystals in Year 2.
Sustainability
Triple Bottom Line (TBL or 3BL):
measurement of sustainability related to:
• Environmental Factors – Energy
consumption, recycling, resource conservation
activities, air emissions, solid and hazardous
waste rates, etc.
• Social Factors – Consumer and workplace
safety, community relations, and corporate ethics
and governance
• Economic Factors – Auditing, regulatory
compliance, sanctions, donations, fines, etc.
Analytics in Operations Management, Part 1
 Helps Operations Managers analyze data
effectively and make better decisions
Applications
• Visualizing data to examine performance
trends
• Calculating basic statistical measures
• Comparing results relative to other business
units, competitors, or best in-class benchmarks
• Using correlations and regression analysis
• Statistics
 Involves collecting, organizing, analyzing,
interpreting, and presenting data.
 A statistic is a summary measure of data.
Descriptive Statistics - Refers to methods of
describing and summarizing data using tabular,
visual, and quantitative techniques
 Statistics provides the means of gaining
insight-both numerically and visually into
large quantities of data, understanding
uncertainty and risk in making decisions,
and drawing conclusions from sample data
that come from very large populations.
Analytics in Operations Management, Part 2
• Operations managers use statistics to gauge
production and quality performance to determine
process and design improvements.
• Statistical methods allow us to gain a richer
understanding of data by not only summarizing
data succinctly but also finding unknown and
interesting relationships among the data.
Interlinking
• Quantitative modeling of cause-and-effect
relationships between external and internal
performance criteria
• Helps quantify performance relationships
between all parts of a value chain
Value of a Loyal Customer (VLC), Part 1
• Quantifies total revenues or profits each target
market customer generates over a buyer’s life
cycle
– Total Market Value: multiplying VLC by the
absolute number of customers gained or lost
VLC Equation:
VLC = P x CM x RF x BLC
Where:
P = the revenue per unit
CM = contribution margin to profit and overhead
expressed as a fraction
RF = repurchase frequency = number of
purchases per year
BLC = buyer’s life cycle computed as 1/defection
rate, expressed as a fraction
Value of a Loyal Customer (VLC), Part 2
Problem 2.3
Retention Rate = 80%
Defection Rate = 20% (1- retention rate)
P = 1,000 CM = 45% or 0.45 (10% + 35%)
RF = 0.5 (1/2)
BLC = 5 (1/0.2>>defection rate)
VLC = 1,000 x .45 x. 0.5 x 5 = 1,125
Designing Measurement Systems
Actionable Measures
• Provide the basis for decisions at the level at
which they are applied
- Levels include value chain, organization,
process, department, workstation, job, and
service encounters
Models of Organizational Performance
Baldrige Performance Excellence
Framework, Part 1
• Helps in the process of self assessment to
understand an organization’s strengths and
weaknesses
Self assessment:
 Helps improve quality, productivity, and
overall competitiveness
 Encourages development of high
performance management practices
Seven Categories:
1. Leadership
2. Strategy
3. Customers
4. Measurement, Analysis, and Knowledge
Management
5. Workforce 6. Operations
7. Results
“ leadership drives the system that creates
results”
Baldrige Performance Excellence
Framework, Part 2
Balanced Scorecard Model, Part 1
• Translates strategies into measures that
uniquely communicate an organization’s vision
• Performance perspectives
 Financial: measures value provided to
shareholders
 Customer: focuses on customer needs
and satisfaction and market share and its
growth
 Innovation & Learning: emphasizes
people and infrastructure
 Internal: focuses attention on the
performance of key internal processes
that drive a business
Balanced Scorecard Model, Part 2
Value Chain Model, Part 1

• Evaluates performance throughout the value

chain by identifying measures associated with:
– Suppliers
– Inputs
– Value Creation Processes
– Goods and Service Outputs and Outcomes
– Customers and Market Segments
– Supporting and General Management
Processes

Value Chain Model, Part 2

Service Profit Chain Model, Part 1

• States that employees create customer value

and drive profitability through a service-delivery
system
• Based on a set of cause-and-effect linkages
between internal and external performance
- Helps define key performance
measurements on which service-based
firms should focus

Service Profit Chain Model, Part 2