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Operations Management: Processes and

Supply Chains
Thirteenth Edition

Chapter 1
Using Operations to Create
Value

Learning Goals (1 of 2)

1.1 Describe the role of operations in an organization and

its historical evolution over time.
1.2 Describe the process view of operations in terms of
inputs, processes, outputs, information flows, suppliers,
and customers.
1.3 Describe the supply chain view of operations in terms
of linkages between core and support processes.
1.4 Define an operations strategy and its linkage to
corporate strategy and market analysis.

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Learning Goals (2 of 2)
1.5 Identify nine competitive priorities used in operations
strategy and explain how a consistent pattern of decisions
can develop organizational capabilities.
1.6 Identify the latest trends in operations management and
understand how firms can address the challenges facing
operations and supply chain managers in a firm.
1.7 Define the fourth industrial revolution (Industry 4.0) and
understand how its embedded technologies and
automation are transforming the practice of operations and
supply chain management.
1.8 Understand how to develop skills for your career using
this textbook.

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Disney
• Disney constantly evaluates and improves its processes to enhance
customer experience. One of its recent innovations is a $1 billion
comprehensive reservation and ride-planning system that can allow guests
to book rides months in advance through a website or a smartphone app.

• MagicBands, link electronically to centralized databases and can be used as

admission tickets, credit or debit cards, or hotel room keys. Just by tapping
them against electronic sensors, these MagicBands also become a form of
payment for food, entertainment, and merchandise.

• Data from these wristbands can help Disney determine when to add more
staff to which rides, decide how many employees in costumes should roam
around at which locations in the park, determine restaurant menus

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What is Operations Management?

• Operations Management
– The systematic design, direction, and control of
processes that transform inputs into services and
products for internal, as well as external, customers

Operations Management

• Process
– Any activity or group of activities that takes one or
more inputs, transforms them, and provides one or
more outputs for its customers
• Operation
– A group of resources performing all or part of one or
more processes

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What is Supply Chain Management?

• Supply Chain Management

– The synchronization of a firm’s processes with those
of its suppliers and customers to match the flow of
materials, services, and information with customer
demand

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Supply Chain Management

• Supply Chain
– An interrelated series of processes within and across
firms that produces a service or product to the
satisfaction of customers

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Role of Operations in an Organization

Figure 1.1 Integration between Different Functional Areas of a
Business

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How Processes Work (1 of 2)

Figure 1.2 Processes and Operations

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How Processes Work (2 of 2)

• Every process and every person in the organization

has customers
– External customers
– Internal customers
• Every process and every person in the organization
relies on suppliers
– External suppliers
– Internal suppliers

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Nested Processes

• Nested Process
– The concept of a process within a process

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Service and Manufacturing Processes (1 of 2)

Differ Across Nature of Output and Degree of Customer Contact
Figure 1.3 Continuum of Characteristics of Manufacturing and
Service Processes

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Service and Manufacturing Processes (2 of 2)

• Physical, durable output • Output cannot be

inventoried
• Output can be inventoried
• High customer contact
• Low customer contact
• Short response time
• Long response time
• Labor intensive
• Capital intensive
• Quality not easily
• Quality easily measured
measured
• Intangible, perishable output

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The Supply Chain View (1 of 6)

Each activity in a process should add value to the preceding
activities; waste and unnecessary cost should be eliminated.
Figure 1.4 Supply Chain Linkages Showing Work and Information Flows

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The Supply Chain View (2 of 6)

Supplier relationship process – A process that selects the
suppliers of services, materials, and information and facilitates
the timely and efficient flow of these items into the firm
Figure 1.4 [continued]

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The Supply Chain View (3 of 6)

New service/product development – A process that designs and
develops new services or products from inputs received from
external customer specifications or from the market in general
through the customer relationship process
Figure 1.4 [continued]

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The Supply Chain View (4 of 6)

Order fulfillment process – A process that includes the activities
required to produce and deliver the service or product to the
external customer
Figure 1.4 [continued]

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The Supply Chain View (5 of 6)

Customer relationship process – A process that identifies,
attracts and builds relationships with external customers and
facilitates the placement of orders by customers (customer
relationship management)
Figure 1.4 [continued]

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The Supply Chain View (6 of 6)

Support Processes - Processes like Accounting, Finance,
Human Resources, Management Information Systems and
Marketing that provide vital resources and inputs to the core
processes
Figure 1.4 [continued]

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Supply Chain Process

• Supply Chain Processes

– Business processes that have external customers or
suppliers
– Examples
▪ Outsourcing
▪ Warehousing
▪ Sourcing
▪ Customer Service
▪ Logistics
▪ Crossdocking

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Operations Strategy (1 of 3)

• Operations Strategy
– The means by which operations implements the
firm’s corporate strategy and helps to build a
customer-driven firm

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Operations Strategy (2 of 3)
Figure 1.5 Connection Between Corporate Strategy and Key Operations Management Decisions

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Corporate Strategy

• Corporate Strategy
– Provides an overall direction that serves as the
framework for carrying out all the organization’s
functions
▪ Environmental Scanning
▪ Core Competencies
– Workforce, Facilities, Market and Financial
Know-how, Systems and Technology
▪ Core Processes
▪ Global Strategies

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Market Analysis

• Market Analysis
– Understanding what the customers want and how to
provide it.
▪ Market Segmentation
▪ Needs Assessment

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Competitive Priorities and Capabilities

Competitive Priorities
• The critical dimensions that a process or supply chain
must possess to satisfy its internal or external customers,
both now and in the future.
Competitive Capabilities
• The cost, quality, time, and flexibility dimensions that a
process or supply chain actually possesses and is able to
deliver.

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Order Winners and Qualifiers

Order Winners
• A criterion customers use to differentiate the services or
products of one firm from those of another.
Order Qualifiers
• Minimum level required from a set of criteria for a firm to
do business in a particular market segment.

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Order Winners and Qualifiers (1 of 3)

Table 1.3 Definitions, Process Considerations, and Examples of
Competitive Priorities
Cost Definition Process Considerations Example
1. Low-cost Delivering a service or Processes must be designed Costco
operations a product at the lowest and operated to make them
possible cost efficient

Quality Definition Process Considerations Example

2. Top quality Delivering an May require a high level of Rolex
outstanding service or customer contact and may
product require superior product
features
3. Consistent Producing services or Processes designed and McDonald’s
quality products that meet monitored to reduce errors
design specifications and prevent defects
on a consistent basis

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Order Winners and Qualifiers (2 of 3)

Table 1.3 [continued]
Time Definition Process Considerations Example
4. Delivery speed Quickly filling a Design processes to reduce Netflix
customer’s order lead time
5. On-time delivery Meeting delivery-time Planning processes used to United
promises increase percent of customer Parcel
orders shipped when Service
promised (UPS)
6. Development Quickly introducing a Process involve cross- Zara
speed new service or a functional integration and
product involvement of critical
external suppliers

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Order Winners and Qualifiers (3 of 3)

Table 1.3 [continued]
Flexibility Definition Process Considerations Example
7. Customization Satisfying the unique Processes typically have Ritz Carlton
needs of each low volume, close customer
customer by contact, and can be easily
changing service or reconfigured to meet
product designs unique customer needs
8. Variety Handling a wide Processes are capable of Amazon.com
assortment of larger volumes than
services or products processes supporting
efficiently customization
9. Volume Accelerating or Processes must be The United
flexibility decelerating the rate designed for excess States Postal
of production of capacity and excess Service (USPS)
services or products inventory
quickly to handle
large fluctuations in
demand

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Relationship of Order Winners to

Competitive Priorities
Figure 1.6 Relationship of Order Winners to Competitive Priorities

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Relationship of Order Qualifiers to

Competitive Priorities
Figure 1.6 Relationship of Order Qualifiers to Competitive Priorities

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Operations Strategy (3 of 3)
Table 1.5 Operations Strategy Assessment of the Billing and Payment Process

Competitive
Priority Measure Capability Gap Action
Low-cost Cost per billing $0.0813 Target is $0.06 Eliminate microfilming and
operations statement storage of billing statements
Weekly postage $17,000 Target is $14,000 Develop Web-based process
Low-cost operations

for posting bills

Consistent Percent errors in bill 90% Acceptable No action
quality information
Percent errors in 74% Acceptable No action
Consistent quality

posting payments
Delivery Lead time to 48 hours Acceptable No action
speed process merchant
payments
Volume Utilization 98% Too high to support Acquire temporary
flexibility rapid increase in employees
volumes Improve work methods

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Trends and Challenges in Operations

Management (1 of 2)

• Measuring Productivity
Output
Productivity 
Input

• The Role of Management

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Example (1 of 2)

Calculate the productivity for the following operations:

a. Three employees process 600 insurance policies in a
week. They work 8 hours per day, 5 days per week.

Policies processed
Labor productivity 
Employee hours
600 policies

(3 employees)(40 hours employee)
 5 policies hour

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Example (2 of 2)

Calculate the productivity for the following operations:

b. A team of workers makes 400 units of a product, which
is sold in the market for $10 each. The accounting
department reports that for this job the actual costs are
$400 for labor, $1,000 for materials, and $300 for
overhead.
Value of output
Multifactor productivity =
Labor cost + Materials cost + Overhead cost

(400 units)($10 / unit) $4,000

= = = 2.35
$400 + $1,000 + $300 $1,700

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Application (1 of 2)

Blank This Year Last Year Year Before Last

Factory unit sales 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,000
Sales of manufactured products ($) $49,363 $40,831 —
Total manufacturing cost of sales ($) $39,000 $33,000 —

• Calculate the year-to-date labor productivity:

Blank This Year Last Year Year Before Last
factory
factoryunit
unitsales
sales 2,762,103 divided
2,762,103 2,475,738 divided 2,175,447
2,475,738 2,175,447 divided
divided by by 112,000= equals
24.66/hr by 113,000= 21.91/hr
equals by =$
115,000 18.91/hr
equals
employment 112,000 113,000 115,000
employment 24.66 per hour 21.91 per hour $18.91 per hour

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Application (2 of 2)
• Calculate the multifactor productivity:

Blank This Year Last Year

sales of manufacturing
sales of mfg products $49,363 divided by $39,000
$49,363 $40,831$40,831
divided by $33,000
products divided by total equals 1.27 = 1.27 equals 1.24 = 1.24
total mfg cost $39,000 $33,000
manufacturing cost

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Trends and Challenges in Operations

Management (2 of 2)

• Global Competition
• Ethical, Workforce Diversity, and Environmental Issues

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Fourth Industrial Revolution

(Industry 4.0) (1 of 4)

• Fourth Industrial Revolution (Industry 4.0)

– The ongoing automation of traditional manufacturing
and industrial practices using modern smart
technology
– Examples:
▪ Smart manufacturing technologies
▪ Smart products technologies
▪ Smart supply technologies
▪ Base technologies

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Fourth Industrial Revolution

(Industry 4.0) (2 of 4)

• Manufacturing Execution Systems (MES)

– Computerized systems used in manufacturing to track
and document the transformation of raw materials to
finished goods and optimize their production output
• Artificial Intelligence (AI)
– A constellation of technologies, from machine
learning to natural language processing, that allows
machines to sense, comprehend, act, and learn

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Fourth Industrial Revolution

(Industry 4.0) (3 of 4)

• Internet of Things (IoT)

– The interconnectivity of objects embedded with
software, sensors, and actuators that enable these
objects to collect and exchange data over a network
without requiring human intervention
– OM Applications
– Concerns and Barriers

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Fourth Industrial Revolution

(Industry 4.0) (4 of 4)

• Additive Manufacturing
– The technologies that build 3D objects by adding
layers of material such as plastic, metal, or concrete
– Operations and supply chain implications of AM
– Enablers of Adopting AM

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Developing Skills for Your Career (1 of 2)

Figure 1.7 Managing Processes, Customer Demand, and Supply Chains

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Developing Skills for Your Career (2 of 2)

• Adding Value with Process Innovation
– Examine processes from the perspective of the value they
add
• As you study operations management, keep two
principles in mind:
– Each part of an organization, not just the operations
function, must design and operate processes that are part
of a supply chain and deal with quality, technology, and
staffing issues.
– Each function of an organization has its own identity and
yet is connected with operations through shared
processes.

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Problem 1

Student tuition at Boehring University is $150 per semester

credit hour. The state supplements school revenue by $100
per semester credit hour. Average class size for a typical 3-
credit course is 50 students. Labor costs are $4,000 per
class, material costs are $20 per student per class, and
overhead costs are $25,000 per class.
a. What is the multifactor productivity ratio for this course
process?
b. If instructors work an average of 14 hours per week for
16 weeks for each 3-credit class of 50 students, what is the
labor productivity ratio?

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Problem 2

Natalie Attire makes fashionable garments. During a

particular week employees worked 360 hours to produce a
batch of 132 garments, of which 52 were “seconds”
(meaning that they were flawed). Seconds are sold for $90
each at Attire’s Factory Outlet Store. The remaining 80
garments are sold to retail distribution at $200 each.
What is the labor productivity ratio of this manufacturing
process?

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