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Learning Objectives (2 of 2)
1.4 Compute single-factor productivity
1.5 Compute multifactor productivity
1.6 Identify the critical variables in enhancing productivity
What Is Operations Management?
Production is the creation of goods and services
Operations management (OM) is the set of activities that
create value in the form of goods and services by
transforming inputs into outputs
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Organizing to Produce Goods and Services
• Essential functions:
1. Marketing – generates demand
2. Production/operations – creates the product
3. Finance/accounting – tracks how well the organization
is doing, pays bills, collects the money
Organizational Charts (1 of 3)
Figure 1.1 Organization Charts for Two Service Organizations and One
Manufacturing Organization
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Organizational Charts (2 of 3)
Figure 1.1 [continued]
Organizational Charts (3 of 3)
Figure 1.1 [continued]
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The Supply Chain
• A global network of organizations and activities that
supply a firm with goods and services
• Members of the supply chain collaborate to achieve high
levels of customer satisfaction, efficiency and competitive
advantage
Figure 1.2 Soft Drink Supply Chain
Why Study OM?
1. OM is one of three major functions of any organization;
we want to study how people organize themselves for
productive enterprise
2. We want (and need) to know how goods and
services are produced
3. We want to understand what operations managers do
4. OM is such a costly part of an organization
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Table 1.1 Options for Increasing
Contribution
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What Operations Managers Do
Basic Management Functions
• Planning
• Organizing
• Staffing
• Leading
• Controlling
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Ten Strategic Decisions
Table 1.2 Ten Strategic Operations Management Decisions
Decision Chapter(s)
1. Design of goods and services 5, Supplement 5
2. Managing quality 6, Supplement 6
3. Process and capacity strategy 7, Supplement 7
4. Location strategy 8
5. Layout strategy 9
6. Human resources and job design 10
7. Supply-chain management 11, Supplement 11
8. Inventory management 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17
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The Strategic Decisions (1 of 5)
1. Design of goods and services
– Defines what is required of operations
– Product design determines quality, sustainability and
human resources
2. Managing quality
– Determine the customer’s quality expectations
– Establish policies and procedures to identify and
achieve that quality
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The Strategic Decisions (2 of 5)
3. Process and capacity design
– How is a good or service produced?
– Commits management to specific technology, quality,
resources, and investment
4. Location strategy
– Nearness to customers, suppliers, and talent
– Considering costs, infrastructure, logistics, and
government
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The Strategic Decisions (3 of 5)
5. Layout strategy
– Integrate capacity needs, personnel levels,
technology, and inventory
– Determine the efficient flow of materials, people, and
information
6. Human resources and job design
– Recruit, motivate, and retain personnel with the
required talent and skills
– Integral and expensive part of the total system design
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The Strategic Decisions (4 of 5)
7. Supply chain management
– Integrate supply chain into the firm’s strategy
– Determine what is to be purchased, from whom, and
under what conditions
8. Inventory management
– Inventory ordering and holding decisions
– Optimize considering customer satisfaction, supplier
capability, and production schedules
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The Strategic Decisions (5 of 5)
9. Scheduling
– Determine and implement intermediate- and short-
term schedules
– Utilize personnel and facilities while meeting
customer demands
[Link]
– Consider facility capacity, production demands, and
personnel
– Maintain a reliable and stable process
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Contributions from
• Industrial engineering
• Statistics
• Management
• Economics
• Physical sciences
• Information technology
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Operations for Goods and Services (1 of 2)
Services – Economic activities that typically produce an
intangible product (such as education, entertainment,
lodging, government, financial, and health services)
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Operations for Goods and Services (2 of 2)
• Manufacturers produce tangible product, services often
intangible
• Operations activities often very similar
• Distinction not always clear
• Few pure services
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Table 1.3 Differences between Goods and
Services
Characteristics of Services Characteristics of Goods
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Beauty salon Product can usually be kept in inventory
produces a haircut that is consumed as it is produced (beauty care products)
Unique: Your investments and medical care are unique Similar products produced (iPods)
High customer interaction: Often what the customer is Limited customer involvement in production
paying for (consulting, education)
Inconsistent product definition: Auto Insurance Product standardized (iPhone)
changes with age and type of car
Often knowledge based: Legal, education, and medical Standard tangible product tends to make
services are hard to automate automation feasible
Services dispersed: Service may occur at retail store, Product typically produced at a fixed facility
local office, house call, or via internet.
Quality may be hard to evaluate: Consulting, Many aspects of quality for tangible products
education, and medical services are easy to evaluate (strength of a bolt)
Reselling is unusual: Musical concert or medical care Product often has some residual value
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Productivity Challenge
Productivity is the ratio of outputs (goods and services)
divided by the inputs (resources such as labor and capital)
The objective is to improve productivity!
Important Note!
Production is a measure of output only and not a measure
of efficiency
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The Economic System
Figure 1.6 The Economic System Adds Value by
Transforming Inputs to Outputs
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Improving Productivity at Starbucks (1 of 2)
A team of 10 analysts continually
look for ways to shave time. Some
improvements:
Stop requiring signatures on Saved 8 seconds per
credit card purchases under $25 transaction
Saved 14 seconds per
Change the size of the ice scoop drink
Saved 12 seconds per
New espresso machines
shot
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Improving Productivity at Starbucks (2 of 2)
Operations improvements have helped Starbucks increase
yearly revenue per outlet by $250,000 to $1,000,000.
Productivity has improved by 27%, or about 4.5% per year.
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Productivity
Units produced
Productivity =
Input used
• Measure of process improvement
• Represents output relative to input
• Only through productivity increases can our standard of
living improve
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Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor - hours used
1,000
= = 4 units / labor - hour
250
One resource input single-factor productivity
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Multi-Factor Productivity
Output
Multifactor =
Labor + Material + Energy + Capital + Miscellaneous
• Also known as total factor productivity
• Output and inputs are often expressed in dollars
Multiple resource inputs multi-factor productivity
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Collins Title Productivity (1 of 4)
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
8 titles / day
Old labor productivity = = .25 titles / labor - hr
32 labor - hrs
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Collins Title Productivity (2 of 4)
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
8 titles / day
Old labor productivity = = .25 titles / labor - hr
32 labor - hrs
14 titles / day
New labor productivity = = .4375 titles / labor - hr
32labor - hrs
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Collins Title Productivity (3 of 4)
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
8 titles / day
Old multifactor productivity = = .0077 titles / dollar
$640 + 400
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Collins Title Productivity (4 of 4)
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
8 titles / day
Old multifactor productivity = = .0077 titles / dollar
$640 + 400
14 titles / day
New multifactor productivity = = .0097 titles / dollar
$640 + 800
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Measurement Problems
1. Quality may change while the quantity of inputs and
outputs remains constant
2. External elements may cause an increase or decrease
in productivity
3. Precise units of measure may be lacking
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Productivity Variables
1. Labor - contributes about 10% of
the annual increase
2. Capital - contributes about 38%
of the annual increase
3. Management - contributes about
52% of the annual increase
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Key Variables for Improved Labor
Productivity
1. Basic education appropriate for the labor force
2. Diet of the labor force
3. Social overhead that makes labor available
– Challenge is in maintaining and enhancing skills in
the midst of rapidly changing technology and
knowledge
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Management
• Ensures labor and capital are effectively used to increase
productivity
– Use of knowledge
– Application of technologies
• Knowledge societies
– Labor has migrated from manual work to technical
and information-processing tasks
• More effective use of technology, knowledge, and capital
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Productivity in the Service Sector
• Productivity improvement in services is difficult because:
1. Typically labor intensive
2. Frequently focused on unique individual attributes or
desires
3. Often an intellectual task performed by professionals
4. Often difficult to mechanize and automate
5. Often difficult to evaluate for quality
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Current Challenges in OM
• Globalization
• Supply-chain partnering
• Sustainability
• Rapid product development
• Mass customization
• Lean operations
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Ethics, Social Responsibility, and
Sustainability (1 of 2)
Challenges facing operations managers:
• Develop and produce safe, high-quality green products
• Train, retrain, and motivate employees in a safe
workplace
• Honor stakeholder commitments
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Ethics, Social Responsibility, and
Sustainability (2 of 2)
Stakeholders
Those with a vested interest in an organization, including
customers, distributors, suppliers, owners, lenders,
employees, and community members.
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Improve the Supply Chain
• Locating facilities closer to unique resources
– Auto design to California
– Athletic shoe production to China
– Perfume manufacturing in France
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Reduce Costs
• Risks associated with currency exchange rates
• Reduce direct and indirect costs
• Trade agreements can lower tariffs
– Maquiladoras
– World Trade Organization (WTO)
– North American Free Trade Agreement (NAFTA)
– APEC, SEATO, MERCOSUR, CAFTA
– European Union (EU)
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Improve Operations
• Understand differences between how business is
handled in other countries
– Japanese – inventory management
– Germans – robots
– Scandinavians – ergonomics
• International operations can improve response time and
customer service
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Understand Markets
• Interacting with foreign customers, suppliers, competition
can lead to new opportunities
– Cell phone design moved from Europe to Japan
– Extend the product life cycle
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Improve Products
• Remain open to free flow of ideas
• Toyota and BMW manage joint research and
development
– Reduced risk, state-of-the-art design, lower costs
• Samsung and Bosch jointly produce batteries
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Attract and Retain Global Talent
• Offer better employment opportunities
– Better growth opportunities and insulation against
unemployment
– Relocate unneeded personnel to more prosperous
locations
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Cultural and Ethical Issues
• Social and cultural behavior differs
• International laws, agreements, codes of conduct for
ethical behaviors
• Mobility of capital, information, goods, and people
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Companies Want To Consider
• National literacy rate • Work ethic
• Rate of innovation • Tax rates
• Rate of technology • Inflation
change
• Availability of raw materials
• Number of skilled workers
• Interest rates
• Political stability
• Population
• Product liability laws
• Transportation infrastructure
• Export restrictions
• Communication system
• Variations in language
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Match Product and Parent
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Match Product and Country
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Developing Missions and Strategies
• Mission statements tell an organization where it is going
• The Strategy tells the organization how to get there
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Mission
• Mission - where is the organization going?
– Organization’s purpose for being
– Answers “What do we contribute to society?”
– Provides boundaries and focus
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Figure 2.2 Mission Statements for
Organization (2 of 3)
PepsiCo
Our mission is to be the world's premier consumer products
company focused on convenient foods and beverages. We
seek to produce financial rewards to investors as we
provide opportunities for growth and enrichment to our
employees, our business partners and the communities in
which we operate. And in everything we do, we strive for
honesty, fairness and integrity.
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Factors Affecting Mission
Mission
• Philosophy and Values
• Profitability and Growth
• Environment
• Customers
• Public Image
• Benefit to Society
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Strategic Process
• Organization’s Mission
– Functional Area Missions
▪ Marketing
▪ Operations
▪ Finance/Accounting
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Figure 2.3 Sample Missions for a Company, the
Operations Function, and Major OM Departments (1 of 4)
Sample Company Mission
To manufacture and service an innovative, growing, and
profitable worldwide microwave communications business
that exceeds our customers’ expectations.
Sample Operations Management Mission
To produce products consistent with the company’s
mission as the worldwide low-cost manufacturer.
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Figure 2.3 Sample Missions for a Company, the
Operations Function, and Major OM Departments (2 of 4)
Sample OM Department Missions
Product design To design and produce products and services
with outstanding quality and inherent customer
value.
Quality management To attain the exceptional value that is consistent
with our company mission and marketing
objectives by close attention to design,
procurement, production, and field service
operations
Process design To determine, design, and produce the
production process and equipment that will be
compatible with low-cost product, high quality,
and good quality of work life at economical cost.
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Figure 2.3 Sample Missions for a Company, the
Operations Function, and Major OM Departments (3 of 4)
Location To locate, design, and build efficient and
economical facilities that will yield high value
to the company, its employees, and the
community.
Layout design To achieve, through skill, imagination, and
resourcefulness in layout and work methods,
production effectiveness and efficiency while
supporting a high quality of work life.
Human resources To provide a good quality of work life, with
well-designed, safe, rewarding jobs, stable
employment, and equitable pay, in exchange
for outstanding individual contribution from
employees at all levels.
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Figure 2.3 Sample Missions for a Company, the
Operations Function, and Major OM Departments (4 of 4)
Supply-chain To collaborate with suppliers to develop
management innovative products from stable, effective, and
efficient sources of supply.
Inventory To achieve low investment in inventory
consistent with high customer service levels and
high facility utilization.
Scheduling To achieve high levels of throughput and timely
customer delivery through effective scheduling.
Maintenance To achieve high utilization of facilities and
equipment by effective preventive maintenance
and prompt repair of facilities and equipment.
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Strategy
• Action plan to achieve mission
• Functional areas have strategies
• Strategies exploit opportunities and strengths, neutralize
threats, and avoid weaknesses
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Strategies for Competitive Advantage
1. Differentiation – better, or at least different
2. Cost leadership – cheaper
3. Response – more responsive
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Competing on Differentiation
Uniqueness can go beyond both the physical
characteristics and service attributes to encompass
everything that impacts customer's perception of value
• Safeskin gloves – leading edge products
• Walt Disney Magic Kingdom – experience differentiation
• Hard Rock Cafe – dining experience
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Experience Differentiation
Engaging a customer with a product through imaginative
use of the five senses, so the customer “experiences” the
product
• Theme parks use sight, sound, smell, and participation
• Movie theatres use sight, sound, moving seats, smells,
and mists of rain
• Restaurants use music, smell, and open kitchens
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Competing on Cost
Provide the maximum value as perceived by customer.
Does not imply low quality.
• Southwest Airlines – secondary airports, no frills service,
efficient utilization of equipment
• Walmart – small overhead, shrinkage, and distribution
costs
• Franz Colruyt – no bags, no bright lights, no music, and
doors on freezers
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Competing on Response
• Flexibility is matching market
changes in design innovation
and volumes
– A way of life at Hewlett-
Packard
• Reliability is meeting schedules
– German machine industry
• Quickness in design,
production, and delivery
– Johnson Electric, Pizza Hut
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OM’s Contribution to Strategy
Figure 2.4 Achieving Competitive Advantage Through Operations
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Issues in Operations Strategy
• Resources view
• Value-chain analysis
• Porter’s Five Forces model
• Operating in a system with many external factors
• Constant change
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Figure 2.5 Product Life Cycle (1 of 2)
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Figure 2.5 Product Life Cycle (2 of 2)
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SWOT Analysis
Analysis
• Internal Weaknesses
• Internal Strengths
• Mission
• External Opportunities
• External Threats
• Strategy
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Figure 2.6 Strategy Development Process
Analyze the Environment
• Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and
competitors.
Determine the Corporate Mission
• State the reason for the firm’s existence and identify the value
it wishes to create.
Form a Strategy
• Build a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability, after-
sale service, broad product lines.
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Strategy Development and Implementation
• Identify key success factors
• Integrate OM with other activities
• Build and staff the organization
The operations manager’s job is to implement an OM
strategy, provide competitive advantage, and increase
productivity
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Key Success Factors
Figure 2.7 Implement Strategy by Identifying and Executing Key
Success Factors That Support Core Competencies
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Activity Mapping at Southwest Airlines (1 of 7)
Figure 2.8 Activity Mapping at Southwest Airlines’ Low-Cost
Competitive Advantage
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Activity Mapping at Southwest Airlines (2 of 7)
Figure 2.8 [continued]
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Activity Mapping at Southwest Airlines (3 of 7)
Figure 2.8 [continued]
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Activity Mapping at Southwest Airlines (4 of 7)
Figure 2.8 [continued]
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Activity Mapping at Southwest Airlines (5 of 7)
Figure 2.8 [continued]
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Activity Mapping at Southwest Airlines (6 of 7)
Figure 2.8 [continued]
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Activity Mapping at Southwest Airlines (7 of 7)
Figure 2.8 [continued]
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Implementing Strategic Decisions (1 of 2)
Table 2.1 Operations Strategies of Two Drug Companies
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Implementing Strategic Decisions (2 of 2)
Table 2.1 [continued]
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Strategic Planning, Core Competencies,
and Outsourcing (1 of 2)
• Outsourcing – transferring activities that traditionally
been internal to external suppliers
• Accelerating due to
1) Increased technological expertise
2) More reliable and cheaper transportation
3) Rapid development and deployment of advancements
in telecommunications and computers
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Strategic Planning, Core Competencies,
and Outsourcing (2 of 2)
• Subcontracting - contract manufacturing
• Outsourced activities
– Legal services
– IT services
– Travel services
– Payroll
– Production
– Surgery
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Theory of Comparative Advantage
• If an external provider can perform activities more
productively than the purchasing firm, then the external
provider should do the work
• Purchasing firm focuses on core competencies
• Drives outsourcing
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Risks of Outsourcing
Table 2.2 Potential Advantages and Disadvantages of Outsourcing
Advantages Disadvantages
Cost savings Increased logistics and inventory
costs
Gaining outside expertise that Loss of control (quality, delivery, etc.)
comes with specialization
Improving operations and service Potential creation of future
competition
Maintaining a focus on core Negative impact on employees
competencies
Accessing outside technology Risks may not manifest themselves
for years
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Rating Outsourcing Providers
• Insufficient analysis most common reason for failure
• Factor-rating method
• Points and weights assigned for each factor to each
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Rating Provider Selection Criteria
Table 2.3 Factor Ratings Applied to National Architects’s Potential IT
Outsourcing Providers
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Global Operations Strategy Options (1 of 8)
Figure 2.9 Four International Operations Strategies
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Global Operations Strategy Options (2 of 8)
Figure 2.9 [continued]
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Global Operations Strategy Options (3 of 8)
Figure 2.9 [continued]
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Global Operations Strategy Options (4 of 8)
Figure 2.9 [continued]
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Global Operations Strategy Options (5 of 8)
Figure 2.9 [continued]
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Global Operations Strategy Options (6 of 8)
Figure 2.9 [continued]
68
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