Operations Management

27th batch
Sections
 Session-1

Overview
Understanding goods & services;
OM in workplace
Customer benefit Package (CBP)
 An Overview and Scope of OM
• Operations management (OM)
– Creation of goods and
services and succesfully
delivered to customers.
− Design of goods, services,
and the processes that create
them.
− Day-to-day management of
those processes.
− Continual improvement of
these goods, services, and
processes.
• Three Issues at the Core of
Operations Management
– Efficiency
– Cost
– Quality
What Do Operations Managers
Do?
• Forecasting
• Supply chain management
• Facility layout and design
• Technology selection
• Quality management
• Purchasing
• Resource and capacity
management
• Process design
• Job design
• Service encounter design
• Scheduling
 A Typical OM function example
• Shelly Decker, an accounting and information
systems major in college, and her sister
created a venture to manufacture and sell
natural soaps and body products.OM Skills
used are
• Process design – When a new product is to
be introduced, the best way to produce it
must be determined in detail.
• Inventory management – Inventory is
tightly controlled to keep cost down and to
avoid production that isn't needed.
• Scheduling – Production schedules
are created to ensure that enough product is
available for both retail and wholesale
customers, taking into account such factors
as current inventory and production
capacity.
• Quality management – Each product must
conform to the highest quality standards. If
a product does not conform to standard (for
example, wrong color, improper packaging,
improper labeling, improper weight, size, or
shape), then it is removed from inventory to
determine where the process broke down
and to initiate corrective action.
• Brooke Wilson is a Process Manager for J.P.
Morgan Chase in the Credit Card Division.
He was an accounting major in college.
Among his OM-related activities are:
• Planning and budgeting: Representing the
plastic card production area in all meetings,
developing annual budgets and staffing
plans, and watching technology that might
affect the production of plastic credit cards.
• Inventory management: Overseeing the
management of inventory for items such as
plastic blank cards, inserts such as
advertisements, envelopes, postage, and
credit card rules and disclosure inserts.
• Scheduling and capacity: Daily to annual
scheduling of all resources (equipment,
people, inventory) necessary to issue new
credit cards and reissue cards that are up for
renewal, replace old or damaged cards, and
one's that are stolen.
• Quality: Embossing the card with accurate
customer information and quickly getting
the card in the hands of the customer.
 Understanding Goods and Services
• A good is a physical product that
you can see, touch, or possibly
consume. Examples of goods
include: oranges, flowers,
televisions, soap, airplanes, fish,
furniture, coal, lumber, personal
computers, paper, and industrial
machines.
• A durable good is a product that
typically lasts at least three
years. Vehicles, dishwashers,
and furniture are some examples
of durable goods.
• A non-durable good is perishable
and generally lasts for less than
three years. Examples are
toothpaste, software, shoes, and
fruit.
•
A service is any primary or complementary
activity that does not directly produce a
physical product.
• Service management integrates marketing,
human resources, and operations functions to
plan, create, and deliver goods and services,
and their associated service encounters.
• A service encounter is an interaction
between the customer and the service
provider.-consists of one or more moments of
truth—any episodes, transactions, or
experiences in which a customer comes into
contact with any aspect of the delivery
system, however remote, and thereby has an
opportunity to form an impression.
• Examples:
− A gracious welcome by an employee
at a hotel check-in counter
− A grocery store employee who seems
too impatient to help
− Trying to navigate a confusing Web
site
 Comparing Goods and Services
Similarities Between Goods and Differences Between Goods and Services
Services 1. Goods are tangible while services
1. Goods and services provide are intangible.
value and satisfaction to
2. Customers participate in many
customers who purchase and
service processes, activities, and
use them. transactions.

2. They both can be 3. The demand for services is more

standardized or customized
to individual wants and
4.
needs.
3. A process creates and
delivers each good or 5.
service, and therefore, OM
is a critical skill.
6.
difficult to predict than the demand
for goods.
Services cannot be stored as physical
inventory.
Service management skills are
paramount to a successful service
encounter.
Service facilities typically need to be
in close proximity to the customer.

7. Patents do not protect services.

How Goods/Services Affect Operations management Activities
 Customer Benefit Package
• A customer benefit package (CBP) is a clearly
defined set of tangible (goods-content) and
intangible (service-content) features that the
customer recognizes, pays for, uses, or
experiences.
• CBP is some combination of goods 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.
• Primary good or service is the “core” offering
that attracts customers and responds to their
basic needs. For example, the primary service
of a personal checking account is the capability
to do convenient financial transactions.
• Examples:
− an airline flight
− a checking account
− a brief case
− a football game
− tax preparation advice
• Peripheral goods or services are those that
are not essential to the primary good or
service, but enhance it.
– Examples for a personal checking
account:
− online access and bill payment
− debit card
− designer checks
− paper or electronic account
statement
• A variant is a CBP attribute that departs
from the standard CBP and is normally
location- or firm-specific.
• Example:
− a fishing pond or pool at an automobile
dealership where kids can fish while
the parents shop for vehicles
CBP Examples for a Good and a Service
Example of CBP for mixed Goods & Services content
 Session-2

Processes
Evolution of OM
Current Challenges
 Processes
• A process is a sequence • Key business processes:
• Value creation processes, focused on
of activities that is producing or delivering an organization’s
primary goods or services, such as filling
intended to create a and shipping a customer’s order,
certain result. assembling a dishwasher, or providing a
home mortgage.
• Support processes, such as purchasing
materials and supplies used in
• Processes are the manufacturing, managing inventory,
installation, health benefits, technology
means by which goods acquisition, day care on-site services, and
research and development.
and services—the • General management processes,
components of a including accounting and information
systems, human resource management,
CBP—are produced and marketing.
• Nearly every major activity within an
and delivered. organization involves a process that
crosses traditional organizational
boundaries.
• Networks of processes are called value
chains
 Example-Pal’s Sudden Service
• Pal’s Sudden Service is a small
chain of mostly drive-through quick
service restaurants located in
Northeast Tennessee and Southwest
Virginia.
• Pal’s competes against major
national chains and outperforms all
of them by focusing on important
customer requirements such as
speed, accuracy, friendly service,
correct ingredients and amounts,
proper food temperature, and safety.
• Pal’s uses extensive market research
to fully understand customer
requirements: convenience; ease of
driving in and out; easy-to-read
menu, simple, accurate order-
system; fast service; wholesome
food; and reasonable price.
• Pal’s value chain begins with raw
materials and suppliers providing items
such as meat, lettuce, tomatoes, buns,
and packaging; uses intermediate
processes for order taking, cooking, and
final assembly; and ends with order
delivery and—hopefully—happy
customers.
• Every process is flowcharted and
analyzed for opportunities for error, and
then mistake-proofed if at all possible.
• Entry-level employees—mostly high
school students in their first job—receive
120 hours of training on precise work
procedures and process standards in
unique self-teaching, classroom, and on-
the-job settings, reinforced by a “Caught
Doing Good” program that provides
recognition for meeting quality standards
and high performance expectations.
• Pal’s collects performance measures such
as complaints, profitability, employee
turnover, safety, and productivity.
Six 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.
• Environmental sustainability is an organization’s
commitment to the long-term quality of our environment.
• Social sustainability is an organization’s commitment to
maintain healthy communities and society that improve the
quality of life.
• Economic sustainability is an organization’s 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.
 Current Challenges in OM
• Technology
• Globalization
• Changing customer expectations
• Changing job designs
• Quality-Process and Product
• Global manufacturing
• Productivity
• Reporting
• Right Talent
• Conflicts between departments
 Session-3

Concept of Value
Value Chain for goods
Value Chain for services
Food for Thought-1
 What is Value?
• Value is the perception of the benefits associated
with a good, service, or bundle of services & goods
(i.e., the customer benefit package) in relation to
what buyers are willing to pay for them
• The decision to purchase a good or service,or a CBP
is based on an assessment by the customer of the
perceived benefits in relation to its price
• The customer's cumulative judgment of the
perceived benefits leads to either satisfaction or
dissatisfaction.
 How can a firm increase the value?
Value = Perceived benefits/Price (cost) to the customer
Higher the value ratio the good
or service is perceived favorably
by customers
• Increase perceived benefits with constant price/cost
• Increase perceived benefits reducing price/cost
• Decrease price/cost with constant perceived benefit
 The Value Chain
• A value chain is a network of facilities and processes that
describes the flow of goods, services, information & financial
transactions-from suppliers through the facilities and processes
that create goods and services and deliver them to customer.
• It is a “cradle-to-grave” model of the operations function

distributors,
employment
agencies,
dealers,
financing and
leasing agents,
information and
Internet
companies, field
maintenance
and repair
services,
architectural
Goods Producing/Service Providing Value Chains
Examples
Goods Producing/Service Providing Value Chains
Examples
Pre and Post service view of
Value Chain
 Service View of a Business
• Nestle once defined its business from goods viewpoint as
"selling coffee machines."
• They redefined their business from a service perspective
where the coffee machine is more of a peripheral good
• They decided to lease coffee machines/provide daily
replenishment of the coffee and maintenance of the
machine for a contracted service fee
• This "primary leasing service" was offered to organizations
that sold more than 50 cups of coffee per day
• The results were greatly increased Nestle coffee sales, new
revenue opportunities, and much stronger profits
• Nestle's service vision of their business required a completely
new service and logistical value chain capability.
 Buhrke Industries, Inc. Value Chain
• Buhrke Industries Inc., located in Arlington Heights Illinois,provides stamped metal parts to many
industries, including automotive, appliance, computer, electronics, hardware, housewares, power
tools, medical, and telecommunications.
• Its objective is to be-customer’s best total value producer with on-time delivery, fewer rejects, and
high-quality stampings.
• However, the company goes beyond manufacturing goods; it prides itself in providing the best service
available as part of its customer value chain
• Service is more than delivering a product on-time. It's also partnering with customers by providing
personalized service for fast, accurate response; customized engineering designs to meet customer
needs; preventive maintenance systems to ensure high machine uptime; experienced, highly trained,
long-term employees; and troubleshooting by a
• knowledgeable sales staff.
 Value Chain and Supply Chain
• A value chain is broader in scope than a supply
chain, and encompasses all pre-and post prodn.
Services to create and deliver the entire customer
benefit package.
• Value chain views an organization from customer's
perspective—the integration of goods and services
to create value—while a supply chain is more
internally-focused on the creation of physical goods
P&G’s Supply Chain
 Session-4

Value Chain Interpretations/Decisions

Offshoring
Issues of Value Chain in Globalized
Environment
Sustainable Value Chain
 Value Chain Decisions
• Value chain integration is the process of managing information,
physical goods, and services to ensure their availability at the right
place, at the right time, at the right cost, at the right quantity, and
with the highest attention to quality.
• Outsourcing-process of having suppliers provide goods and services
that were previously provided internally
• Vertical integration-process of acquiring and consolidating elements
of a value chain to achieve more control
• Outsourcing is the opposite of Vertical integration
• Backward integration refers to acquiring capabilities at the front-end
of the supply chain (for instance, suppliers)
• Forward integration refers to acquiring capabilities toward the back-
end of the supply chain (forinstance, distribution or even customers)
• Companies must decide whether to integrate backward (acquiring
suppliers) or forward (acquiring distributors), or both
 Three types of Outsourcing
• First wave is Goods Producing Jobs to China, Korea etc

• Second Wave involves simple service work, such as standard

credit card processing, billing and other forms of transaction
processing, keying information into computers, and writing
simple software programs. Accenture, for example, does
much of its bookkeeping operations in Costa Rica

• The third, and current wave, involves skilled knowledge

work, such as engineering design, graphic artists,
architectural plans, call center, customer service
representatives, and computer, chip design. For example,
Massachusetts General Hospital uses radiologists located in
Bangalore, India, to interpret CT scans.
Outsourcing goods & Breakeven analysis-solved problem
Problem
Suppose that a manufacturer
needs to produce a custom
aluminum housing for a special
customer order. Because it
currently does not have the
equipment necessary to make the
housing, it would have to acquire
machines and tooling at a fixed
cost (net of salvage value after the
project is completed) of $250,000.
The variable cost of production is
estimated to be $20 per unit. The
firm can outsource the housing to
a metal fabricator at a cost of $35
per unit. The customer order is for
12,000 units.
What should they do?
Solution
VC1 =Variable cost/unit if
produced = $20
VC2 =Variable cost/unit if
outsourced = $35
FC = fixed costs associated with
producing the part = $250,000
Q = quantity produced
Using Equation Q=FC/(VC2-VC1)
Q = 250,000/($35 - $20) = 16,667
In this case, because the customer
order is for only 12,000 units
which is less than the break-even
point, the least cost decision is to
outsource the component.
 Value Chain Integration-Services
• Where value is in the form of low prices, access to to
special time-sensitive deals and travel packages,
convenience, —takes many forms. Some examples:
• Travel Industry: Global Distribution System(GDS) and
Advanced Passenger Information system(API). Make my
Trip and Clear Trip, Thomas Cook
• Financial services use information networks provided
by third-party information technology integrators, such
as AT&T, Sprint, IBM, and Verizon, to coordinate their
value chains
• Hospitals also use third-party integrators for both their
information and physical goods, such as managing
patient billing and hospital inventories
 Offshoring
• Offshoring is the building, acquiring, or moving of
process capabilities from a domestic to location in
another country while maintaining ownership and control. According to one framework, foreign
factories can be classified into one of six categories
– Offshore factories established to gain access to low wages and other ways to reduce
costs, such as avoiding trade tariffs
– Outpost factories established primarily to gain access to local employee skills and
knowledge including software programming or call center service management
– Server factories established to supply specific national or regional markets
– Source factories, like offshore factories, established to gain access to low cost
production but also have the expertise to design and produce a component part for the
company's global value chain
– Contributor factories established to serve a local market and conduct activities like
product design and customization. Primary manufacturing, accounting, engineering
design, and marketing and sales processes often reside at contributor factories
– Lead factories established to innovate and create new processes, products, and
technologies. Lead factories must have the skills and knowledge to design and
manufacturer "the next generation of products”
Four degrees of Offshoring Scenarios
Some Issues to be considered for offshoring
Difficulties in Managing complex Global Value Chains
• Higher levels of risk
• Uncertainty, requiring more
inventory
• Day-to-day monitoring to
prevent product
• Shortages
• Workforce disruptions, such
as labor strikes
• Government turmoil in
foreign countries can create
inventory shortages
• disrupting surges in orders.
• Complex transportation chains
• Tracing global shipments
• Normally involves more than
one mode of transportation
• Involves foreign company
• Transportation infrastructure
may vary considerably from
coast to interior parts
• Change in sources of supply
• Change in regional economies
• Change in governments change
• Disputes and Legal challenges
relating to price fixing and
quality defects
 Rocky Shoes and Boots Company
• RS&B began making boots in 1932 as the William Brooks Shoe Company with an average wage rate
of 28 cents per hour. In the 1960s, Rocky Shoes & Boots were 100% "Made in USA
• In 1960, more than 95 percent of all shoes sold in America were made in America.Timberland,
Wolverine, and Rocky are popular brand names for this shoe market segment
• Rocky profit margins are only about 2 percent on sales of over $100 million while Timberland
sales top $1 billion and have a 9 percent profit margin.
• After seventy years in Nelsonville, the main factory closed in 2002. At that time, local labor
• costs were about $11 per hour without benefits, while in Puerto Rico the hourly rate was $6; $1.25
in the Dominican Republic; and 40 cents in China.
• The price of boots continues to decline globally from roughly $95 a pair to $85, and is heading
toward $75.
• The grandson of the founder of RS&B said,"We've got to get there, or we're not going to be able to
compete."
 Rocky Shoes and Boots Company
• Leather is produced in Australia and then shipped to the
Dominican Republic.
• Outsoles are purchased in China and shipped to Puerto
Rico.
• Gor-Tex fabric waterproofing materials made in the United
States.
• Shoe uppers are cut and stitched in the Dominican
Republic,and then shipped to Puerto Rico.
• Final shoe assembly is done at the Puerto Rico factory.
• The finished boots are packed and shipped to the
warehouse in Nelsonville, Ohio.
• Customer orders are filled and shipped to individual stores
and contract customers from Nelsonville.