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SEVENTH EDITION

Operations Management in the Supply Chain DECISIONS AN AND D CASES

Roger Schroeder | Susan Mey Meyer er Goldstein

Operations Management Manag ement in the the Supply Chain Decisions and Cases

The McGraw-Hill Education Series Operations and Decision Sciences

OPERATIONS MANAGEMENT Beckman and Rosenfield Operations Strategy: Competing in the 21st Century First Edition Benton Purchasing and Supply Chain Management Third Edition Bowersox, Closs, and Cooper Bowersox, Supply Chain Logistics Management Fifth Edition Brown and Hyer Managing Projects: A Team-Bas Team-Based ed Approach Second Edition Burt, Petcavage, and Pinkerton Supply Management Ninth Edition Cachon and Terwiesch Operations Management First Edition Cachon and Terwiesch Matching Supply with Demand: An Introduction to Operations Management Fourth Edition Finch Interactive Models for Operations and Supply Chain Management First Edition Fitzsimmons and Fitzsimmons Service Management: Operations, Strategy, Information Technolo Technology gy Eighth Edition Edition Gehrlein Operations Management Cases First Edition Harrison and Samson Technology Management First Edition

Hayen SAP R/3 Enterprise Software: An Introduction First Edition Hill Manufacturing Strategy: Text & Cases Third Edition Hopp Supply Chain Science First Edition Hopp and Spearman Factory Physics Third Edition

Simchi-Levi, Kaminsky, and Simchi-Levi Designing and Managing the Supply Chain: Concepts, Strategies, Case Studies Third Edition Sterman Business Dynamics: Systems Thinking and Modeling for a Complex World First Edition Stevenson Operations Management Twelfth Edition

Jacobs, Berry, Whybark, Whybark, and Vollmann Vollmann Manufacturing Planning & Control for Supply Chain Management Sixth Edition

Swink, Melnyk, Cooper, and Hartley Managing Operations Across the Supply Chain Third Edition

Jacobs and Chase Operations and Supply Chain Management Fourteenth Edition

Thomke Managing Product and Service Development: Text Text and Cases First Edition

Jacobs and Chase Operations and Supply Chain Management: The Core Fourth Edition

Ulrich and Eppinger Product Design and Development Sixth Edition

Jacobs and Whybark Whybark Why ERP? First Edition

Zipkin Foundations of Inventory Management First Edition

Johnson, Leenders, and Flynn Purchasing and Supply Management Fifteenth Edition

QUANTITATIVE METHODS AND MANAGEMENT MANAGEMEN T SCIENCE

Larson and Gray Project Management: The Managerial Process Sixth Edition

Hillier and Hillier Introduction to Management Science: A Modeling and Case Studies Approach with Spreadsheets Fifth Edition

Schroeder and Goldstein Operations Management in the Supply Chain: Decisions and Cases Seventh Edition

Stevenson and Ozgur Stevenson Introduction to Management Science with Spreadsheets First Edition

Operations Management in the Supply Chain Decisions and Cases

Seventh Edition

Roger G. Schroeder Susan Meyer Goldstein Carlson School of Management University Univers ity of Minnesota

OPERATIONS MANAGEMENT MANAGEMENT IN THE SUPPLY CHAIN: DECISION AND CASES, SEVENTH EDTION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2013, 2011, and 2008. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be availabl availablee to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LWI 21 20 19 18 17 ISBN 978-0-07-783543-9 MHID 0-07-783543-3 Chief Product Officer, SVP Products & Markets: G. Scott Virkler Vice President, General Manager, Products & Markets: Marty Markets: Marty Lange Managing Director: James Director: James Heine Brand Manager: Dolly Manager: Dolly Womack Womack Product Developer: Camille Corum Marketing Manager: Britney Manager: Britney Hermsen Director, Content Design & Delivery: Delivery: Linda Linda Avenarius Avenarius Program Manager: Mark Manager: Mark Christianson Christianson Content Project Managers: Melissa Managers: Melissa M. Leick, Bruce Gin, Gin, Timothy Cote Cote Buyer: Laura Buyer: Laura Fuller Fuller Design: Studio Montage, Inc. Content Licensing Specialists: Beth Specialists: Beth Thole Cover Image: © David Vernon/E+/Getty Images Compositor: Aptara® , Inc. Printer: LSC Printer: LSC Communications

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publicatio Cataloging-in-Publication n Data

Schroeder, Roger G., author. | Goldstein, Susan Meyer, author. | Operations management in the supply chain : decisions and cases / Roger G. Schroeder, Susan Meyer Goldstein, Carlson School of Management, University of Minnesota. Operations management Seventh edition. | Dubuque : McGraw-Hill Education, 2016. LCCN 2016043564 | ISBN 9780077835439 (alk. paper) | ISBN 0077835433 (alk. paper) LCSH: Production management. | Production management—Case studies. | Decision making. LCC TS155 .S334 2016 | DDC 658.5—dc23 LC record available at https://lccn.loc.gov/2016043564 https://lccn.loc.gov/2016043564 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered

To our families, whose encouragement and love we appreciate —Roger G. Schroeder —Susan Meyer Goldstein

About the Authors Roger G. Schroeder is the Frank A. Donaldson Chair in Operations Management Emeritus at the Curtis L. Carlson School of Management, University of Minnesota. He received a B.S. degree in Industrial Engineering with high distinction and a MSIE degree from the University of Minnesota, and a Ph.D. from Northwestern University. He held positions in the Carlson School of Management as Director of the Ph.D. program, Chair of the Operations and Management Science Department, and Co-Director of the Joseph M. Juran Center for Leadership in Quality. Professor Professor Schroeder has obtained research grants from the National Science Foundation, the Ford Foundation, and the American Production and Inventory Control Society. His research is in the areas of quality management, operations strategy, and high-performance manufacturing, and he is among the most widely published and cited researchers in the field of operations management. He has been selected as a member of the University of Minnesota Academy of Distinguished Teachers and is a recipient of the Morse Award for outstanding teaching. Professor Schroeder received the lifetime achievement achievem ent award in operations management from the Academy of Management, and he is a Fellow of the Decision Sciences Institute and a Fellow of the Production and Operations Management Society. Professor Professor Schroeder has consulted widely with numerous organizations, including 3M, Honeywell, General Mills, Motorola, Golden Valley Foods, and Prudential Life L ife Insurance Company. Company.

Susan Meyer Goldstein is Associate Professor in the Supply Chain and Operations Department at the Curtis L. Carlson School of Management, University of Minnesota. She earned a B.S. degree in Genetics and Cell Biology and an M.B.A. at the University of Minnesota and worked in the health care industry for several years. She later obtained a Ph.D. in operations management from Fisher College of Business at The Ohio State University. She has served on the faculty at the University of Minnesota since 1998 and was a Visiting Professor at the Olin Business School at Washington University University in St. Louis for two years. Her current research investigates the link between service process design and process performance, and she is currently working with a Minnesota hospital that has been achieving one of the lowest heart attack mortality rates in the United States. She is also interested in issues related to aging service workers, operations strategy, strategy, and service ser vice quality. quality. Her research has been published in Decision Sciences, Journal of Operations Management, and Production and Operations Management, among others. She is Associate Editor at Decisi Decision on Scienc Sciencee Journal, Quality Management Journal, and Service Industries Journal and serves on the editorial boards of many operations and service journals. She is the recipient of several research awards and research grants, and received the 2011 Carlson School of Management Teaching Award.

vi

Preface FEATURES Operations management is an exciting and vital field in today’s complex business world. Therefore, students in both MBA and undergraduate courses have an urgent need to understand operations—an essential function in every business. This textbook textbook on operations operations management management in the supply chain emphasizes decision makmaking in operations with a supply chain orientation. The text provides materials of interest to general business students and operations and supply chain management majors. By stressing cross-functional decision making, the text provides a unique and current business perspective for all students. This is the first text to incorporate cross-functional decision making in every chapter. A unique unique decision decision framework organizes the material by grouping decisions into five major categories: process, quality, capacity, inventory, and supply chain. This framework is intended to make it easy for students to understand the decision role and responsibilities of operations and supply chain management in relation to functions such as marketing and finance. See the illustration below. The text also provides a balanced treatment of both service and manufacturing firms. fir ms. We continue to emphasize operations in the supply chain with new chapters on sourcing and logistics. The most current knowledge knowledge is incorpora incorporated, ted, including global operations, supply chain management, e-operations, service blueprinting, bluepr inting, competency-based strategy, strategy, Six Sigma, lean systems, 3D printing, sustainability, supply chain risk, and mass customization. Complete coverage is also provided on traditional topics, including process design, service systems, quality management, ERP, inventory control, and scheduling. While covering covering the concepts of operations and supply chain management in 18 chapters, the book also provides 18 case studies. The cases are intended to strengthen problem formulation skills and illustrate the concepts presented in the text. Long and short case studies are included. The cases are not just large problems or examples; rather, they are substantial management case studies, including some from the Northwestern, Sheffield, Cranfield, and The Case Centre collections. The softcover edition with fewer pages than most introductor introductory y books covers covers all the essentials students need to know about operations management in the supply chain, leaving out only superfluous and tangential topics. By limiting the size of the book, we have condensed the material to the basics. The book is also available for the first time in digital formats in Connect and LearnSmart versions.

Decision-making framework for operations in the supply chain.

Human Resources

Supply Chain Decisions

Finance Process

Suppliers

Customers Inventory

Information Systems

Quality

Marketing

Capacity Accounting

vii

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Preface

This book book is ideal for for regular operations management courses and and also case courses and modular courses. It is particularly useful for those who desire a cross-functional and decision-making perspective that reaches across the supply chain. Instructors can easily supplement the text with their own cases, readings, or course materials as desired. The Connect Connect Library and Instructor Resources Resources contain 20 Excel templates designed to assist in solving problems at the end of chapters and the case studies. These resources also contain technical chapters on linear programming, simulation, transportation method, and queuing, which can be assigned by the instructor, if desired. The resources have PowerPoint slides, solutions manual, the test bank, and web links to companies cited in the Student Internet Exercises in the text. Access to these web resources can be obtained from your McGraw-Hill sales representative or directly in the Connect Library. A number of pedagogical features are contained in this book.

x

e cel

∙ Operations Leader boxes are included in each chapter to illustrate current practices being implemented by leading firms. ∙ Each chapter contains at least three t hree Student Internet Exercises. These exercises allow for extended learning about concepts discussed in the chapter. ∙ Points of cross-functional emphasis are noted in each chapter by a special symbol—a handshake. This highlights the locations of cross-functional aspects of operations decisions. ∙ Solved problems are included at the end of quantitative chapters to provide additional examples for students. ∙ Excel spreadsheets are keyed keyed to specific problems at the t he end of chapters.

KEY CHANGES IN THE SEVENTH EDITION This book is known for its decision orientation and case studies. We have have strengthened the decision-making framework by addressing new decisions in sourcing, logistics, sustainability, and global supply chains. We We also added new cases to address these decisions. 1. Supply Chain Management. This edition added a new section on Supply Chain. It contains two new chapters on Sourcing and Global Logistics. The Sourcing chapter contains material on sourcing goals, outsourcing, offshoring, reshoring, supply base optimization, the purchasing cycle, and scorecard weighting. The Global Logistics chapter contains material on the role of logistics, transportation modes, distribution centers, logistics networks, location, t hird-party logistics, and logistics strategy. In addition, the Supply Chain Management chapter was moved to this section and updated to add a new section on supply chain risk and another new section on supply chain sustainability. This edition now has the latest and best supply chain material available. 2. Sustainability. More emphasis is given to sustainability. It is now covered in the chapters on The Operations Function, Operations and Supply Chain Strategy, Process Selection, and Supply Chain Management. A new case study is added on Murphy Warehouse: Sustainable Logistics. 3. Global. More material is provided on global operations and supply chains. With the addition of the Sourcing and Global Logistics chapters, global emphasis now moves beyond operations operations to the entire supply chain. New material on outsourcing, offshoring, and managing global supply chains has been added. New cases on global sourcing, global plant location, and global logistics are added.

Preface

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4. Other Additions. We have added materials on lean Six Sigma, 3D Printing, big data, analytics, ethics in sourcing, and disaster logistics. 5. Digital Versions. Digital versions of the text in McGraw-Hill’s Connect and LearnSmart have been developed. The Connect version provides a complete course management system for the instructor and pdf content for students. It can be used to customize the course by selecting learning objectives for course coverage, using the test bank for multiple choice questions, automatic grading for selected quantitative problems, and access to all instructor support materials. The LearnSmart version provides feedback to students via multiple choice probes for each learning objective. The student is directed to return to readings where retention is weak. 6. Cases. Eighteen case studies are provided including cases from The Case Centre, and Northwestern, Sheff ield, and Cranfield Universities. Existing cases have been revised to add current information. Ten new cases are added: Altimus Brands: Managing Procurement Risk; Murphy Warehouse Company: Sustainable Logistics; Polaris Industries Inc.—Global Plant Location; Shelter Box: A Decade of Disaster Relief; The Westerfield Physician Practice: Value Stream Mapping; Journey to Perfect: Perfect: Mayo Mayo Clinic Clinic and the Path to Quality; The Evolution to Lean Six Sigma in 3M, Inc.; Sage Hill Above Onion Creek: Focusing on Service Process and Qualilty; Toledo Custom Manufacturing: Quality Control; Best Homes: Forecasting

INSTRUCTOR INSTRUCT OR RESOURCES Instructor Resourc Resource e Center www.mhhe.com/schroeder7e www.mhhe.com/schroeder7e The Instructor Resource Center provides complete materials for study and review. At this book’s website, instructors have access to teaching support such as electronic files of the ancillary materials: Solutions Manual, Technical Chapters, Excel Spreadsheets, PowerPoint Lecture Slides, Digital Image Library, and Test Bank. Solutions Manual. Prepared by the authors, this manual contains solutions to all the

end-of-chapter problems and cases. Test Bank. Ban k. The Test Bank includes true/false, tr ue/false, multiple-choice, and discussion questions/

problems at varying levels of difficulty. EZ Test Online. All test bank questions are available in EZ Test Online, a flexible elec-

tronic testing program. The answers to all questions are given, along with a rating of the level of difficulty, chapter learning objective met, Bloom’s taxonomy question type, and the AACSB knowledge category. PowerPoint Lecture Slides. The PowerPoint slides draw on the highlights of each chapter

and provide an opportunity for the instructor instruct or to emphasize the key concepts in class discussions. Digital Image Library. All the figures in the book are included for insertion in Power-

Point slides or for class discussion.

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Preface

Excel Spreadsheets. Twenty Excel Spreadsheets are provided for students to solve des-

ignated problems at the end of chapters. Technical Chapters. Four technical chapters are provided for additional technical mate-

rial on linear programming, transportation method, simulation and waiting lines.

Operations Management Video Series The operations management video series, free to text adopters, includes professionally developed videos to help students fully understand the content and terminology within Operations and Supply Chain Management. These videos will be both relevant and up-todate in order to be effectively utilized. Each video will come with a series of questions to assess the students’ knowledge of the material.

TECHNOLOGY McGraw-Hill Connect ® Operations Management McGraw-Hill Connect® Operations Management is an online assignment and assessment solution that connects students with the tools and resources they’ll need to achieve success through faster learning, higher retention, and more efficient studying. It provides instructors with tools to quickly pick content and assignments according to the topics they want to emphasize. Online Assignments. Connect Operations Management helps students learn more efficiently by providing practice material and feedback when they are needed. Connect grades homework

automatically and provides feedback on any questions that students may have missed. LearnSmart. LearnSmart adaptive self-study technology with Connect Operations Management helps students make the best use of their study time. LearnSmart provides

a seamless combination of practice, assessment, and remediation for every concept in the textbook. LearnSmart’s intelligent software adapts to students by supplying questions on a new concept when students are ready to learn it. With LearnSmart students will spend less time on topics they understand and instead focus on the topics they need to master. Simple Assignment Management and Smart Grading. When it comes to studying, time is precious. Connect Operations Management helps students learn more efficiently by

providing feedback and practice material when they need it, where they need it. When it comes to teaching, your time also is precious. The grading function enables you to: ∙ Have assignments scored automatically, giving students immediate feedback on their work and side-by-side comparisons with correct answers. ∙ Access and review each response; manually change grades or leave comments for students to review. Student Reporting. Connect Operations Management keeps instructors informed about

how each student, section, and class is performing, allowing for more productive use of lecture and office hours. The progress-tracking function enables you to: ∙ View scored work immediately (Add Assignment Results Screen) and track individual or group performance with assignment and grade reports. ∙ Access an instant view of student or class per formance relative to learning objectives. ∙ Collect data and generate reports required by many accreditation organizations, such as AACSB.

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Instructor Library. The Connect Operations Management Instructor Library is your

repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. The Connect Operations Management Instructor Library includes: ∙ ∙ ∙ ∙ ∙ ∙ ∙

eBook PowerPoint presentations Test Bank Instructor’s Solutions Manual Digital Image Library Excel Spreadsheets Technical Chapters

Integrated Media-Rich eBook. An integrated media-rich eBook allows students to

access media in context with each chapter. Students can highlight, take notes, and access shared instructor highlights/notes to learn the course mater ial. Dynamic Links. Dynamic links between the problems or questions you assign to your

students and the location in the eBook where that problem or question is covered.

Tegrity Campus: Lectures 24/7 Tegrity Campus is a service that makes class time available 24/7 by automatically cap-

turing every lecture in a searchable format for students to review when they study and complete assignments. With a simple one-click start-and-stop process, you capture all computer screens and corresponding audio. Students can replay any part of any class with easy-to-use browser-based viewing on a PC or Mac. Educators know that the more students can see, hear, and experience class resources, the better they learn. In fact, studies prove it. With Tegrity Campus, students quickly recall key moments by using Tegrity Campus’s unique search feature. This search helps students efficiently find what they need, when they need it, across an entire semester of class recordings. Help turn all your students’ study time into learning moments immediately supported by your lecture. To learn more about Tegrity, watch a two-minute Flash demo at http://tegritycampus.mhhe.com.

Online Course Management No matter what online course management system you use (WebCT, BlackBoard, or eCollege), we have a course content ePack available for your course. Our new ePacks are specifically designed to make it easy for students to navigate and access content online. For help, our online Digital Learning Consultants are ready to assist you with your online course needs. They provide training and will answer any questions you have throughout the life of your adoption. McGraw-Hill Higher Education and Blackboard have teamed up. What does this mean for you? 1. Single sign-on. Now you and your students can access McGraw-Hill’s Connect and Create right from within your Blackboard course-all with one single sign-on. 2. Deep integration of content and tools. You get a single sign-on with Connect and Create, and you also get integration of McGraw-Hill content and content engines right into Blackboard. Whether you’re choosing a book for your course or building Connect assignments, all the tools you need are right where you want them-inside of Blackboard. 3. One gradebook. Keeping several gradebooks and manually synchronizing grades into Blackboard is no longer necessary. When a student completes an integrated Connect

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assignment, the grade for that assignment automatically (and instantly) feeds your Blackboard grade center. 4. A solution for everyone. Whether your institution is already using Blackboard or you just want to try Blackboard on your own, we have a solution for you. McGraw-Hill and Blackboard can now offer you easy access to industry-leading technology and content, whether your campus hosts it, or we do. Be sure to ask your local McGraw-Hill representative for details.

ASSURANCE OF LEARNING READY Many educational institutions today are focused on the notion of assurance of learning, an important element of some accreditation standards. Operations Management in the Supply Chain, 7e is designed specifically to support your assurance of learning in initiatives with a simple yet powerful solution. Instructors can use Connect to easily query for learning outcomes/objectives that directly relate to the learning objectives of the course. You can then use the reporting features of Connect to aggregate student results in similar fashion, making the collection and presentation of assurance of learning data simple and easy.

AACSB STATEMENT McGraw-Hill Global Education is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, the authors of Operations Management in the Supply Chain , 7e have sought to recognize the curricula guidelines detailed in the AACSB standards for business accreditation. By connecting questions in the test bank and end-of-chapter material to the general knowledge and skill guidelines found in the AACSB standards. It is important to note that the statements contained in Operations Management in the Supply Chain, 7e are provided only as a guide for the users of this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While Operations Management in the Supply Chain , 7e and the teaching package make no claim of any specific AACSB qualification or evaluation, we have within Operations Management in the Supply Chain , 7e labeled selected questions according to the general knowledge and skills areas.

MCGRAW�HILL CUSTOMER CARE CONTACT INFORMATION At McGraw-Hill, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can e-mail our Product Specialists 24 hours a day to get product-training online. Or you can search our knowledge bank of Frequently Asked Questions on our support website. For Customer Support, call 800-331-5094 , e-mail [email protected], or visit www. mhhe.com/support. One of our Technical Support Analysts will be able to assist you in a timely fashion.

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ACKNOWLEDGMENTS The authors would like to acknowledge the many individuals who have assisted with this book. Special thanks go to the reviewers for this edition: Tobias Stapleton University of Massachusetts—Dartmouth

Jeryl L. Nelson Wayne State College

Richard C. Yokeley Forsyth Technical Community College

Clarke W. Higgins Chapman University

Ralph James Rich Marian University

Jay Zortman Eastern University

Rajkumar Kempaiah College of Mount Saint Vincent

Deborah L. Piscitiello University of Jamestown

Thomas Buchner University of Minnesota

Charles Vincent Nemer Metropolitan State University

Chris D. Bellamy Eastern University

Kenneth E. Murphy Chapman University

Pradip K. Shukla Chapman University

Kathy Schaefer Southwest Minnesota State University

Marvin E. Gonzalez College of Charleston Gerald T. Pineault Lasell College Jeffrey William Fahrenwald Rockford University William M. Penn Belhaven University

Nancy Levenburg Grand Valley State University Tyler M. Moore Marian University Steven Williams Marian University

The authors would also like to thank the staff at McGraw-Hill Education who had a direct hand in the editing and production of the text. We would like to thank our colleagues at the University of Minnesota who listened to our ideas and provided suggestions for book improvement. Additional thanks go to Doug and Letty Chard, who diligently and carefully prepared the index. We would also like to thank Tom Buchner of the University of Minnesota who carefully prepared the test bank questions. Our thanks to Ed Pappanastos of Troy University for constructing the Connect solutions to problems. Finally, we thank our families for their patience and perseverance during the many months of writing and editing. Without their support and encouragement this textbook would not have been possible. Roger G. Schroeder Susan Meyer Goldstein

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Brief Table of Contents About the Authors Preface

vi

vii

PART ONE

Introduction

Scheduling Operations

246

13

Project Planning and Scheduling 263

PART FIVE

1

Inventory

1

The Operations Function

2

Operations and Supply Chain Strategy 18

3

12

Product Design

2

Independent Demand Inventory 286 Supplement: Advanced Models

15

36

PART TWO

Process Design

14

285

314

Materials Requirements Planning and ERP 317

PART SIX

51


4

Process Selection

52

5

Service Process Design

73

6

Process-Flow Analysis

92

7

Lean Thinking and Lean Systems 113

341

16

Supply Chain Management

17

Sourcing

18

Global Logistics

342

367 386

PART SEVEN

Case Studies

409

PART THREE

Quality

APPENDIXES

137

8

Managing Quality

9

Quality Control and Improvement 159

138

Capacity and Scheduling

Forecasting

185

xvi

Capacity Planning

��

Technical Chapters available in the Instructor’s Resource Library in Connect Waiting Lines

186

Supplement: Advanced Methods 211 11

��

ACRONYMNS

PART FOUR

10

INDEX

��

216

Simulation Transportation Method Linear Programming

Contents About the Authors Preface

vi

2.4 2.5

vii

2.6 2.7

PART ONE INTRODUCTION

1

Chapter � The Operations Function 1.1 1.2 1.3 1.4 1.5 1.6 1.7

2.8

Student Internet Exercises 34 Discussion Questions 34

2

Why Study Operations Management? 3 Definition of Operations Management and Supply Chains 4 Decisions at Pizza U.S.A. 7 Operations Decisions in the Supply Chain—A Framework 9 Cross-Functional Decision Making 10 Operations as a Process 11 Challenges Facing Operations and Supply Chain Managers 13 Services 14 Customer-Directed Operations 14 Integration of Decisions Internally and Externally 14 Environmental Sustainability 14 Globalization of Operations and the Supply Chain 15

1.8

Key Points and Terms

Distinctive Competence 28 Global Operations and Supply Chains 29 Supply Chain Strategy 30 Environment and Sustainable Operations 32 Key Points and Terms 33

Chapter � Product Design 3.1 3.2

36

Strategies for New-Product Introduction 37 New-Product Development Process Concept Development 38 Product Design 39 Pilot Production/Testing 39

3.3 3.4 3.5

Cross-Functional Product Design 40 Supply Chain Collaboration 42 Quality Function Deployment 43 Customer Attributes 44 Engineering Characteristics

3.6 3.7

Modular Design 47 Key Points and Terms

15

Chapter � Operations and Supply Chain Strategy 18

Chapter � Process Selection 20

Corporate and Business Strategy Operations Mission 22 Operations Objectives 22 Strategic Decisions 22 Distinctive Competence 24

2.2 2.3

48

PART TWO PROCESS DESIGN

Operations Strategy Model

45



2.1

38

4.1 4.2 4.3 4.4 4.5 4.6 4.7

21

Competing with Operations Objectives 25 Cross-Functional Strategic Decisions

26

4.8

51

52

Product-Flow Characteristics 53 Approaches to Order Fulfillment 58 Process Selection Decisions 61 Product-Process Strategy 62 Focused Operations 64 Mass Customization 65 3D Printing and Additive Manufacturing 67 Environmental Concerns 68 xvii

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4.9 4.10

Contents

Cross-Functional Decision Making Key Points and Terms 70

69

7.5 7.6


Chapter � Service Process Design 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8

7.7

73

Defining Service 74 Service-Product Bundle 75 Service Delivery System Matrix 77 Customer Contact 80 Service Recovery and Guarantees 82 Technology and Globalization of Services 84 Service Profitability and Employees 87 Key Points and Terms 89 Student Internet Exercises 90 Discussion Questions 90

Chapter � Process-Flow Analysis 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8

Student Internet Exercises 133 Solved Problems 133 Discussion Questions 134 Problems 135

PART THREE

92

Process Thinking 93 The Process View of Business 94 Process Flowcharting 95 Process-Flow Analysis as Asking Questions 100 Measuring Process Flows 101 Measuring Process Flows at Pizza U.S.A. 103 Process Redesign 104 Key Points and Terms 107

8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8

Stabilizing the Master Schedule 120

138

Quality as Customer Requirements 139 Product Quality 140 Service Quality 142 Quality Planning, Control, and Improvement 142 Mistake-Proofing 145 Ensuring Quality in the Supply Chain 146 Quality, Cost of Quality, and Financial Performance 147 Quality Pioneers 150 W. Edwards Deming Joseph Juran 150

8.9 8.10 8.11

113

8.12

150

ISO 9000 Standards 152 Malcolm Baldrige Award 154 Why Some Quality Improvement Efforts Fail 156 Key Points and Terms 157 Student Internet Exercises 158 Discussion Questions 158

Evolution of Lean 114 Lean Tenets 115 Create Value 115 Value Stream 116 Ensure Flow 117 Customer Pull 118 Strive for Perfection 119 Lean Thinking Techniques

137

Chapter � Managing Quality

Chapter � Lean Thinking and Lean Systems

7.3

7.8 7.9 7.10 7.11

Controlling Flow with the Kanban System 121 Reducing Setup Time and Lot Sizes 124 Changing Layout and Maintaining Equipment 125 Cross-Training, Rewarding, and Engaging Workers 126 Delivering Quality 127 Changing Relationships with Suppliers 127 Implementation of Lean 129 Key Points and Terms 132

QUALITY


7.1 7.2

7.4

Chapter � Quality Control and Improvement

119

9.1 9.2 9.3 9.4 9.5

Design of Quality Control Systems Process Quality Control 163 Attribute Control Chart 165 Variables Control Chart 166 Using Control Charts 167

159 160

Contents

9.6 9.7 9.8 9.9 9.10

Process Capability 168 Continuous Improvement 170 Six Sigma 174 Lean and Six Sigma 176 Key Points and Terms 177

11.6 11.7 11.8 11.9



PART FOUR CAPACITY AND SCHEDULING

185

Chapter �� Forecasting 186 Forecasting for Decision Making 188 Qualitative Forecasting Methods 189 Time-Series Forecasting 191 Moving Average 192 Exponential Smoothing 194 Forecast Accuracy 197 Advanced Time-Series Forecasting 199 10.8 Causal Forecasting Methods 200 10.9 Selecting a Forecasting Method 202 10.10 Collaborative Planning, Forecasting, and Replenishment 203 10.11 Key Points and Terms 205 10.1 10.2 10.3 10.4 10.5 10.6 10.7

Student Internet Exercises 206 Solved Problems 206 Discussion Questions 208 Problems 208 Supplement: Advanced Methods 211

Chapter �� Scheduling Operations 12.1 12.2 12.3 12.4 12.5 12.6 12.7

11.1 11.2

11.3

13.1 13.2 13.3 13.4 13.5 13.6

11.4 11.5

263

Objectives and Trade-Offs 264 Planning and Control in Projects 265 Scheduling Methods 268 Constant-Time Networks 269 CPM Method 274 Use of Project Management Concepts 277 Key Points and Terms 278 Student Internet Exercises 279 Solved Problems 279 Discussion Questions 282 Problems 283

Capacity Defined 217 Facilities Decisions 219

Sales and Operations Planning Definition 224 Cross-Functional Nature of S&OP 226 Planning Options 227

Batch Scheduling 247 Gantt Charts 248 Finite Capacity Scheduling 251 Theory of Constraints 253 Priority Dispatching Rules 254 Planning and Control Systems 256 Key Points and Terms 258

Chapter �� Project Planning and Scheduling

216

Amount of Capacity 220 Size of Facilities 221 Timing of Facility Decisions Facility Location 222 Types of Facilities 223

246


13.7

Chapter �� Capacity Planning

Basic Aggregate Planning Strategies 229 Aggregate Planning Costs 230 Aggregate Planning Example 231 Key Points and Terms 236

PART FIVE 222

INVENTORY

285

Chapter �� Independent Demand Inventory 14.1 14.2 14.3

Definition of Inventory 287 Purpose of Inventories 289 Costs of Inventory 290

286

xix

xx

Contents

Independent versus Dependent Demand 291 14.5 Economic Order Quantity 292 14.6 Continuous Review System 296 14.7 Periodic Review System 301 14.8 Using P and Q Systems in Practice 304 14.9 Vendor Managed Inventory 306 14.10 ABC Classification of Inventory 306 14.11 Key Points and Terms 308 14.4

Student Internet Exercises 309 Solved Problems 309 Discussion Questions 311 Problems 312 Supplement: Advanced Models 314

Chapter �� Materials Requirements Planning and ERP 317 15.1 15.2 15.3 15.4

The MRP System 318 MRP versus Order-Point Systems Parts Explosion: How an MRP System Works 321 MRP System Elements 326 Master Scheduling 326 Bill of Materials (BOM) 327 Inventory Records 327 Capacity Planning 328 Purchasing 328 Shop-Floor Control 329

15.5 15.6 15.7 15.8

16.3 16.4 16.5 16.6 16.7 16.8

Analysis of Supply Chain Risk

Chapter �� Sourcing 367

320

17.1 17.2 17.3

16.1 16.2

Importance of Sourcing 368 Sourcing Goals 369 Insource or Outsource? 369 Advantages of Outsourcing 370 Disadvantages of Outsourcing 370 Total Cost Analysis 372

17.5

Offshoring

372

17.6

Supply Chain and Supply Chain Management 343 Measuring Supply Chain Performance 347

Supply Base Optimization

375

The Purchasing Cycle

377

Internal User-Buyer Interface 378 Sourcing and Make-Buy Decision 378 Find Suppliers 378 Supplier Selection 378 Supplier Relationship Management 379

17.7 17.8

Challenges Facing Purchasing Key Points and Terms 381

380


341

342

373

Spend Analysis 375 Total Number of Suppliers 376 Single or Multiple Suppliers 376

PART SIX Chapter �� Supply Chain Management

361


The Costs of Offshoring Reshoring 374

Student Internet Exercises 335 Solved Problem 335 Discussion Questions 337 Problems 338

359

16.9 Sustainability of the Supply Chain 16.10 Key Points and Terms 364

17.4

Operating an MRP System 329 The Successful MRP System 330 Enterprise Resource Planning Systems 331 Key Points and Terms 334

SUPPLY CHAIN DECISIONS

Supply Chain Dynamics—The Bullwhip Effect 349 Improving Supply Chain Performance 352 Supply Chain Structural Improvements 352 Supply Chain System Improvements 354 Technology and Supply Chain Management 356 Supply Chain Risk and Resilience 358

Chapter �� Global Logistics 18.1

386

Role of Logistics in Supply Chain Management 387

Contents

18.2

Transportation

The Evolution of Lean Six Sigma at 3M, Inc. 441

389

Transportation Economics 389 Modes of Transportation 390 Selecting the Transportation Mode

18.3 18.4

Capacity and Scheduling 392

Location 397 Number of Warehouses (Distribution Centers) 399

18.5 18.6 18.7

Best Homes, Inc.: Forecasting 447 Polaris Industries Inc.: Global Plant Location 449 Lawn King, Inc.: Sales and Operations Planning 454

Distribution Centers and Warehousing 394 Logistics Networks 396

Third-Party Logistics Providers Logistics Strategy 403 Key Points and Terms 405

Inventory

401


Consolidated Electric: Inventory Control 458 Southern Toro Distributor, Inc. 463 ToysPlus, Inc.: MRP 470

Supply Chain Altimus Brands: Managing Procurement Risk 474 Murphy Warehouse Company: Sustainable Logistics 477 Shelterbox: A Decade of Disaster Relief 481

PART SEVEN CASE STUDIES Introduction

409

Operations Strategy at BYD of China, Electrifying the World’s Automotive Market 410 Early Supplier Integration in the Design of the Skid-Steer Loader 415

Process Design Eastern Gear, Inc.: Job Shop 417 Sage Hill Inn Above Onion Creek: Focusing on Service Process and Quality 420 U.S. Stroller: Lean 424 The Westerville Physician Practice: Value-Stream Mapping 430

Quality Journey to Perfect: Mayo Clinic and the Path to Quality 433 Toledo Custom Manufacturing: Quality Control 439

APPENDIXES A B

Areas Under the Standard Normal Probability Distribution 485 Random Number Table 486

INDEX

487

ACRONYMNS

501

Online Technical Chapters Technical Chapters available in the Instructor’s Resource Library in Connect

Waiting Lines Simulation Transportation Method Linear Programming

xxi

� � � P

i

Introduction

�.


�.

Operations and Supply Chain Strategy

�.

Product Design

The introductory part of this text provides an overview of the operations function, operations and supply chain strategy, and product design. After reading this part, students should have an appreciation for the importance to the firm of decisions made in the operations function and its associated supply chain. Also, the need for strategy to guide all decision making is emphasized. New-product design is treated as a cross-functional decision responsibility that precedes the production and delivery of goods or services.

�

� � � � � � �

The Operations Function LEARNING OBJECTIVES After reading this chapter, you should be able to: LO�.�

Define operations management.

LO�.�

Describe the five main decisions made by operations and supply chain managers.

LO�.�

Explain the nature of cross-functional decision making with operations.

LO�.�

Define typical inputs and outputs of an operations transformation system.

LO�.�

Identify contemporary challenges facing operations and supply chain managers.

Operations management, as a field, deals wit h the production of goods and services. Every day we come in contact with an abundant ar ray of goods or services, all of which are produced under the leadership of operations managers. Nonprofit and government services are also managed by operations managers. Without effective management of operations, a modern industrialized society cannot exist. The operations function is the engine that creates goods and services for the enter prise and underpins the global economy. Operations managers have important positions in every organization. One example is the plant manager who is in charge of a factory. Other managers who work in the factory— including production and inventory control managers, quality managers, and line supervisors—are also operations managers. Collectively, this group of managers is responsible for producing the supply of goods in a manufacturing business. We should also include in the group of operations managers all manufacturing managers at the corporate or divisional level. These managers might include a corporate vice president of operations (or manufacturing) and a group of corporate staff operations managers concerned with quality, production and inventory control, facilities, and equipment. Operations managers have important responsibilities in service industries as well. In the private sector, operations managers take leadership roles in hotels, restaurants, airlines, 2

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3

banks, and retail stores. In each of these organizations, operations managers are responsible for producing and delivering the supply of services. In government offices, there are operations managers in the post office, police department, and housing department, to name only a few. Anyone who is responsible for producing or delivering the service is an operations manager. At first glance, it may appear that service operations have little in common with manufacturing operations. However, the unifying feature of these operations is that both can be viewed as transformation processes inside organizations that are themselves embedded within supply chains. In manufacturing, inputs of raw materials, energy, labor, and capital are transformed into finished goods. In service operations, the same types of inputs are transformed into services. Managing the transformation process in an efficient and effective manner is the task of the operations manager in any type of organization. Most Western economies have shifted dramatically from the production of goods to the production of services. It may come as a surprise that today more than 80 percent of the U.S. workforce is employed in service industries.1 Even though the preponderance of employment is in the service sector, manufacturing remains important to provide the goods needed for export and internal consumption. Because of the importance of both service and manufacturing operations, they are treated on an equal basis in this text. In the past when the field was related primarily Operations managers make important decisions in both to manufacturing, operations management was called manufacturing and service organizations. © McGraw-Hill Education/Jill Braaten production management. Later, the name was expanded to “production and operations management,” or, more simply, “operations management,” to include the service industries as well. The term “operations management” as used in this text refers to both manufacturing and service industries. Today, individuals who work in operations and associated supply chains can belong to a number of professional societies. These societies provide opportunities to become certified, network with other professionals, and learn about and share best practices. See the Operations Leader box titled “Professional Societies Affiliated with Operations and Supply Chain Management.” The Operations Leader boxes throughout this book highlight best practices and useful professional knowledge in a variety of industries.

1.1

WHY STUDY OPERATIONS MANAGEMENT? All businesses want to hire bright people who can make the best decisions for the business as a whole, not the best marketing, finance, or operations decisions. They want employees who can see the big picture of how these functional are as interact. You will severely limit your career if you take a nar row functional perspective. �

U.S. Census Bureau, Statistical Abstract of the United States, Washington, DC, �� ed.

Part One Introduction

4

Operations Leader

Professional Societies Affiliated with Operations and Supply Chain Management

ASSOCIATION FOR OPERATIONS MANAGEMENT The global leader and premier source of the body of knowledge in operations management, including production, inventory, the supply chain, materials management, sourcing and logistics (see www.apics.org for more information).

AMERICAN SOCIETY FOR QUALITY The world’s leading organization devoted to advancing learning, quality improvement, and knowledge exchange to improve business results and create better workplaces and communities worldwide (see www.asq. org for more information).

INSTITUTE FOR SUPPLY MANAGEMENT The largest and one of the most respected supply management associations in the world, whose mission is to lead the supply management and sourcing profession through its standards of excellence, research, promotional activities, and education (see www. ism.ws for more information).

COUNCIL OF SUPPLY CHAIN MANAGEMENT PROFESSIONALS The preeminent worldwide professional association for supply chain management professionals, whose vision is to lead the evolving supply chain management profession by developing, advancing, and disseminating supply chain knowledge and research (see http://cscmp.org for more information).

Every decision is cross-functional in nature. 2 You will be working with operations and need to understand operations no matter what career path you choose. Operations is a major function in every organization, and regardless of the function in which you work, you will interact with the operations function that produces goods or services (or both). The organization in which someone works only with people from his or her own function does not exist. That is why we take a cross-functional perspective in this text so that the content is useful to all majors. As you study operations management, you will find that many of the ideas, techniques, and principles can be applied across the business, not just in operations. For example, all work is accomplished through a process (or sequence of steps). The principles of process thinking found in this text can be applied to all functions. After graduating, many students find that the ideas learned in operations management are among the most useful, regardless of the industry or career they enter. Operations management is an exciting and challenging field of study. The material is both qualitative and quantitative, and both are essential to good management practices. You are embarking on a journey that is interesting and useful no matter what career you choose!

1.2

DEFINITION OF OPERATIONS MANAGEMENT AND SUPPLY CHAINS

LO1.1 Define opera-

tions management.

All organizations (for-profit and nonprofit) thrive by producing and delivering a good or a service deemed to be of value to customers. Value is the tangible and intangible benefits that customers derive from consuming a good or service at a price they are willing to pay. �

The “hand shake” symbol in t he margin identifies a point of cross-funct ional emphasis and is designed to illustrate that the various functions must work together for an organization to be successful and thrive.

Chapter 1

Operations Leader


5

Dell Delivers Products and Value

In �� Michael Dell founded Dell Computer Corporation with $�� in start-up capital and a business model to sell custom-configured personal computers directly to customers while passing along cost savings to customers by cutting out the middlemen. The company offers a range of products beyond personal desktop and mobile computing products; servers, storage, and networking products; printing and imaging products; electronics and accessories; enhanced business and consumer services; and business solutions. Nearly half of Dell’s revenue comes from outside of the United States. In �� Dell was taken private in a stock buyout by Michael Dell and investors. In �� Dell bought EDS services to expand its offerings to services, and the cloud. A key to Dell’s strategy is its customer- driven approach to innovation. This approach signals a commitment to delivering new products and services that are valued by customers and that address customer needs. This approach explains how Dell pioneered the direct-selling system to allow customer orders to be placed over the Internet or over the phone and, since

��, through select retail outlets. Orders for products, once taken, are assembled in one of Dell’s factories and often shipped to customers or retail stores within days, with the factories carrying very little finished goods inventory. In addition to the importance of the operations function at Dell, sourcing and logistics activities are critical. Sourcing managers source the many components required to manufacture Dell products, and logistics managers handle the global movement of components and finished goods to satisfy customer demand. Managing Dell’s fast and rapidly changing supply chain is a challenging task that they perform well. Dell today is pursuing environmentally friendly best practices: Its global headquarters campus is now powered by �� percent green energy; its desk computer systems have been designed to reduce carbon dioxide emissions; Dell was the first computer manufacturer to offer free computer recycling to customers worldwide; and its “Plant a Tree for Me” and “Plant a Forest for Me” programs have planted over ��,�� trees. Source: Adapted from www.dell.com, ��.

For example, value in a pair of shoes may be shoes that are good looking and comfortable and will last a long time at a price you can afford. What is of value to one customer (or set of customers) may not be of value to another. Flying in first class may be of value to business travelers, but for leisure travelers flying in first class may not be of value because of the price of first-class seats. Value, thus, is always defined in the eyes of the customer (or set of customers) relative to the price paid. See the Operations Leader box for Dell Computer Inc. for a company that creates value for its customers. Organizations that are successful strive to identify the value inherent in the goods or services being offered to customers. They then deploy this understanding to guide t he decisions that affect the production and delivery of those goods and services. These decisions have an impact on the design, execution, and performance of operations and should be coordinated with decisions made by managers of the sourcing and the logistics functions. The sourcing function (also called purchasing or procurement) is responsible for finding other organizations to serve as sources and then buying the material and service inputs for the transformation process of the organization. The logistics function, in contrast, is typically responsible for the actual movement of goods and/or services across organizations. Collectively, the operations, sourcing, and logistics functions manage the production of the goods or services that are moved through the production process and delivered to customers. Most organizations exist as part of a larger supply chain. The supply chain is the network of manufacturing and service operations (often multiple organizations) that supply one another from raw materials through production to the ultimate customer. The supply chain consists of the physical flow of materials, money, and information along the entire chain of sourcing production, and distribution. For example, the food supply chain reaches

6


from the farm to the food processor to the wholesaler and then the retailer. The supply chain links together the work and output of many different organizations. In this book we discuss operations management in the supply chain. This means we deal with operations in the larger context of its supply chain, including external suppliers and customers. Before discussing the larger supply chain implications, we define operations management as follows: Operations management focuses on decisions for the production and delivery of the firm’s products and services.

There are three aspects of operations management that require elaboration: 1. Decisions. The above definition refers to decision making as an important element of operations management. Since all managers make decisions, it is natural to focus on decision making as a central theme in operations. Within the broader context of supply chain, this decision focus provides a basis for identifying major decision types. In this text, we specify the five major decision responsibilities of operations and supply chain management as process, quality, capacity, inventory, and supply chain. These decisions provide the framework for organizing the text and describing what operations and supply chain managers do. We will discuss these decisions in greater detail in subsequent chapters. 2. Function. Operations is a major function in any organization, along with marketing and finance. In a ma nufacturing company, the operations function typically is called the manufacturing or production department. In service organizations, the operations function may be called the operations department or some name peculiar to the particular industry (e.g., the policy service department in insurance companies). In general, the generic term “operations” refers to the function that produces and delivers goods or services. While separating operations out in this manner is useful for analyzing decision making and assigning responsibilitie s, we must also integrate the business by considering the cross-functional nature of decision making in the firm. 3. Process. Operations managers plan and control the transformation process and its interfaces in organizations as well as across the supply chain. This process view provides common ground for defining service and manufacturing operations as transformation processes and is a powerful basis for the design and analysis of operations in an organization and across the supply chain. Using the process view, we consider operations managers as managers of the conversion process in the firm. But the process view also provides important insights for the management of productive processes in functional areas outside the operations function. For example, a sales office may be viewed as a production process with inputs, transformation, and outputs. The same is true for an accounts payable office and for a loan office in a bank. In terms of the process view, operations management concepts have applicability beyond the functional area of operations. Toyota, for example, uses lean thinking to improve processes throughout the firm, including processes in human resources, accounting, finance, information systems, and even the legal department. Process improvement is not restricted to operations. Since the field of operations and supply chain management can be defined by decisions, function, and processes, we will expand on these three elements in detail in this chapter. But first we provide an example of the decisions that would be made by operations and supply chain management in a typical company that makes a nd markets pizzas.

Chapter 1

1.3


7

DECISIONS AT PIZZA U.S.A.

LO1.2 Describe the five

main decisions made by operations and supply chain managers.

Pizza U.S.A., Inc., produces and markets pizzas on a national basis. The f irm consists of 85 company-owned and franchised outlets (each called a store) in the United States. The operations function in this company exists at two levels: the corporate level and the level of the individual store. The major operations and supply chain decisions made by Pizza U.S.A. can be described as follows:

Process Corporate staff makes some of the process decisions, since uniformity across different stores is desirable. They have developed a standard facility design that is sized to fit a particular location. Each store incorporates a limited menu with equipment that is designed to produce high volumes of pizza. As pizzas are made, customers can watch the process through a glass window; this provides entertainment for both children and adults as they wait for their orders to be filled. Because this is a ser vice facility, special care is taken to make the layout attractive and convenient for the customers. Within the design parameters established by the corporate operations staff, the store managers seek to improve the process continually over time. This is done both by additional investment in the process and by the use of better methods and procedures, which often are developed by the employees themselves. For example, a store might re-arrange its layout to speed up the process of producing pizzas.

Quality Certain standards for quality that all stores must follow have been set by the corporate staff. The standards include procedures to maintain service quality and ensure the quality and food safety of the pizzas served. While perceptions of service quality may differ by customer, the quality of the pizzas can be specified more exactly by using criteria such as temperature at serving time and the amount of raw materials used in relation to standards, among others. Service-quality measures include courtesy, cleanliness, speed of service, and a friendly atmosphere. Service quality is monitored by store manager observation, comment cards, and occasional random surveys. Each Pizza U.S.A. store manager must carefully monitor quality internally and with suppliers to make sure that it meets company standards. All employees are responsible for the quality of their work to ensure that service quality and food quality are meeting the standards of the company.

Capacity

Pizza U.S.A. satisfies its customers by carefully managing the four key decision areas in operations. © Steve Mason/Getty Images

Decisions about capacity determine the maximum level of output of pizzas. The capacity available at any point in time is determined by the availability of equipment and labor inputs for the pizza-making process at that time. First, when the initial location and process decisions are made, the corporate staff determines the physical capacity of each facility. Individual store managers then plan for annual, monthly, and daily fluctuations in capacity within the available physical facility. During peak periods, they may employ part-time help, and advertising is used in an

8


Operations Leader

Careers in Operations and Supply Chain from Monster.com

SUPPLY CHAIN ANALYST PayPal, owned by online shopping site eBay, is hiring a supply chain management professional responsible for end-to-end support for PayPal’s new Here product. The job require requiress internati international onal travel to manufacturing and distribution sites. Responsibilities include product and distribution management, on time and on budget; reviewing inventory reports with supply partners; arranging freight shipments globally; and coordinating and collaborating with internal groups within PayPal and eBay. The job description also requests “maniacal attention to detail.”

BUSINESS METRICS/ANALYTICS SUPPLY CHAIN ANALYST Cardinal Health is seeking an analyst to develop, quantify, and evaluate the transformation of internal and external information into business intelligence. Qualified candidates will demonstrate knowledge of concepts and principles of business metrics and analytical techniques/ tools. The position requires listening to internal/external customers’ needs and proactively providing them a quality experience through effective communication.

VICE PRESIDENT OF OPERA OPERATIONS TIONS Envista Credit Union is seeking an executive whose responsibilities include organizing, planning, and directing all operations functions associated with branches and

central operations. This individual will participate in the development of strategic implementation plans and related objectives. Candidates must have strong communication skills and acknowledge the important relationship with customer members in supporting the credit union’s vision and mission.

CONTINUOUS IMPROVEMENT PLANT LEAD ConAgra Foods seeks a partner to roll out a system establishing a zero-loss manufacturing culture. Coordinating with the Plant Manager, this Plant Lead executes plans for sustainability, develops and maintains training and tracking standards, and coaches sites on improvement methodologies. This position serves as a key development role for a future Plant Manager.

MATERIALS SOURCING MANAGER Herbalife, a direct-sales nutrition company, is hiring a senior-level sourcing manager for global spending of $�� million on raw materials. Responsibilities include reducing raw materials costs yearly, analyzing market intelligence for trends in commodity markets, and making strategic recommendations to senior management for each category of raw materials. This job also requires maintaining appropriate inventory levels and developing strategic supplier relationships. Source: Abstracted from www.monster.com, April ��.

attempt to raise demand during slack periods. In the short run, individual personnel are scheduled in shifts to meet demand during store hours.

Inventory Each store manager buys the ingredients required to make the recipes provided by corporate staff. The store managers decide how much flour, tomato paste, sausage, and other ingredients to order and when to place orders. Store operators must carefully integrate sourcing and inventory decisions to control the flow of materials in relation to capacity. For example, they do not want to purchase ingredients for more pizzas than they have the capacity to bake. They also do not want to run out of food during peak periods or waste food when demand is low.

Supply Chain The supply chain decisions consist of sourcing and logistics. Sourcing is done by the corporate office. They select the specific suppliers for all inputs, negotiate prices, write contracts, and issue blanket purchase orders that stores use to order individual ingredients and items as

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9

they need them. The orders are ar e then fulfilled by the suppliers, and a logistics provider ensures the orders are delivered on time. Logistics is handled by a third-party provider who secures transportation and uses its distribution centers to make deliveries to Pizza U.S.A. stores. Because Pizza U.S.A. is only only one example of an operation, students students often ask: What do operations managers do in more general terms? The Monster.com Operations Leader box provides examples of five typical operations management and supply chain positions and describes the associated decision-making responsibilities. The descriptions have been greatly simplified for purposes of illustration. As the Operations Leader box indicates, there is a great variety of management management positions in operations and the supply chain. These range from entry-level supervisory positions to middle- and top-management positions with considerable responsibility. These positions also show the breadth of operations and apply to both manufacturing and service operations. There are many opportunities for international employment employment in operations management since operations are located around the world. Many operations in other countries are seeking to implement world-class best practices, and so what is learned in this course can be applied globally.

1.4

OPERATIONS DECISIONS IN THE SUPPLY CHAIN�A FRAMEWORK The five decision groupings showcased in the Pizza U.S.A. example provide provide a framework for understanding the various decisions made by operations and supply chain managers. Although many different frameworks frameworks are possible, the primary one used here is a conceptual scheme for grouping decisions according to decision responsibilities. The five key decision areas—process, quality, capacity, inventory, inventory, and supply chain—encompass what operations and supply chain managers do. This novel and useful decision framework is shown in Figure 1.1 and summarized in Table 1.1. In the table, examples are given of key decisions in each area. Careful attention to the five decision decision areas in the framework is the key to the successful management of operations and the associated supply chain. Indeed, well-managed operations and its supply chain can be defined in terms of this decision framework. If decisions in each of the five groupings support the strategy of the firm, provide value, and are well integrated with the other functions of the organization, the operations function and its associated supply chain can be considered well managed. Each major section of this text is devoted devoted to one one of the five decision categories. 3 The framework thus provides an integrating mechanism for the text that covers both the decisions faced by operations and supply chain managers as well as the cross-functional issues that must be considered.

FIGURE �.� Decision-making framework for operations in the supply chain.

Human Resources


Finance Process

Suppliers

Customers Inventory

Information Systems

�

Quality

Marketing

Capacity Accounting

Students have called these five categories QPICS, pronounced “Q-PICS. “Q-PICS.””

10


TABLE �.� Operations and Supply Chain Decisions—A Framework

Decisions

Examples of Decisions

�. Process

� � � � �

�. Quality

� What should the quality quality standards be? be? � How can quality be controlled controlled and improved? � What statistical approaches should be used (e.g., (e.g., control charts and Six Sigma)? � How should the suppliers and customers be involved in quality? quality?

�. Capacity

� � � �

What is the facility strategy for size, location, and timing? timing? How should Sales and Operations Operations Planning be implemented? How should variable demand be handled with capacity adjustments? adjustments? What priority rule should be used for scheduling?

�. Inventory

� � � �

How much inventory inventory should be held? held? What should the order size and reorder frequency be? Who should hold the inventory? How can the inventories of suppliers and customers be coordinated?

�. Supply Chain

� What suppliers should be used for for products and services?

What type of process should be selected? How should the service delivery delivery system be designed? designed? How should material and customer flows be managed? What principles of lean systems systems should be deployed? How should environmental and global goals be met?

� How should sourcing be conducted and evaluated? � What form of transportation should be used? � How should warehouses be used to allow economic flow of materials?

Analytics is the analysis of data to make better decisions. Analytics uses many techniques for the analysis including those from operations research, statistics, data sciences, and computer science. The analysis can use either big data from massive databases or small data depending on the application. Analytics can be descriptive, predictive, or prescriptive in nature. A descriptive descr iptive analysis typically typically summarizes the present situation from data. The data can be used to go one step further and predict what will happen in t he future. Prescriptive analytics typically uses mathematical models to find an optimal or best decision. Analytics are used in operations and supply chains for a variety of decisions, including quality control, forecasting, capacity, scheduling, inventory, inventory, logistics, and sourcing. Throughout the text, best practices practices are presented. Additionall Additionally, y, discussion and examples examples of firms in which the best practice is not the best for their particular situation are included. These contingencies, situations, or conditions that r equire different solutions offer a more nuanced view of operations decision making. For example, successful implementation of a new method such as lean or Six Sigma is contingent on top management support. Similarly, the “best” forecasting tools and concepts depend on the availability of data. If there was a single best practice that works for all firms, then operations would not be the challenging function to manage that it is. Therefore, by offering insight into specific conditions in which best practices may not be best, the text addresses the various contingencies or prerequisites or situaitons that need to be considered.

1.5

CROSS�FUNCTIONAL DECISION MAKING

LO1.3 Explain

the nature of cross-functional decision making with operations.

The operations function is a critical element in every business. No business can survive without good decisions being made by operations managers. The operations function is one of the three primary pr imary functions in an organization, along with marketing and finance. In addition, an organization has supporting functions t hat include human resources, information systems, and accounting. Some organization organizationss also hav havee separate sourcing and logistics

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11

functions that support operations. In others, the operations, sourcing and logistics functions are joined together to become the supply chain function. Functional areas are concerned with a particular par ticular focus of responsibility or decision making in an organization. The marketing function is typically responsible for creating demand and generating sales revenue; the operations function is responsible for the production and distribution of goods or services (generating supply); and finance is responsible for the acquisition and allocation of capital. Within for-profit businesses, functional areas tend to be closely associated with organizational departments because businesses typManagerial decision making is cross-functional ically are organized on a functional basis. Supporting functions are in nature. essential to provide staff support to the three primary functions. © Corbis Every function must be concerned not only with its own decision responsibilities but also with integrating decisions with other functions. The five areas of operations and supply chain decisions, for example, cannot be made separately; they must be carefully integrated with one another and, equally important, with decisions made in marketing, finance, and other parts of the organization. In the Pizza U.S.A. example, if marketing decides to change the price of pizza, this is likely to affect sales and change the capacity needs of operations as well as the amount of ingredients (materials) used. Also, if finance cannot raise the necessary capital, operations may have to redesign the process to require less capital or manage pizza-related inventories more efficiently. This in turn may affect the response re sponse time to serve customers, costs, and so on. Decision making is therefore highly interactive and systemic in nature. Unfortunately Unfortunately,, functional silos have developed in many organizations and impede cross-functional decision making. As a result, the overall organization suffers due to an emphasis on functional prerogatives. But some companies are different. Tex Texas as Instruments, for example, has been a leader in fostering cross-functional integration. They do this by forming cross-functional management teams for new-product introductions and for day-to-day improvement. improvement. Each member of the team is trained in common methodologies, and the team is given responsibility for achieving its own goals. Some of the key cross-functional decision-making relationships are shown in Table 1.2.

1.6

OPERATIONS AS A PROCESS

LO1.4 Define typical

inputs and outputs of an operations transformation system.

Operations can be defined as a transformation system (or process) that converts inputs into outputs. Inputs to the system include energy, energy, materials, labor, capital, and information (see Figure 1.2). Process technology is then used to convert inputs into outputs. The process technology is the methods, procedures, and equipment used to transform mater ials or inputs into products or services. Viewing operations as a process is very useful in unifying seemingly seemingly different different operations from different industries. For example, the transformation process in manufacturing is one of material conversion from raw materials into f inished products. When an automobile is produced, steel, plastics, aluminum, cloth, and many other mater ials are transformed into parts that are then assembled into the finished automobile. Labor is required to operate and maintain the equipment, and energy and information are also required to produce the finished automobile. In service industries a transformation process is also used to transform inputs into serservice outputs. For example, airlines use capital inputs of aircraft and equipment and human

12


TABLE �.� Examples of CrossFunctional Decision Making

Key Decision Area

Interface with Operations Decisions

Marketing Market segment and needs Market size (volume) Distribution channels Pricing New-product in introduction Finance and Accounting Availability of capital Effi Ef fici cien ency cy of co conv nver ersi sion on pr proc oces ess s Net pr Net pres esen entt val alue ue an and d ca cash sh fl flow ow Process costing or job costing Measurement of operations Human Resources Skill level of employees Number of employees and part-time or full-time employment Training of employees Job design Teamwork Information Systems Determination of of us user ne needs Des esig ign n of of inf infor orma mati tion on sy syst stem ems s Software de development Hardware acquisition

FIGURE �.� An operation as a productive system.

Quality design and quality management Type of process selected (assembly line, batch, or project) and capacity required Inventory levels and logistics Quality, capacity, and inventory Cross-functional te teams

Inventory levels, degree of automation, process type selected, and capacity Proc Pr oces ess s typ type e sel selec ecti tion on,, pro proce cess ss fl flow ows, s, va valu luee-ad adde ded d determination and sourcing Aut utom omat atiion on,, inv nven ento tory ry,, an and d ca capa paci city ty Type of process selected Costing systems used

Process type selected and automation Capacity and scheduling decisions Quality improvement and skills Process and technology choice Cross-functional decisions in operations

Systems sh should su support al all us users in in op operations Sys yste tems ms sh shou ould ld he help lp st stre ream amllin ine e ope opera rati tion ons s and and su supp ppor ortt all analytics and decisions in operations Software is is ne needed fo for ca capacity, qu quality, in inventory, scheduling and supply chain decisions Hardware is needed to support automation decisions in operations and to run software

EXTERNAL BUSINESS ENVIRONMENT

OPERATIONS MANAGEMENT INPUTS

OUTPUTS

Energy Materials Labor Capital

Transformation (conversion) process

Goods or services

Information

Feedback information for control of process inputs and process technology NATURAL ENVIRONMENT

Chapter 1

TABLE �.� Examples of Productive Systems


Operation

Inputs

Outputs

Bank

Tellers, staff, computer equipment, facilities, and energy Cooks, wa waiters, fo food, eq equipment, facilities, and energy Doctors, nurses, staff, equipment, facilities, and energy Faculty, st staff, eq equipment, fa facilities, energy, and knowledge Equipment, Equip ment, facil facilities, ities, labor labor,, energy energy,, and and raw materials Planes, facilities, pilots, flflight at attendants, maintenance people, labor, and energy

Financial services (loans, deposits, safekeeping, etc.) Meals, entertainment, and satisfied customers Health services and healthy patients Educated students, research, and public service Finished goods

Restaurant Hospital University Manufacturin Manufa cturing g plant plant Airline

13

Transportation from one location to another

inputs of pilots, flight attendants, and support personnel to produce safe, reliable, fast, and efficient transportation. Transformations of many different types occur in all industries, as indicated in Table 1.3. By studying these different types of transformation processes, you can learn a great deal about how to analyze and manage any operation. Operations as a process provides a basis for seeing an entire business as a system of interconnected processes. This makes it possible to analyze an organization and improv improvee it from a process point of view view.. All work, whether in finance, marketing, accounting, or other functions, is accomplished by processes. For example, financial analysis of a stock, closing the books at the end of the year, or conducting market research are each conducted by carrying out an appropriate process. Thus, process pr inciples and tools can be applied in every function in a business. All of these processes and systems interact with their internal and external environments. We have have indicated the nature of internal interaction through cross-functional decision making. Interaction with the external environment occurs through the economic, physical, social, and political environment of operations. Examples include economic changes such as rising labor costs, social changes such as customer preference for “green” products, and political changes such as regulations. Each of these can mean that the operations function and associated supply chain will have to change the way it was producing products and services. Operations is surrounded by both internal and external environments and constantly interacts with them. The interactive nature of these relationships makes it necessary to constantly monitor the environment and make decisions related to corresponding changes in operations and the supply chain when needed. In the fast-changing world of today’s global business, constant change has become essential as a means of survival. Viewing operations as a process or a constantly updating transformation system helps us understand how operations and the supply chain cannot be insulated from changes in the environment but rather must adapt to them.

1.7

CHALLENGES FACING OPERATIONS AND SUPPLY SUPPLY CHAIN MANAGERS MANAGERS

LO1.5 Identify

contemporary challenges facing operations and supply chain managers.

Several challenges are important for operations and supply chain managers today and will be addressed repeatedly throughout this text. These challenges make operations and supply chain management an exciting and interesting place for aspiring managers and those who want the challenge of leadership in a fast-moving career.

14


Services

Operations concepts and ideas have been applied in ser vice operations for years. Yet, service operations lag behind manufacturing in applying the latest ideas in supply chain management, lean operations, and quality improv improvement. ement. This represents a challenge and tremendous opportunity to apply what is learned in this course. Also, service-specific ideas such as service recovery, web-enabled service and globalization of service still represent implementation challenges. Nevertheless, some leading service businesses do excel in operations including Walmart, Nordstrom, Starbucks, Amazon.com, FedEx, and Delta Airlines, to name only a few.. They excel by applying many of the operations concepts that are presented in this text. few

CustomerDirected Operations

Every operation should be externally directed to meet customer requirements based on the “voice of the customer .” This concept is often taught in marketing courses and is being integrated into operations and supply chain courses as well. A key point is that operations efficiency need not be sacrificed in the pursuit of meeting customer needs. Rather, the customer can be a powerful driver for reducing waste and improving the efficiency of all processes as firms reduce or eliminate activities that customers do not value. This is an ongoing challenge for for operations and supply chain managers to put the customer f irst, and we provide tools and concepts for doing so.

Integration of Decisions Internally and Externally

One of the most difficult challenges facing all managers is cross-functional integration within the organization. Some organizations are managing functions as separate departments with little integration across them. The best operations are now seeking increased integration through the use of cross-functional teams, information systems, management coordination, rotation of employees and other methods of integration. Most of the implementation problems of new systems or new approaches can be traced to lack of cross-functional internal cooperation. The same thing can be said about interorganizational change in supply chains. Even when companies partner with their suppliers or customers the partnerships are often not successful. Adequate information systems may also be lacking for supply chain integration.

Environmental Sustainability

The focus on sustainability of the natural environment has been heightened in recent years with concerns over global warming, water contamination, air pollution, and so on. Organizations are increasingly being asked to produce and deliver products or services while minimizing the negative impact on the global ecosystem and not endangering the ability to meet the needs of future generations. See the Operations Leader box titled “Sustainability in Interface Inc.’s Operations Transformation Process” for an example of one firm’s success in facing these issues. Operations and supply chain partners have made tremendous strides in reducing pollution of the environment from air to ground to water, but there is still a long way to go. Operations and their supply chains are finding they can reduce pollution, conserve resources, recycle products and be socially responsible to provide a sustainable world for future generations. Sustainability is a challenge that progresCoke is produced and sold globally. Here, workers unload sive operations and supply chain bottles of Coca Cola from a truck in Caracas, Venezuela. © Ronaldo Schemidt/AFP/Getty Images organizations are accepting.

Chapter 1

Operations Leader


15

Sustainability in Interface Inc.’s Operations Transformation Process

Interest in sustainability continpost-consumer waste (used carues to grow, and the operations pet) as raw material input to their function of most organizations is production system. It is not a deeply involved in such efforts. perfect system, as it still requires The philosophy of sustainability some newly extracted raw mateis “meeting the needs of the rials, but they believe they are present without compromising moving in the right direction for the ability of future generations achieving sustainability. to meet their own needs.” Over With production on four contithe past �� years, carpet manunents and offices in more than facturer Interface Inc. has shifted �� countries, Interface Inc. is the its operations toward this phiglobal leader in the design, prolosophy and three bottom-line duction, and sales of modular carimpacts: social, environmental, pet squares. Since undertaking and financial. Or, in their words: the goal of sustainability, InterPeople, Planet, and Profit. face Inc. reports more than �� A typical operations transformillion pounds of post-consumer post-consumer mation process requires a conwaste has been diverted from tinuous supply of new raw matelandfills to serve as raw materials rial input. “In most instances, for new carpet squares. They extraction of raw material have achieved a series of major [from the natural environment] © Arcaid Images/Alamy Stock Photo milestones at the European manexceeds its natural rate of regenufacturing facility in The Nethereration.” Following production, customers use and then lands. As of ��, the plant is operating with �� percent dispose of products. Interface Inc. set out to change this renewable energy, using virtually zero water in manufacturtypical supply chain with its environmental costs at both ing processes and has attained zero waste to landfill. ends. They found that the most benign materials to use in Source: Adapted from Dave Gustashaw and Robert W. Hall, manufacturing new products are their own used products. “From Lean to Green: Interface, Inc.”. Target ��, no. � Creating a closed-loop supply chain, they use their own (��), pp. �–�� and interfaceglobal.com interfaceglobal.com ��.

Globalization of Operations and the Supply Chain

1.8

Finally, the globalization of operations and supply chains is a pervasive theme in business today. One can hardly avoid information on the accelerating nature of global business. Strategies for operations and its supply chain partners should be formulated with global effects in mind and not only consider narrow national interests. Even many small businesses compete globally, sourcing or selling goods and services in markets with global competitors. Facility location must be considered in view of its global implications. Technology can be transferred rapidly across national borders. All decisions in operations and its associated supply chains are affected by the global nature of business.

KEY POINTS AND TERMS This text provides a broad overview of the challenging and dynamic field of operations management and the supply chain. It stresses decision making in operations, its associated supply chain, and the relationship of these decisions to other functions. The five major decision categories—process, quality, capacity, inventory and supply chain are the organizing framework for the text.

16


Key points emphasized in the chapter are these: ∙ Operations and its associated supply chain produces and delivers goods or services deemed to be of value to customers in a global economy. economy. The operations function is essential for both for-pro for-profit fit and nonprofit organizations. ∙ Operations management focuses on decisions for the production and delivery of the firm’s products and services. These decisions are intended to maximize the value inherent in goods or services delivered to customers throughout throughout the entire supply chain. ∙ The supply chain is the network of manufacturing and service operations that supply each other from raw materials through manufacturing to the ultimate customer. The supply chain consists of the physical flow of materials, money, and information along the entire chain of sourcing production, and distribution. The supply chain connects many different organizations. ∙ There are five key groupings of decisions in operations: process, quality, capacity, inventory, inven tory, and supply chain. These decisions need to utilize analytics when appropriate and account for contingencies, or special situations, because a best practice may not be best in all circumstances. ∙ Operations decisions are often cross-functional in nature. Decisions may impact or be impacted by activities in other functions such as marketing and finance. Often, crossfunctional teams are formed to undertake complex decisions. ∙ We identify several challenges facing operations and supply chain managers that are emerging and will be important in the future. These challenges are services, customerdirected operations, integration of decisions internally and externally, environmental sustainability,, and globalization of operations and the supply chain. sustainability

Key Terms

STUDENT INTERNET EXERCISES

Value 4 Sourcing function 5 Logistics function 5 Supply chain 5 Operations management 6 Decision making 6 Process 6

Quality 6 Capacity 6 Inventory 6 Process view 6 Analytics 10 Cross-functional decision making 11

Transformation system 11 Internal and external environments 13 Voice of the customer 14 Sustainability 14 Globalization 15

1. Search the Internet for “Wikipedia Operations Management.” Management.” Read about the Wiki definition of Operations Management and prepare a short synopsis of the History of Operations Management. 2. Search the Internet for “How everyday everyday things are made.” Find a site (e.g., manufacturing.stanford.edu) that shows everything from motorcycles to jelly jell y beans beans to denim denim.. Create Create a presen presentation tation that exp explains lains the five opera operation tionss and and suppl supply y chain chain decisions relevant to the sourcing, production and delivery of a product of your choosing. 3. Monster.com www.monster.com Check the monster.com website for positions and career opportunities in operations management. Come to class prepared to discuss one or two jobs in operations that you found interesting (not necessarily an entry-lev entr y-level el job).

Chapter 1


17

Discussion Questions 1. Why study operations management in the supply chain? 2. What is the the difference difference between between the terms “production management” managemen t” and “operations management management”? ”?

8. For the organizations organizations listed in question 7, describe the inputs, transformation process, and outputs of the production system.

3. What is the difference between operations management and supply chain management?

9. Describe the decision-maki decision-making ng view and the view of of operations as a process. Why are both views useful in studying the field of operations management?

4. What are the key decisions made by sourcing and logistics managers? 5. How does the work of an operations manager differ from the work of a marketing manager or a finance manager? How are these functions similar?

10. Write a short paper paper on some of the the challenges challenges facing operations management in the future. Use newspapers, newspa pers, business magazines, or the Internet as your sources.

6. How is the operations operations management management function related to activities in human resources, information systems, and accounting?

11. Review job postings from various sources for management positions that are available for operations managementt graduates. Summarize the responsibilitie managemen responsibilitiess of these positions.

7. Describe the nature of of operations operations management management in the following follo wing organizations. In doing this, f irst identify the outputs of the organization and then use the five decision types to identify important operations decisions and responsibilities responsibilities..

12. Describe how the view view of operations as a process process can be applied to the following types of work: a. Acquisition of another company. b. Closing the books at the end of the year.

a. A college library b. A hotel

c. Marketing research for a new product. d. Design of an information system.

c. A small manufactu manufacturing ring firm

e. Hiring a new employee.

�

� � � � � � �

Operations and Supply Chain Strategy LEARNING OBJECTIVES After reading this chapter, you should be able to: LO�.�

Define operations strategy.

LO�.�

Describe the elements of operations strategy and alignment with business and other functional strategies.

LO�.�

Differentiate the ways to compete with operations objectives.

LO�.�

Compare product imitator and innovator strategies.

LO�.�

Provide examples of a distinctive competence for operations.

LO�.�

Explain the nature of global operations and supply chains.

LO�.�

Describe two types of supply chain strategies.

LO�.�

Illustrate how operations can become more environmentally sustainable.

LO2.1 Define opera-

tions strategy. 18

There is an increasing awareness that operations and the supply chain contribute to the global competitive position of a business and are not merely making a firm’s products or services. This can be done by contributing distinctive capability (or competence) to the business and continually improving the products, services, and processes. The Operations Leader box on Insignia Athletics discusses the way it competes through a strategy of flexible manufacturing and just-in-time delivery for both customized and standard products. Operations should be fully connected to the business strategy. Operations strategies and decisions should fulfill the needs of the business and add competitive advantage to the firm.

Chapter 2

Operations Leader Insignia Athletics in Worcester, Massachusetts, is manufacturing baseball gloves in the United States, where wages are much higher than those paid by other companies for imported gloves. Insignia balances the cost of labor with other product characteristics that customers value, like fast delivery, unique designs, product quality, and customer preferences. Their $��–�� gloves are sold through retailers and online. Gloves can be customized with your choice of colors and your embroidered name, and delivered in ten days. Operations strategy helps this firm compete. Insignia uses the advantages of a flexible justin-time manufacturing process to quickly make, ship, and sell what customers want, without old


19

Insignia Athletics: American-Made for America’s Pastime inventory to sell off when styles change. Material costs, mostly leather, make up �� percent of manufacturing costs. The company developed an automated cutting system to get higher yields from irregularly shaped raw materials and the system can be very quickly updated for new styles. While U.S. labor costs are high, Insignia competes with efficient manufacturing, material savings, speed to market, quick response to retailers, and the ability to customize for the consumer. Firms use their operations strategy to compete in a variety of ways. Source: “Worcester Manufacturer

© Purestock/SuperStock

Dons a Rally Cap,” www.wbjournal.com, ��, www.insigniaathletics.com, ��.

The operations function is a key value creator for the firm. Value can be created only by operations and supply chains that are more productive than competitors’ in relation to the company’s chosen markets. All functions of the firm must be well coordinated for value to be created and competitive advantage to occur. The cross-functional coordination of decision making is facilitated by an operations strategy that is developed by a team of managers from across the entire business. The following definition of operations strategy is a starting point for our discussion: Operations strategy is a consistent pattern of decisions for operations and the associated supply chain that are linked to the business strategy and other functional strategies, leading to a competitive advantage for the firm.

This definition will be expanded throughout this chapter as a basis for guiding all decisions that occur in operations and its supply chain with decisions in other f unctions. We will use McDonald’s as an example in the next several sections to illustrate the elements of an operations strategy. In 1955, Ray Kroc opened his first restaurant in Des Plaines, Illinois, patterned after the McDonald brother’s hamburger stand in California. The McDonald’s service system was designed on the idea of a very limited menu and fast production of standardized food and service with convenience and a low price. Never before had customers been served food so fast in a clean and courteous environment. Using a standard design for equipment, facilities, and employee training, the McDonald’s system was replicated in many locations and rapidly expanded throughout the United States and then the world. The McDonald’s system is a standardized service system designed to meet stringent specifications. Every detail of the system is designed to provide fast and efficient food and service.

20


McDonald’s is a leading global service firm. © McGraw-Hill Education/ Christopher Kerrigan

McDonald’s has continuously adapted its service system and supply chain over the years. For example, the menu has been expanded to offer many more food and beverage items, but always within the capability of the existing restaurants. They have updated their information systems in operations, and responded to environmental challenges by replacing, for example, the foam boxes previously used for sandwiches with biodegradable paper wrappers. In response to healthy food trends, they added salads, apple slices, and grilled chicken. Nevertheless, McDonald’s still has its critics and sometimes is blamed for the obesity of Americans and for having an adverse environmental impact. McDonald’s is a global service firm. The operations strategy for global expansion has been to replicate the service system design and supply chain in each country with minimum modifications to the menu or processes. However, a few local international options are provided. For example, McDonald’s serves beer in Germany, McRice in Indonesia, soup in Portugal, and salmon burgers in Norway. They have also extended their supply chain forward by developing a franchise system that maintains strong control over the product and service. Today, McDonald’s is the global leader in food service with more than 35,000 restaurants in 120 countries serving an average of 68 million customers each day. Now we will describe the elements of operations strategy in detail. We will use McDonald’s to illustrate how the elements of operations strategy support overall business strategy.

2.1

OPERATIONS STRATEGY MODEL

LO2.2 Describe

the elements of operations strategy and alignment with business and other functional strategies.

Operations strategy is a functional strategy along with a firm’s other functional strategies such as those of marketing, engineering, information systems, and human resources. Since operations strategy is a functional strategy, it should be guided by the business and corporate strategies shown in Figure 2.1. The four elements inside the dashed box—mission, objectives, strategic decisions, and distinctive competence—are the heart of operations strategy. The other elements in the figure are inputs or outputs from the process of developing operations strategy. The outcome of using the operations strategy is a consistent pattern of operations decisions that are well connected with the other functions in the business.

Chapter 2

FIGURE �.� Operations strategy process.


21

Corporate strategy

Business strategy

Internal analysis

Operations strategy

Functional strategies in

Mission

marketing, finance, engineering,

External analysis

Objectives (cost, quality, flexibility, and delivery)

human resources, and information systems

Strategic decisions (process, quality system, capacity, inventory, and supply chain)

Distinctive competence

Consistent pattern of decisions

Results

Corporate and Business Strategy

Corporate strategy and business strategy are at the top of Figure 2.1. The corporate strategy defines the business that the company is pursuing. For example, Walt Disney Corporation considers itself in the business of “making people happy.” Disney Corporation includes not only theme parks but the production of cartoons, movie production, merchandizing, and a variety of entertainment-related businesses around the world. Business strategy follows from the corporate strategy and defines how each particular business will compete. Most large corporations have several different businesses, each competing in different market segments. Michael Porter (1980) describes three generic business strategies: differentiation, low cost, and focus. Differentiation is associated with a unique and frequently innovative product or service, while low cost is pursued in commodity markets where the products or services are imitative. Focus refers to the geographical or product portfolio being narrow or broad in nature. Focus can be combined with either a differentiation or a low-cost strategy.

22


Operations Mission

Every operation should have a mission that is connected to the business strategy and is coordinated with the other functional strategies. For example, if the business strategy is differentiation through innovative products, the operations mission should emphasize new-product introduction and flexibility to adapt products to changing market needs. Other business strategies lead to other operations missions, such as low cost or fast delivery. The operations mission is thus derived from the particular business strategy selected by the business unit. At McDonald’s, the operations mission is to provide food and service quickly to customers with consistent quality and low cost in a clean and friendly environment. See the Medtronic Operations Leader box for another example of a mission-driven firm.

Operations Objectives

Operations objectives, sometimes called THE MAGIC KINGDOM. Disney Corporation is in competitive priorities, are the second ele- the business of “making people happy.” ment of operations strategy. The four com- © Phelan M. Ebenhack/AP Images mon objectives of operations are cost, quality, delivery, and f lexibility. In certain situations, other objectives may be added, such as innovation, safety, and sustainable operations. The objectives should be derived from the operations mission, and they constitute a restatement of the mission in quantitative and measurable terms. The objectives should be long-range-oriented (5 to 10 years) to be strategic in nature and should be treated as goals. Definitions of the four common operations objectives follow: ∙ Cost is a measure of the resources used by operations, typically the unit cost of production or the cost of goods or ser vices sold. ∙ Quality is the conformance of the product or service to the customers’ requirements. ∙ Delivery is providing the product or service quickly and on time. ∙ Flexibility is the ability to rapidly change operations. Table 2.1 shows some common measures of objectives that can be used to quantify long-range operations performance. The objectives for five years into the future are compared to the current year and also to a current world-class competitor. The comparison to a world-class competitor is for benchmarking purposes and may indicate that operations is behind or ahead of the competition. However, the objectives should be suited to the particular business, which will not necessarily exceed the competition in every category. At McDonald’s, each restaurant has specific objectives with respect to cost, quality, and service times. These objectives are pursued using extensive standards and are frequently measured for compliance. McDonald’s tracks the performance of each restaurant and compares the results with those of competitors.

Strategic Decisions

Strategic decisions constitute the third element of operations strategy. These decisions determine how the operations objectives will be achieved. A consistent pattern of strategic decisions should be made for each of the major operations decision categories (process, quality, capacity, inventory, and supply chain). These decisions must be well integrated

Chapter 2


TABLE �.� Typical Operations Objectives

Current Year

Objective: � Years in the Future

Current: World-Class Competitor

��% �.�

��% �.�

��% �.�

��% �% �%

��% �% �.�%

��% �% �%

��% � wk

��% � wk

��% � wk

�� mo � mo

� mo � mo

� mo � mo

23

Cost Manufacturing cost as a percentage of sales Inventory turnover Quality Customer satisfaction (percentage satisfied with products) Percentage of scrap and rework Warranty cost as a percentage of sales Delivery Percentage of orders filled from stock Lead time to fill stock Flexibility Number of months to introduce new products Number of months to change capacity by ±��%

with other functional decisions. This coordination and consistency is one of the most difficult things to achieve in business. Table 2.2 indicates some important strategic decisions for operations. Note that these decisions may require trade-offs or choices. For example, in the capacity area there is a

Operations Leader

How Mission-Driven Companies Create Long-Term Shareholder Value: Medtronic’s Former CEO Bill George

. . . I have developed a deep conviction that the widely accepted philosophy, that the primary mission of a for-profit corporation is to maximize shareholder value, is flawed at its core. While that philosophy may result in short-term increases in shareholder value, it is simply not sustainable over the long term. Over time, shareholder value will stagnate and eventually decline for companies that drive their strategy simply from financial considerations. . . . The best path to long-term growth in shareholder value comes from having a well-articulated mission that employees are willing to commit to, a consistently practiced set of values, and a clear business strategy that is adaptable to changing business conditions. Companies that pursue their mission in a consistent and unrelenting manner in the end will create shareholder value far beyond what anyone believes is possible. . . . Tying financial incentives of the management team— be they bonuses, incentive compensation, stock grants,

or stock options—to immediate results that increase shareholder value will indeed motivate the top people in the organization, at least in the short term. This is well established and documented. Unfortunately, the top people represent only a small fraction of the people doing the work of the organization. . . . The purpose of a company boils down to one thing: serving the customers. If it is superior (in serving its customers) to everyone else in the field, and can sustain this advantage over the long term, that company will create ultimate shareholder value. . . . In the end, motivating employees with a mission and a clear sense of purpose is the only way I know of to deliver innovative products, superior service, and unsurpassed quality to customers over an extended period of time. Over time, an innovative idea for a product or a service will be copied by your competitors. Creating an organization of highly motivated people is extremely hard to duplicate. Source: William George, “Address Given to the Academy of Management,” Academy of Management Executive ��, no.

� (November ��), pp. ��–��, and medtronic.com, ��.

24


TABLE �.� Examples of Important Strategic Decisions in Operations

Strategic Decision

Decision Type

Strategic Choice

Process

Span of process Automation Process flow Job specialization

Make or buy Handmade or machine-made Project, batch, line, or continuous High or low specialization

Quality

Approach Training Suppliers

Prevention or inspection Technical or managerial training Selected on quality or cost

Capacity

Facility size Location Investment

One large or several small facilities Near markets, low cost, or foreign Permanent or temporary

Inventory

Amount Distribution Control systems

High or low levels of inventory Centralized or decentralized warehouse Control in greater or less detail

Supply Chain

Sourcing Logistics

Insource or outsource products National or global distribution

choice between one large facility and several smaller ones. While the large facility may require less total investment due to economies of scale, the smaller facilities can be located in their markets and provide better customer service. Thus, the strategic decision depends on what objectives are being pursued in operations, the availability of capital, marketing objectives, and so forth. McDonald’s illustrates how a consistent pattern of strategic decisions is made in the five operations decisions areas: Process: Specialized equipment and work flows ensure meals are delivered to cus-

tomers quickly. For example, the special French fry scoop puts the right amount of fries in each serving with little effort. Also, ser vers use information technology to instantly communicate orders to food preparers. Quality: More than 2,000 quality, food safety, and inspections monitor food as it moves from farms to suppliers to restaurants. McDonald’s requires that 72 safety and quality protocols be conducted at each restaurant every day. Managers are trained at “Hamburger U” in the McDonald’s system to ensure standards for service, speed, food quality, cleanliness, and courtesy are met. Capacity: Restaurant capacity is carefully designed to control customer waiting times. Employees are scheduled to meet the fluctuating demand during the day. Inventory: Just-in-time replenishment ensures food and packaging are available when needed. Food and packaging are highly standardized across restaurants. Supply Chain: Each restaurant is connected to its supply chain for fast replenishment. The supply chain is designed for f requent deliveries and to avoid stockouts.

Distinctive Competence

All operations should have a distinctive competence (or operations capability) t hat differentiates it from the competitors. The distinctive competence is something that operations does better than anyone else. It may be based on unique resources (human or capital) that are difficult to imitate. Distinctive competence can also be based on proprietary or patented technology or any innovation in operations that cannot be copied easily. The distinctive competence should match the mission of operations. For example, it is a mismatch to have a distinctive competence of superior inventory management systems when the operations mission is to excel at new-product introduction. Likewise, the distinctive competence must be coordinated with marketing, finance, and the other functions so that it is supported across the entire business as a basis for competitive advantage.

Chapter 2 Walmart has distinctive competencies to support its low-cost strategy. © Mcgraw-Hill Education/ John Flournoy

2.2


25

Distinctive competence may be used to define a particular business strategy in an ongoing business. The business strategy does not always emanate from the market; it may be built instead on matching operations’ distinctive competence (current or projected) with a current or potential new market. Both a viable market segment and a unique capability to deliver the product or service offered must be present for the firm to compete. Walmart has a mission to be the low-cost retailer. To achieve this mission it has developed a distinctive competence in cross-docking aimed at lowering the costs of shipping. Using cross-docking, goods from suppliers’ trucks are transferred across the loading dock to waiting Walmart trucks and delivered to the stores without entering the warehouse. Walmart also has a sophisticated inventory control system and more purchasing power than its competitors and therefore can minimize inventories and related costs. These distinctive competencies help Walmart compete on the basis of low cost. McDonald’s early distinctive competence was its unique service and supply chain that it designed. Since other firms have copied this system over time, t he distinctive competence has shifted to continuous improvement of the transformation system along with the brand. McDonald’s system and its brand are now its distinctive competence.

COMPETING WITH OPERATIONS OBJECTIVES

LO2.3 Differentiate

the ways to compete with operations objectives.

We will now use the four operations objectives discussed above to describe different ways to compete through operations. Most fir ms choose one or a few objectives to focus on, so that the strategic decisions made in operations can be aligned with and support these focused objectives. Suppose we start with the idea of competing through a quality objective. Delivering quality means satisfying customer requirements. This assumes that marketing has identified a particular target market, and that operations understands these customers’ specific requirements. Operations processes must be capable of meeting those requirements. If competing through quality is the objective, strategic decisions related to product or service design, operations, and the supply chain must support customers’ expectations for quality. For example, expectations for customer service in a moderately priced hotel differ from those for a high-end luxury hotel. Workers must be trained to provide the expected level of service, and supply chain decisions—for instance, which softness of sheets to purchase for the hotel—must satisfy customer requirements. Now, suppose we decide to pursue a low-cost objective. Perhaps the best way to achieve low cost is to focus on conforming to customer requirements (quality) in product/service design and operations processes by eliminating rework, scrap, inspection, and other nonvalue-added activities. By preventing errors through continuous improvement, costs can be lowered. A low-cost objective may require more than just an e mphasis on conformance quality. Investment in automation and information systems may also be needed to reduce costs. If we select a delivery objective, strategic decisions should support fast or on-time delivery, depending on the expectations of customers. Industrial (business) customers often want on-time delivery because they schedule loading docks at warehouses or retail stores and do not want several trucks delivering at the same time. Fast delivery may be desirable for consumers ordering products online (they will order from the company that can deliver the product soonest). For services, fast delivery could take the form of the shortest wait for a fast food meal during the lunch rush. In manufacturing, when quality improvement efforts

26


reduce non-value-added steps, the time to produce and deliver the product is indirectly reduced. Time can also be directly reduced by improving process changeover times, simplifying complex operations, and redesigning the product or service for fast production. Finally, we could choose to emphasize a flexibility objective. If we reduce delivery time, flexibility will automatically improve. For example, if it originally took 16 weeks to make a product and we reduce production time to 2 weeks, then it is possible to change the schedule within a 2-week time frame rather than 16 weeks, making operations more flexible to changes in customer requirements. Other types of flexibility can be directly improved by adding capacity, buying more flexible equipment, training workers to perform a wider variety of tasks, or redesigning the product or service for high variety. We can see that operations objectives are connected. If we stress a quality objective, we also naturally get some cost reduction, time improvement, and more flexibility. Quality is often a good place to start for improving operations. Then other objectives may be tackled by directing strategic decisions to impact them. Sometimes operations objectives require tradeoffs. Designing more quality into the transformation processes may cost more when the best technology is used, and designing in flexibility to make future changes may also cost more. We use a few company examples to illustrate the effect of focusing on certain operations objectives. McDonald’s, of course, excels at low-cost and fast (delivery) service. Zara, a giant European fashion retailer, is able to achieve fast replenishment of hot-selling items within a few weeks by holding spare capacity and supporting rapid supply chain management practices. Lexus is renowned for high quality in its cars, which results from both its design and its manufacturing process. Chipotle uses a highly flexible serving process that allows each customer to self-customize a meal.

2.3

CROSS�FUNCTIONAL STRATEGIC DECISIONS

LO2.4 Compare

product imitator and innovator strategies.

Not only should objectives be linked to an operations mission, operations strategic decisions should be linked to business strategy and to marketing and financial strategies as well. Table 2.3 illustrates this linkage by showing two diametrically opposite business strategies that can be selected and the resulting functional strategies. The first one is the product imitator (low-cost) business strategy, which is typical of a mature, price-sensitive market with a standardized product (or service). In this case, the operations objective should emphasize cost as the dominant objective, and operations should strive to reduce costs through strategic decisions such as superior process technology, low personnel costs, low inventory levels, a high degree of vertical integration, and quality improvement aimed at saving cost. Marketing and finance would also pursue and support the product imitator business strategy, as shown in Table 2.3. The second business strategy shown in the table is one of product innovator and newproduct introduction (or product/service leadership). This strategy typically is used in emerging and possibly growing markets where advantage can be gained by bringing to market superior-quality products in a short amount of time. Price is not the dominant form of competition, and higher prices are charged, thereby putting a lower emphasis on costs. In this case, the operations and supply chain objective is flexibility to introduce superior new products rapidly and effectively. Operations strategic decisions include the use of new-product introduction teams, flexible automation that is adapted to new products, a workforce with flexible skills, and rapidly responding to marketplace changes. Once again, finance and marketing also need to support the business strategy to achieve an integrated whole. What Table 2.3 indicates is that drastically different types of operations are needed to support different business strategies. Flexibility and superior-quality products may cost more for the product innovator strategy. There is no such thing as an all-purpose operation

Chapter 2

TABLE �.� Strategic Alternatives Business Strategy

�M corporate strategy is product innovation. © McGraw-Hill Education/ Jill Braaten


Strategy A

Strategy B

Product Imitator

Product Innovator

Market Conditions

Price-sensitive Mature market High volume Standardization

Product-features-sensitive Emerging market Low volume Customized products

Operations Mission and Objectives

Emphasize low cost for mature products

Emphasize flexibility to introduce new products

Operations Strategic Decisions

Superior processes Dedicated automation Slow reaction to changes Economies of scale Workforce involvement

Superior products Flexible automation Fast reaction to changes Economies of scope Use of product development teams

Distinctive Competence Operations

Low cost through superior process technology and vertical integration

Fast and reliable new-product introduction through product teams and flexible automation

Marketing Strategies

Mass distribution Repeat sales Maximizing of sales opportunities National sales force

Selective distribution New-market development Product design Sales made through agents

Finance Strategies

Low risk Low profit margins

Higher risks Higher profit margins

27

that is best for all circumstances. Thus, when asked to evaluate operations, one must immediately ask, what is the business strategy, mission, and objective of operations? Table 2.3 also suggests that all functions must support the business strategy for it to be effective. For example, in the product imitator strategy, marketing should focus on mass distribution, repeat sales, a national sales force, and maximization of sales opportunities. In contrast, in the product innovator strategy, marketing should focus on selective distribution, new-market development, product design, and perhaps sales through agents. It is not enough for just operations to be integrated with the business strategy; all functions must support the business strategy and one another. Integrating marketing and operations and clearly laying out a particular mission and objective for operations is essential to meet customer preferences for order winners and order qualifiers. An order winner is an objective that will cause customers in a particular segment that marketing has selected as the target market to choose a particular product or service. In the product imitator strategy, the order winner for the customer is price; this implies the need for low cost in operations, marketing, and finance. Other objectives in this case (flexibility, quality, and delivery) are order qualifiers in that the company must have acceptable levels of these three objectives to qualify to get

28


the customer order. Insufficient levels of performance on order qualifiers can cause the business to lose the order, but higher performance on order qualifiers cannot by themselves win the order. Only low price/cost will win the order in this case. In the product innovator strategy, the order winner is flexibility to introduce superior products rapidly and effectively; the order qualifiers are cost, delivery, and quality. Note how the order winner depends on the particular strategy selected and that all functions must pursue superior levels relative to the competition on the order winner while achieving levels acceptable to the customer on order qualifiers. What is the order winner at Walmart? It’s low cost, and strategic decisions in operations are made to keep costs down. The same cannot be said about Nordstrom, which competes on upscale merchandise and superior customer service. Since the order winners in these stores are different, so are the operations strategies.

2.4

DISTINCTIVE COMPETENCE

LO2.5 Provide

examples of a distinctive competence for operations.

It’s not enough to just select the right objectives for operations or linking functional strategies. While these actions are important, the strategy must provide a competitive advantage. This requires a strategy that is difficult to imitate or substitute and that is rare and valuable to the firm.1 Otherwise, the competition will quickly copy or circumvent the strategy to yield it competitively neutral. A competitive advantage can be provided by operations through developing capabilities that are a distinctive competence. There are many kinds of distinctive competencies that can be developed that are unique and difficult to copy. We categorize these by using the operations strategic decision types already discussed. Process: Patented or proprietary technology or equipment. 3M, for example, devel-

ops some of its own manufacturing equipment to ensure that it is not available to competitors. Also, having a process that is innovative, for example, producing energy from corn, waste products, or algae. Finally, unique practices and culture that encourage low turnover and high productivity of employees. Quality: Innovative quality practices, for example, the ability to implement Six Sigma in-depth or winning the Malcolm Baldrige National Quality Award. Capacity: Being the first to have capacity in a particular region or market. For example, Volkswagen was the first foreign company to make cars in China. Also, having more capacity when others are lagging behind can be a distinctive competence. Xcel Energy, for example, is ahead on installing wind-generated electricity capacity. Inventory: The ability to have sufficient inventory to meet demand. For example, Seagate Technologies could meet demand for its disk drives, while competitors could not due to floods in Southeast Asia in 2011. A distinctive competence in one or more of the above areas can lead to a competitive advantage but, of course, it must also meet a customer need. If a distinctive competence does not meet a customer need, it is worthless. It must also align with the business strategy. Note that distinctive competencies such as unique advertising or creative financing plans can come from outside of operations. Distinctive competencies can be difficult to imitate because they are often path dependent. In this case, one step leads to the next and the path of development is critical and may take many years (or even decades). For example, the capability to explore and drill for oil offshore �

This is often called the Resource-Based View (RBV) of the firm.

Chapter 2

Operations Leader


29

Under Armour Goes Local

Under Armour, maker of sports clothing and accessories, has an operations mission to develop advanced manufacturing processes with the goal of producing products on a small scale in local markets where they are sold. They plan to manufacture in the United States for U.S. consumers, in Brazil for South American buyers, in Europe for the European © Justin Sullivan/Getty Images market, and in China for the Chinese market. Under Armour currently manufactures in �� countries, mostly China, Jordan, and Vietnam. But shipping times to key markets are typically weeks and sometimes longer

due to production delays or labor disputes at ports. Timing is everything in this “fashion industry” for firms like Under Armour. Engineers and designers from around the world will rotate and collaborate at headquarters in Baltimore, Maryland, to develop the new manufacturing processes. Under Armour hopes to improve response times with their “local for local” model, by both producing and selling within their global markets. Source: L. Mirabella, “Under Armour Pushes to Localize Manufacturing,” Baltimore Sun, reprinted in Star Tribune,

Oct. ��, ��.

is rare, and only a few global firms do this. Distinctive competencies can also be idiosyncratic and may be difficult to examine or understand. This is particularly true in the case of culture, or where learning is involved. For example, Trader Joe’s grocery stores have a unique culture with low turnover and good profitability, and medical technology firms illustrate how learning (and knowledge) can be valuable capabilities. Thus, distinctive competencies may appear to be easy to copy but may be more difficult to imitate than they first appear. See the Operations Leader box on Under Armour for an example of using operations strategy to create competitive advantage. In the remainder of this chapter, we expand operations strategy to a global scope and also consider supply chain strategy and environmental factors. These are, of course, emerging topics of considerable interest to business.

2.5

GLOBAL OPERATIONS AND SUPPLY CHAINS

LO2.6 Assess the

nature of global operations and supply chains.

Every day we hear that markets are becoming global in nature. Many products and services are global in nature, including soft drinks, DVD players, TVs, fast food, banking, travel, automobiles, motorcycles, farm equipment, machine tools, and a wide variety of other products. To be sure, there are still market niches that are national or even local but the trend is toward more global markets and products. When operating in global markets, a company needs to be organized properly to produce and market its products. As a result, the global corporation has emerged with the following characteristics. Facilities and plants are located on a worldwide basis, not country by country. Products and services can be shifted between countries. Components, parts, and services are sourced on a global basis. The best worldwide suppliers are sought, regardless of their national origin. The entire supply chain is global in nature. A few wellknown manufacturing companies that are global corporations are Ford, 3M, Nestl é, Philips, Deere & Company, Coca-Cola, and Caterpillar.

30


The global corporation uses global product design and process technology. A basic product or service is designed, whenever possible, to fit global tastes. When a local variation is needed, it is handled as an option rather than as a separate product or service. Process technology is also standardized globally. For example, Black & Decker recently designed worldwide hand tools. Even fast food, clothing, and soft drinks have become global products. In the global corporation, demand for products or services is considered on a worldwide, not a local, basis. Therefore, the economies of scale are greatly magnified, and costs can be lower. The iPhone came out as a worldwide product and was marketed globally. Its demand and cost were scaled for a global market right from the star t. Logistics and inventory control systems are also global in nature. This makes it possible to coordinate shipments of products and components on a worldwide basis. Some services have taken on a global scope of operations. For example, consulting firms, fast food, telecommunications, air travel, entertainment, financial services, and software programming have global operations. Global consolidation has taken the place of these formerly fragmented service industries. Certainly, not all service is global. There remain services that are delivered on a local basis to Ford has operations located worldwide. serve local markets, but the trend toward globalization is undeniable. © Eduardo Verdugo/AP Images A few of the service companies that are globally oriented are British Airways, Starbucks, Microsoft, and Walmart. Some firms have adopted a hybrid approach with global economies of scale but a local touch. In this case certain functions, for example, product design, are handled on a local basis, while other functions, such as logistics and inventory control systems, are standardized around the world. The implications for operations strategy of this change toward global business are profound. Operations and supply chains must be conceived of as global in nature, including very broad searches for both suppliers and customers. A global distinctive competence should be developed for operations, along with a global mission, objectives, and strategic decisions. Product design, process design, facility location, workforce policies, and virtually all decisions in operations and the supply chain are affected.

2.6

SUPPLY CHAIN STRATEGY

LO2.7 Describe two

types of supply chain strategies.

In the same way that operations are being expanded to a global context, operations strategy can be expanded to supply chain strategy. Supply chain strategy includes consideration of customers, suppliers, sourcing, and logistics in addition to operations. There is a focus on flows of inventory, materials, and information throughout the supply chain from the suppliers to the ultimate customer. A supply chain is the network of manufacturing and service operations that supply one another from raw materials through manufacturing to the ultimate customer. Supply chain strategy thus takes into account not only the operations strategy of the firm but also the strategies and capabilities of the suppliers and customers in t he firm’s supply chain. A supply chain strategy allows the supply chain to compete, not just t he firm. Supply chain strategy should be aimed at achieving a sustainable competitive advantage for the entire supply chain. This advantage can be achieved by expanding the concepts already covered in this chapter. For example, a supply chain should have a distinctive competence that is valuable and difficult to imitate or replace by competitors. This distinctive

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31

competence should be based on what the firm does along with actions of its supply chain partners. In a similar way, the supply chain partners and the firm should be working toward the same mission and objectives in order to have a consistent supply chain strategy. Since no single firm controls the entire supply chain, a coherent supply chain strategy can be difficult to achieve. Nevertheless, it is important to realize that supply chain partners that are working toward differing goals will not be competitive with other supply chains that have achieved a high degree of cooperation and consistency. Just like we have already discussed for operations, there are two fundamental supply chain strategies: imitation and innovation . Imitators have products or services similar to those of their competitors and are oriented toward efficiency and low cost as a way of competing. In contrast, innovators differentiate their product or service as their way of competing and can charge higher prices. For example, Sport Obermeyer is in the fashion skiwear business. Each year up to 95 percent of its ski clothes are new or redesigned. The company must plan production and forecast demand well in advance of sales (more than a year), and as a result it often has stockouts or overstock situations that result in markdowns at the end of the season. The problem facing Sport Obermeyer is that its supply chain doesn’t match the nature of its product. The supply chain is oriented toward efficiency and low cost, whereas Sport Obermeyer with its innovative products needs a faster more flexible supply chain with better forecasting that responds to uncertain demand. Sport Obermeyer appears to have the wrong supply chain. To identify the proper supply chain, companies should first sort their products into two categories: imitative and innovative. Imitative products are like commodities—they have predictable demand and low profit margins. As a result, imitative products should have a very efficient low-cost supply chain. Examples are toothpaste, oil, standard automobiles, and most food. In contrast, innovative products have unpredictable demand and high profit margins. They need a flexible and fast supply chain to deal with uncertainty in demand. Examples are fashion clothing, electric cars, new electronic products, and some toys. The characteristics of these two types of products are shown at the top of Table 2.4. TABLE �.� Supply Chain Strategies Source: Adapted from Fisher (1997)

Product Differences

Imitative Products

Innovative Products

Product life cycle

Greater than � years

� months to � year

Contribution margin

�% to ��%

��% to ��%

Average forecast error when production is planned

��%

��% to ��%

Average stockout rate

�% to �%

��% to ��%

Average forced end-of-theyear markdown

�%

��% to ��%

Objective

Predictable supply at low cost

Respond quickly to unpredictable demand.

Manufacturing

High utilization and low-cost production

Excess buffer capacity and short throughput time. May have low utilization of capacity.

Inventory

High turnover

Significant buffers of parts or finished goods. May have low turnover.

Suppliers

Selected for cost and quality

Selected for speed, flexibility, and quality.

Supply Chain Strategy

32


Note that the product life cycle, contribution margin, average forecasting error, stockout rate, and forced end of the year markdowns are all dramatically different for imitative and innovative products. Firms often make the mistake of using one type of supply chain strategy for both types of products. For example General Mills, a food company, might use an efficient supply chain with high inventory turnover and high utilization of its factories since most of its products are imitative in nature. But General Mills needs a different supply chain that is highly flexible and responsive to meet the uncertain demand for its new and innovative products. When firms face this dilemma, they should not make the mistake of choosing only one supply chain strategy for all products. The two types of supply chain strategies are summarized in the bottom half of Table 2.4. The objectives of these two strategies are different. While imitative supply chains should aim at a predictable supply at low cost, innovative supply chains should aim for quick response to unpredictable demand to minimize stockouts, lost sales, and markdowns. In innovative supply chains the high margins can absorb the higher costs of buffer capacity and buffer inventories needed to deal wit h uncertainty. By using better forecasting, additional capacity, and drastic lead-time reductions for its innovative products, Sport Obermeyer was able to cut the cost of both overproduction and underproduction in half—enough to increase profits by 60 percent. Retailers were very happy that product availability exceeded 99 percent, making Sport Obermeyer the best in the industry for order fulfillment. In every operations decision it is important to consider the proper context, whether it is for the firm or the supply chain of which the firm is a part. Operations and the supply chain set the context not only for operations strategy but also for decision making in all parts of the organization and across the supply chain as well.

2.7

ENVIRONMENT AND SUSTAINABLE OPERATIONS

LO2.8 Illustrate

how operations can become more environmentally sustainable.

Sustainable operations has become an increasingly important par t of operations and supply chain objectives and strategy. It refers to minimizing or eliminating the environmental impact of operations along with social and f inancial viability of the firm for future generations. The greening of operations and the supply chain should begin by examining the environmental footprint in the firm across all operations and supply chains globally. In greening its supply chain a company should examine all opportunities, including product development, sourcing, manufacturing, packaging, distribution, transportation, services, and end-of-life management. This must be a cross-functional effort that involves all functions in the firm, because it may require, for example, investments in new equipment or changes to product packaging. Since reducing operations’ environmental impact is a strategic task, it must be conceived as part of the business strategy. Once the strategy has been set, it is usually best to start with a few focused initiatives from the following list. Others can be attacked later.

1. 2. 3. 4. 5.

Eliminate air, water, and landfill pollution. Reduce energy consumption. Minimize transportation and total carbon footprint. Work with suppliers to use recyclable and biodegradable packaging. Incorporate product reuse, end-of-life return, and recycling.

The first step that most companies take is to measure their environmental impact in any or all of these five areas. Once this is known, cross-functional teams can be formed to

Chapter 2


33

develop strategies and action plans to improve the measures. These teams can also include supply chain partners to spread the effort up and down the supply chain. This should be done in concert with the operations and supply chain strategy to ensure that environmental impacts are minimized. A Walmart effort in 1989 to use recyclable and biodegradable packaging ended in failure. Critics and suppliers believed the effort was intended to generate benefits for Walmart at the expense of its suppliers. In 2005, their environmental effort was different. It was launched by forming teams of representatives from suppliers, Walmart management, environmental groups, government, and academics. The teams set goals, developed measures of environmental impact, and implemented programs to green the supply chain. Some results are as follows: ∙ Buying diesel-electric trucks that keep cargo cold without the engine running, saving nearly $75 million in fuel and 400,000 tons of CO 2 pollution annually. ∙ Committing to buying organically grown cotton from farmers and to buying the alternative crops those farmers need to grow between cotton harvests, making the company one of the world’s largest buyers of organic cotton. Sustainable operations with a focus on the environment is an objective and strategy that firms and operations can achieve with the help of their supply chain partners. This objective need not cost more or reduce profits. In many cases, but not all, through product redesign or process changes, costs can be reduced and profits improved. British retailer Marks & Spencer has met goals to send zero waste to landfills and is the first major retailer to be carbon neutral. Supply chain partners have been an important source of support for this effort.

2.8

KEY POINTS AND TERMS This chapter emphasizes achieving a competitive advantage through operations by developing an operations and supply chain strategy based on what the customers of the business value. The key points are as follows: ∙ Operations strategy consists of mission, objectives, strategic decisions, and distinctive competence. These four elements must be tightly integrated with one another and with other functions. ∙ The operations mission should be aligned with the business strategy. Possible missions for operations include low cost, fast new-product introduction, fast delivery, or best quality. ∙ The objectives of operations are cost, quality, delivery, and flexibility. These objectives can work in concert if non-value-adding activities are removed from operations. One of the four objectives should be selected as an order winner; the others are order qualifiers. ∙ Operations strategic decisions indicate how operations objectives will be achieved. Strategic decisions can be developed for each of the major decision areas (process, quality systems, capacity, inventory, and supply chain). ∙ The operations and supply chain strategy must be linked to the business strategy and other functional strategies, leading to a consistent pattern of decisions, unique capability, and competitive advantage for the firm. ∙ The distinctive competence of operations should support the mission and differentiate operations from its competitors. Possible distinctive competencies include proprietary technology, embedded organization culture, available capacity, inventory, and any innovation in operations that cannot be copied easily.

34


∙ The scope of operations and supply chain strategy has expanded to a global basis, particularly for businesses pursuing a global business strategy. ∙ In many situations the basis of competition is not the firm but the entire supply chain. Supply chain strategy is an extension of operations strategy that considers not only the firm but also the strategies and capabilities of its supply chain partners. ∙ Sustainable operations has become a critical objective and strategy. It should be approached by forming cross-functional teams that include suppliers. Measuring and reducing the environmental impact in all phases of design, operations, and distribution are the path of action. ∙ There is no one best strategy for all operations. The mission, objectives, strategic decisions, and distinctive competence of operations depend on whether a product imitator, product innovator, or another strategy is being pursued by the business.

Key Terms


Operations strategy 19 Functional strategy 20 Corporate satrategy 21 Business strategy 21 Operations mission 22 Operations objectives 22 Strategic decisions 22

Benchmarking 22 Distinctive competence 24 Quality objective 25 Low-cost objective 25 Delivery objective 25 Flexibility objective 26

Product imitator 26 Product innovator 26 Order winners 27 Order qualifiers 27 Global corporation 29 Supply chain strategy 30 Sustainable operations 32

1. Medtronic www.medtronic.com Check the Medtronic website for a mission. How can t he mission be related to operations strategy and operations decisions? 2. Walmart Company www.corporate.walmart.com On the Walmart website read about culture and global responsibility. Come to class prepared to discuss what sets Walmart apart from its competition and how Walmart is approaching global operations. 3. Accenture Consulting www.accenture.com How does Accenture help companies master global operations to enable high performance?

Discussion Questions 1. 2.

What are the reasons for formulating and implementing an operations and supply chain strategy? Describe a possible operations mission that fits the following business situations:

3.

a. Does the business have an operations strategy?

a. Ambulance service. b. Production of hybrid automobile batteries. c. Production of electronics products that have a short product life cycle.

An operations manager was heard complaining, “The boss never listens to me—all the boss wants from me is to avoid making waves. I rarely get any capital to improve operations.”

4.

b. What should be done about the situation? Define the following terms in your own words: operations mission, order winner, order qualifier, and distinctive competence.

Chapter 2

5.

6.

7.

8.

9.

How would you determine whether a company has an operations and supply chain strategy? What specific questions would you ask, and what information would you gather? Evaluate a couple of local hospitals in terms of its emphasis on the four operations objectives: cost, quality, delivery, and flexibility. Are all departments focused on the same objectives? What are the order winners and the order qualifiers? Define some of the strategic decisions that might be required in a grocery store’s operation and its supply chain depending on whether the strategy was emphasizing imitation or innovation. Find examples of operations and supply chain strategies. Write a few paragraphs describing the strategies being pursued. Describe an operation where higher quality will cost more. What is your definition of quality? Why does


35

higher quality cost more? If you use a different definition of quality, will higher quality cost less? 10. What is the distinctive competence of the following companies? a. Starbucks Coffee Company b. Hewlett Packard c. Burger King 11. Explain how a distinctive competence in operations can be the basis for competition in the company. 12. Give two examples of a distinctive competence that can be sustained and not easily duplicated. Explain why it is hard to copy these distinctive competencies. 13. Give an example of a global business with which you are familiar. How has globalization affected its operations and its supply chain? 14. What are the practical consequences of a lack of strategic linkage between the business and the operations function?

� � � � � � � �

Product Design LEARNING OBJECTIVES After reading this chapter, you should be able to: LO�.�

Compare the three strategies for new-product introduction.

LO�.�

Describe the three phases of new-product development.

LO�.�

Evaluate how concurrent engineering deals with misalignment.

LO�.�

Describe the criteria that should be used for supplier selection.

LO�.�

Evaluate an example of Quality Function Deployment.

LO�.�

Explain the benefits of modular design.

New-product development is a crucial part of business. New products provide growth opportunities and a competitive advantage for a fir m. Increasingly, there is a challenge to introduce new products more quickly without sacrificing quality. For example, the world’s automobile makers can now introduce a new car design in two years, whereas it used to take four years. Personal computers have a very short product life cycle, sometimes less than a year. New-product design greatly affects operations by specifying the products that will be made; it is a prerequisite for production to occur. At the same time, existing processes and products can constrain the technology available for new products. Thus, new products must be defined with not only the market in mind but also the production process that will be used to make a product. Product design follows from the development of a business strategy. The business strategy will include a value proposition that defines the target market, the differentiation of your product, and why the customer should buy from you. This is the starting point for designing a new product. These new-product designs should reflect the business strategy. See the Operations Leader box on the Ford Motor Company for linkages between strategy and new-product development. 36

Chapter 3

Operations Leader

•

3.1

Ford strategy and goals for performance and leadership. Market research.

37

The Product Development Process at Ford

The product development process is how Ford’s vision becomes reality—and how societal needs are arrayed and accommodated through innovative design and engineering. An automobile is the most complex product that most people are ever likely to own. A typical midsize family car is made up of more than ��,�� individual parts comprising �� major subsystems or components. At least �� different materials are used in a typical vehicle, including �� different types of plastics. The process of designing and producing a modern vehicle is similarly complex. It begins with information inputs of three major types: •

Product Design

•

Research and development technical approaches to a variety of environmental, safety, and performance challenges.

To accomplish its goals, Ford spends about $� billion per year on research and development. The product development process itself is changing in significant ways. Ford is developing a global approach to product development by integrating the engineering and purchasing organizations and assigning development responsibilities to particular vehicle segments such as small, midsize, and large cars and utilizing expertise from around the world. This should result in more customerfocused products at lower costs with better quality by eliminating duplicate engineering and purchasing practices. Ford has achieved this realignment of its Global Product Programs. Source: corporate.ford.com, ��.

STRATEGIES FOR NEW�PRODUCT INTRODUCTION

LO3.1 Compare the

three strategies for new-product introduction.

There are three fundamentally different ways to introduce new products. These approaches are called market pull, technology push, and interfunctional view. Market pull. According to this view, the market is the primary basis for determining the products a firm should make, with little regard for existing technology. A firm should make what it can sell. Customer needs are deter mined, and then the firm organizes the technology, resources and processes needed to supply the customer. The market will “pull” through the products that are made. Technology push. In this view, technology is the primary determinant of the products the firm should make, with little regard for the existing markets. The firm should pursue a technology-based advantage by developing superior technologies and products. The products then are pushed into the market, and marketing’s job is to create demand for these superior products. Since the products have superior technology, they will have a natural advantage in the market and the customers will want to buy them. Interfunctional view. This view holds that the product should not only fit the market needs (new or existing markets) but have a technical advantage as well. To accomplish this, all functions (e.g., marketing, engineering, operations, and finance) should cooperate to design the new products needed by the firm. Often, this is done by forming cross-functional teams that are responsible for the development of a new product. This is the most appealing of the three views but also the most difficult to implement. Often cross-functional rivalry and friction must be overcome to achieve the degree of cooperation required for interfunctional product development to succeed. If it can be implemented, the interfunctional approach usually will produce the best results, and we emphasize it in the remainder of this chapter. The lack of interfunctional cooperation is depicted in Figure 3.1.


38

FIGURE �.� Lack of cooperation in designing a swing. The Firm Designs a Swing for the Children

As proposed by the marketing department

As specified in the product request

As produced by manufacturing

As used by the customer

3.2

As designed by the senior designer

What the customer wanted

NEW�PRODUCT DEVELOPMENT PROCESS

LO3.2 Describe the

three phases of new-product development.

Concept Development

Most firms have an organized new-product development (NPD) process that follows specific phases or prescribed steps. These phases may be formally defined in company documents and require sign-offs by senior management between phases. The purpose of this process is to gain control of product development and ensure that all important issues are addressed by the NPD team. ISO 9000 certification requires that a prescribed NPD process be defined and followed by the company in the development of its products. 1 The typical phases followed by firms in developing new products are concept development, product design, and pilot production/testing. The names of these phases and the number of phases may vary from one company to the next, but there is a great deal of similarity among the various approaches used. This phase is concerned with idea generation and the evaluation of alter native ideas for the new product. During this phase, several product concepts usually are generated and evaluated. The physical product is not designed during concept development; rather, different approaches to defining and meeting the market need are considered and the best approach �

ISO stands for the International Organization for Standards. ISO �� is a standard that applies to newproduct development and to production to ensure that quality products are designed and manufactured. The ISO �� standard requires that a procedure manual for new-product development be defined and used by the c ompany.

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Product Design

39

is selected by the company. For example, when a new smart phone is developed, it must start with concept development. What features should the new phone have including the size of the screen, the amount of memory, the type of cameras, and the features of the software to name only a few? What will appeal to the customers and the market? Among the several conceptual designs considered and evaluated, one will be selected for the next phase of product development. The decision to proceed to the product design phase ordinarily requires top management approval. At the time of approval, a crossfunctional team will be established, if one does not exist already, to design the new product.

Product Design

This phase is concerned with designing the physical new product. At the beginning, the firm has a general idea of what the new product will be but not too many specifics. At the end of the product design phase, the firm has a set of product specifications and digital images (or engineering drawings) specified in sufficient detail that production prototypes can be built and tested. Product design requires consideration of many different trade-offs between product cost, quality (features), and schedule. Engineers will be assigned to work on the various parts of the project. As they work, they will make decisions that ultimately will affect the product’s cost, its quality (features), and the schedule for product introduction. It is easy to see why marketing, operations, and finance/accounting must also be involved with engineering during this phase so that appropriate trade-offs can be made for the greatest benefit of the entire business. Engineering probably will use computer software to design the product and simulate its operation before it is made. This will help ensure that the product works when it is produced. Virtual prototypes, designed and tested inside a computer, are frequently used to speed up and simplify the engineering design tasks. Computer-aided design (CAD) systems are also used to view the product on a computer screen and, in most cases, to eliminate the need for blueprints or drawings. At the end of this phase, the computer images and database are transmitted to production as a basis for pilot production. In the smart phone example above, all of the physical components and the software will have detailed specifications for manufacturing. Process design should be taking place simultaneously with product design. Manufacturing should not wait for the final design to be completed before process design begins. As a matter of fact, it is better if process design is done in parallel with product design so that changes can be made in the product to facilitate the production process before finalizing the product design. It is also a good idea for the product designers to have some manufacturing experience so that they are aware of the process choices that are available and the pitfalls of designs that can lead to poor production processes. Figure 3.2 shows how process design should proceed in This is a CAD system used for product design. parallel with product design. © Juice Images/Alamy

Pilot Production/ Testing

In this third phase, products require testing of production prototypes before they are put into production. For example, in the design of a new laptop computer, several laptops would be built as prototypes and tested for their ability to meet the product specifications. This may include performance tests of hardware and software and lifetime tests of reliability of the laptop. Similar pilot production and testing is done for aircraf t, automobiles, new cereals, and many other new products.

40


FIGURE �.� New-product design process.

Concept development

Product design

Preliminary process design

Pilot production/testing

Final process design

3D printing or additive manufacturing has made physical prototype development easy and fast. Almost any three-dimensional shape can be made by laying down successive layers of metal, plastic, or ceramics. An inkjet type of printer is used to make successive and additive layers of the three dimensional prototype. Prototypes for testing can be produced in a few hours instead of days or weeks with older technologies. 3D printing, described in more detail later, can also be used to produce low-volume customized products not just prototypes. During this phase, the process for production is finalized. Since the product design is nearing completion, the process can be designed in great detail and tested for its capability to make the product that has been designed. Process and product modifications should be considered so that the process is optimized before full-scale production and market introduction begin. To facilitate full-scale production, an information package should be finalized that contains not only product specifications but also process design specifications, training procedures for operators, and test results. This will facilitate the transition from design to production.

3.3

CROSS�FUNCTIONAL PRODUCT DESIGN

LO3.3 Evaluate how

concurrent engineering deals with misalignment.

The new-product development process is one of frequent misalignment. No matter how excellent the advanced planning or the technology is, misalignment between marketing, product design and operations is a common occurrence. Misalignments can occur in marketing, technology, infrastructure, and reward systems. Misalignment in marketing occurs when the product does not meet market needs. This can occur because of poor market intelligence or a misinterpretation of market needs. As a result sales may be low and the product may need to be redesigned or eliminated. Technology misalignment occurs when the product designed by engineering cannot be made by operations. This happens when technologies are new or unproven or are not well understood. Operations can have an infrastructure that is misaligned with the new product in terms of labor skills, control systems, quality assurance, and organization. Finally, reward systems may reinforce the use of current technology rather than the new processes needed. To overcome these problems in NPD, a concurrent marketing, engineering, and production approach has been suggested. The traditional approach proceeds in stages or steps, as shown in part (a) of Figure 3.3. It is assumed that technology will be transferred in stages, as a handoff, between marketing, engineering, and operations. This is a sequential process, with each function completing its work before the next one starts. Figure 3.3 (b) illustrates a simultaneous development process, also called concurrent engineering (or simultaneous engineering). All functions are involved from the beginning, frequently by forming a NPD team, as soon as concept development is started. In the first stage, marketing has the major effort, but other functions also have a role. During the

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Product Design

41

FIGURE �.� Sequential and concurrent approaches. Marketing

t r o f f E

Marketing

Engineering

Operations

t r o f f E

Time

Time

Sequential approach (a)

Concurrent approach (b)

TEAMWORK IN ACTION. Product design teams are used to involve all functions in the simultaneous design of new products. © Ariel Skelley/Blend Images

Operations

Engineering

product design phase, marketing reduces its effort, but not to zero, while engineering has the major role. Finally, operations picks up the lead as the new product is tested and launched into the market. The traditional approach is more like a relay race, while the concurrent approach is like rugby. In a relay race, each runner picks up the baton for one portion of the race. In rugby, the entire team runs down the field together, pushing and shoving in a group, to advance the ball toward the goal. Concurrent engineering techniques were used at the National Center for Disease Control Institute for Occupational Safety and Health. The concurrent product development team revolutionized the national certification process for industrial respirators used to protect workers in hazardous environments. The crossfunctional team ensured that handoffs between functions occurred quickly and smoothly. As a result, the team improved procedures to speed up certification and ensure better quality respirators, thereby improving safety for workers. Concurrent engineering is not always effective. Research shows that concurrent engineering should be avoided in projects with high uncert ainty (e.g., unfamiliar product, market, or technology) since it decreases project performance. Apparently, concurrent engineering inhibits creativity in this type of project. 2 Concurrent engineering increases performance only for product extensions or products that ser ve familiar markets with current technology. This result indicates that best practices are often not universal in nature, but are contingent on the situation at hand. �

A. R. Sohel, D. N. Mallick, and R. G. Schroeder, “New Product Development: Impact of Project Characteristics and Development Practices on Performance,” Journal of Product Innovation Management ��, no. � (��), pp. ��–��.

42

3.4


SUPPLY CHAIN COLLABORATION

LO3.4 Describe the

criteria that should be used for supplier selection.

Just as internal collaboration is important, so is external collaboration with supply chain customers and suppliers. While relationships with customers and suppliers often are established in new-product development, collaboration is something different, requiring actual participation in the design process. Collaboration with customers means tapping into their knowledge and expertise to design products they are willing to buy. The collaboration can take many different forms, including the following: ∙ Asking customers the right questions. What can we do to help you make your lives easier or more productive? ∙ Aligning incentives for customers to share their knowledge with the design team. Incentives could include merchandise, monetary rewards, and first access to new designs. ∙ Creating a collaborative technology platform to share information. This can take many forms, including computer networks or software to enable collaboration. For example, National Semiconductor created software that allows customers to design circuits by using National Semiconductor’s products. ∙ Including customers as advisors to the design team. To collaborate with customers, Procter & Gamble created the “P&G Advisor” program. It lets consumers contribute to product development by trying new items and providing quick feedback on designs. While collaborating with customers provides benefits, it also requires a change in attitude from “controlling the design” to working in partnership with customers. This requires a different mindset. For example, the designers cannot simply ask the customers what they want or need, since customers don’t always know. A more sophisticated approach is to observe customers using current products to f ind limitations or ask customers what they do to reach the outcomes they seek. The members of the design team should also ask themselves, What do customers do that we can do better? When they work with customers collaboratively in this way, new-product designs are improved. The second aspect of collaboration in the supply chain is working with suppliers. Since purchased materials often account for more than 50 percent of the cost of goods sold, suppliers should collaborate to design the product. This is particularly important when the product involves new technologies in which the company does not have expertise. Suppliers can be asked to join the NPD team or to provide input at critical points in the design process. Their role is to offer improvements in the design or alter native approaches that leverage their expertise. When a supplier is considered a potential collaborator, the following criteria should be considered: ∙ Technical expertise: Does the supplier have technical expertise that the company does not have? ∙ Capability: Can the supplier hit targets for cost, quality, and product performance? ∙ Capacity: Can the supplier meet the product development schedule and the ramp-up to production? ∙ Low risk: What is the risk that the supplier will not perform as expected? Studies have shown that overall performance improves through supplier collaboration from 10 to 20 percent in cost, time, quality, and product performance. But should all suppliers be considered for collaboration? No, it’s best to include only those who are critical to the design and have something to offer the process. One example of critical supplier support is

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Operations Leader

Product Design

43

Suppliers Design Batteries for the Chevy Volt

For the Chevy Volt, �� battery makers were considered before General Motors awarded development to two battery suppliers: Continental Automotive of Germany, which is getting its batteries from A�� of Watertown, Massachusetts, and Compact Power, a Michigan unit of a

Korean battery maker. These two suppliers developed the batteries in collaboration with GM, which tested the prototypes. GM engineers simulated real-life conditions by repeatedly drawing power and stress testing the batteries under vibration, temperature changes, and extreme conditions. In October ��, General Motors chose Compact Power as the sole battery supplier for the Volt. The first preproduction car was built in June �� in Warren, Michigan. By October ��, �� prototype Volts had been built and road-tested under various grueling conditions. In November ��, the first factory-built Volt rolled off the assembly line as the most fuel-efficient vehicle sold in the United States. This illustrates the costly and time-consuming development process for a complex new automobile technology. Subsequently, the Chevy Volt was named �� Motor Trend Car of the Year, �� Green Car of the Year, �� North American Car of the Year, and �� World Green Car.

© Aaron Roeth Photography

Source: Adapted from www.wikipedia.org, ��.

the battery design for the Chevy Volt, as shown in the Operations Leader box. When there is collaboration with critical suppliers and customers in the supply chain, the design process is greatly improved.

3.5

QUALITY FUNCTION DEPLOYMENT

LO3.5 Evaluate

an example of Quality Function Deployment.

The new-product development process is aided by many different tools and techniques, some of which are covered in the remainder of this chapter. Quality function deployment (QFD) is a tool for linking customer requirements as defined by the customer to technical specifications. QFD is very useful in translating the ordinary language obtained from the customers to technical requirements understood by engineers. It also facilitates interfunctional cooperation between marketing, engineering, and manufacturing. QFD was first used in 1972 at the Mitsubishi shipyard in Japan. It spread from there to Toyota and to American companies. Now many companies throughout the world are using QFD in industries, such as automobiles, electronics, home appliances, and services. QFD has been found to be very useful as a communication tool, and it helps ensure that all the customer requirements are being considered and nothing has been forgotten. When using QFD, the firm identifies various customer attributes. Each of these attributes can be met by one or more engineering characteristics of the product. By using the matrix shown in Figure 3.4, the customer attributes on the left side of the matrix can be related to the engineering characteristics on the top of the matrix. When the matrix, is completed, it is called the house of quality. The house of quality illustrated in Figure 3.4 will be explained in some detail by using a bicycle example. We will work through this example one step at a time, beginning with the customer attributes.

44


FIGURE �.� Relationship matrix. Engineering characteristics

e c n a t r o p m i e v i t a l e R

) # ( s r a e g f o r e b m u N

Customer attributes Easy to pedal

10

Strong and durable

20

Fast acceleration

15

Low cost

20

Looks nice

10

Etc.

25 Total

100

) s b l ( t h g i e w e l c y c i B

) s b l / t f ( e m a r f f o h t g n e r t S

Relationships Strong positive

) h p m ( d e e p s g n i s i u r C

Positive ) # ( t n i a p f o s t a o C

Negative Strong negative Customer perceptions 1

2

3

4

5

Our bike Competitor A Competitor B

Customer Attributes

The customer attributes (CAs) shown on the left side of the matrix in Figure 3.4 represent the voice of the customer. These attributes are determined through market research in conjunction with potential customers of the bicycle to define the important attributes of the product. Therefore, a target market must be defined so that the appropriate types of customers can be contacted. Suppose, in this case, the bicycle is being designed for a very specific market: use by college students on campus. College students would be interviewed or questioned to determine what they consider important features or attributes of a bicycle. Suppose that the students would like a bicycle that is easy to pedal, is strong and durable, has fast acceleration, has a low cost, and looks nice. Note that these CAs are not very specific at this point and need further definition by means of the QFD process. A few more things are now added to the house of quality. After the CAs have been listed on the left side of the matrix, they are rated on their relative importance by customers to sum Her bicycle can be designed by use of QFD. to a total of 100 points. This is shown on the © Paul Bradbury/AGE Fotostock

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45

Product Design

“chimney” column of the house of quality in Figure 3.4. On the right side of the matrix is a comparison of how the company’s current bicycle compares to the competitor’s offerings on each of the CAs.

Engineering Characteristics

The next step in QFD is to translate the customer attributes into engineering characteristics (ECs). This is done by thinking about how each of the customer attributes can be met by the new bicycle design. Engineering characteristics must be measurable and specific and are closely related to the final design specifications for the product. For the bicycle design, some of the ECs might be number of gears, weight of the bicycle in pounds, strength of the frame, cr uising speed, and number of coats of paint on the frame. These characteristics are put on the top of the matrix in Figure 3.4 and then related to each of the customer attributes. For example, the CA “easy to pedal” is strongly related to the number of gears on the bicycle. Generally, the more gears, the easier it is to pedal the bicycle in different conditions and situations. Also, “easy to pedal” is inversely related to the weight of the bike. Various symbols are placed in the matrix (see Figure 3.4 for the key) to indicate the nature of the relationship between each particular CA and the ECs. This can be done by conducting engineering tests or by using generally understood relationships. Next, we switch to Figure 3.5, which adds a roof to the house of quality. The roof shows how each EC is related to the other ECs. This makes it possible to study any of the trade-offs that may be required between one EC and another. For example, we see that the weight of the bicycle will negatively affect its cruising speed. Also, the number of coats of paint will have a mild positive effect on bicycle weight.

FIGURE �.� House of quality.

Relationships


Strong positive Positive

Customer attributes Easy to pedal

10

Strong and durable

20

Fast acceleration

15

Low cost

20

Looks nice

10

Etc.

25

Competitive evaluation

A B

Targets

f o ) r # e ( b s r m a u e g N

t h g i e ) w s e b l l c ( y c i B

e m a r f s f ) o l b / h t t ( g f n e r t S

10 10

40 50

1,000 1,000

30 25

2 2

Our bike

12

35

1,100

35

3

Competitor B

d e e p s ) g h n p i m s ( i u r C

) # ( t n i a p f o s t a o C

Negative Strong negative Customer perceptions 1

2

3

Competitor A

4

5

46


Finally, on the bottom of the matrix in Figure 3.5, we have indicated the value of each EC achieved by the competitors’ bicycles. We have also shown a target value that we have set for our new bicycle design. The target value is determined by the import ance of various customer attributes, the linkages to ECs, and the desired performance of the new bicycle relative to those of the competitors. The ultimate result of the house of quality is a translation of the CAs into target values for ECs on the bottom of t he matrix. The house of quality has been found to be very useful in increasing cross-functional communications because it neatly connects the market requirements, which the customer values, with the design characteristics that engineers must consider. Thus, a design can be developed that will meet the needs of the market while still considering all the design tradeoffs required. The house of quality can be extended into production by linking the product to various parts and to process-design parameters. In this case, the target values for the product design become customer attributes for the part design and process design. Also, the house of quality can be linked to suppliers by considering the target value of the design as customer attributes for the suppliers. In this way, a linked design can be developed between all parties in the supply chain involved in designing and producing the product. QFD also can be applied to service industries in much the same way it is applied to manufacturing. To illustrate, suppose a pizza shop is considering adding a take-out delivery service for its pizza and related products. The CAs for this new service have been determined from customers to be fast, courteous, and reliable service. Also, the delivery agent should have a clean-cut appearance and the order should be delivered complete (no missing items) with hot pizza. The CAs are listed on the left side of the QFD matrix in Figure 3.6. FIGURE �.� QFD for Pizza U.S.A. delivery.

Relationships


Strong positive y e n i v r e r e u s g m s e i t t m n n u o o i y n t i t r i s t a e r u c v m a i C f l s e i t D a s

Customer attributes

d e r e v i l e e m d i s t r n e o d r o %

f o e r u a t a z z r i e p p m e T

Positive Negative Strong negative Customer perceptions 1

2

3

4

Fast service

30

Courteous service

10

Reliable (as promised)

25

Clean-cut appearance

10

Complete order

15

Hot pizza

10

Competitive evaluation

A

20

5.0

80

150F

Our position

B

18

5.5

85

140F

Competitor A

15

6.0

90

150F

Competitor B

Targets

5

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Product Design

47

For services it can be difficult to identify the ECs, which are sometimes hard to define and measure. In this case, the ECs are delivery time (minutes), customer satisfaction (from a periodic survey of customers), actual delivery time compared with promised delivery time, and the temperature of the pizza when it is delivered. Note that the customer survey will measure intangible CAs such as a clean-cut appearance, courtesy, order completeness, and general satisfaction with the service. The CAs are now related to each of the ECs in the same way as in the bicycle example. Also, the roof of the house of quality, customer perceptions, competitive evaluations, and targets are added to complete the analysis, as shown in Figure 3.6. While QFD for service may be measured somewhat differently than it is for manufacturing, the same general principles apply.

3.6

MODULAR DESIGN

LO3.6 Explain the

benefits of modular design.

Usually products are designed one at a time without much regard for commonality of parts or modular properties that can aid production and still meet customer needs. Modular design makes it possible to have relatively high product variety and low component variety at the same time. The core idea is to develop a series of basic product components, or modules, that can be assembled into a large number of different products. To the customer, it appears there are a great number of different products. To operations, there are only a limited number of basic components and processes. Modular design is a prerequisite to mass customization, which is described in the next chapter. Controlling the number of different components that go into products is of great importance to operations, since this makes it possible to produce more efficiently for larger volumes while also allowing standardization of processes and equipment. A large number of product variations will greatly increase the complexity and cost of operations. Modular design offers a fundamental way to change thinking about product design. Instead of designing each product separately, the company designs products around standard component modules and standard processes. When this is done, the product line must be carefully analyzed and divided into basic modules. Common modules should be developed that can serve more than one product line, and unnecessary product frills should be eliminated. This approach will still allow for a great deal of product variety, but the number of unnecessary product variations will be reduced. The modular design approach can best be illustrated by an example. A group of students at the University of Minnesota studied the operations of a large manufacturer of beds, a company that produced over 2000 different combinations of mattresses. The team discovered that 50 percent of those combinations accounted for only 3 percent of sales. Market surveys showed that this much product variety was not advantageous to marketing and at the same time had increased costs. Using modular design ideas, a mattress product line was designed with four basic sizes: regular, twin, queen, and king. The inside construction of the mattresses was limited to only a few different spring arrangements and foam padding thicknesses. A moderate variety of mattress covers were used to meet consumer preferences for color and type of design. This approach greatly reduced the number of mattress components while providing substantial variety for the customer. For example, with four bed sizes, three types of spring construction, three types of foam, and eight different covers, a total of 288 different mattress designs were possible. 4 × 3 × 3 × 8 = 288 combinations Not all these combinations were produced, since some might be unacceptable to the customer (e.g., the expensive springs with the thin foam pad). Although there are still many product combinations in this example, the number of components has been limited.

48


Dell uses modular design. © Jeff Chiu/AP Images

The team suggested that marketing, operations, and engineering get together to define the basic components that would be made and the product combinations desired. They also suggested that the company rigorously adhere to those components once the decision had been made, with a periodic revision perhaps once a year. The team not only dealt with the problem of product proliferation but, by using the concept of modular design, retained the marketing advantages of product variety. Dell Computer Corporation uses modular design for its computers. Dell Inspiron notebooks, for example, have many optional choices: six processors, four memories, three hard drives, two operating systems, two media devices, three wireless options, five displays, five software choices, and three battery choices. This provides a total of 33 different modules (or components) that go into Dell notebooks. The theoretical number of different notebooks that can be produced is as follows: 6 × 4 × 3 × 2 × 2 × 3 × 5 × 5 × 3 = 64,800 Of course, not every module is combined with every other module, thereby limiting the total number of choices. Modular design provides an opportunity to streamline production at Dell while offering abundant consumer choices.

3.7

KEY POINTS AND TERMS New-product design has a great impact on operations, since it determines the specifications for the product. Likewise, operations can constrain a f irm’s ability to develop new products and make them more costly to produce. As a result, operations should be deeply involved in new-product development. ∙ There are three ways to develop new products: market pull, technology push, and interfunctional. The interfunctional approach is usually the best since it includes both market and technological considerations in the new-product design. ∙ The NPD process is often specified in companies as having three phases: concept development, product design, and pilot production/testing. ∙ Products should be designed from the start for manufacturability. This is done by considering design of the production process as part of product design and utilizing a concurrent engineering approach. ∙ Concurrent engineering uses overlapping phases for product design rather than a sequential approach. Typically, an NPD team is formed with representation from all major functions (marketing, engineering, operations, and finance/accounting) to ensure cross-functional integration. ∙ Supply chain collaboration in NPD is essential. This should be accomplished by collaborating with both customers and suppliers in the NPD process. ∙ QFD is used to connect customer attributes to engineering characteristics. This typically is done through a technique called the house of quality that can be used for both manufacturing and services. ∙ Modular design is used to minimize the number of different parts needed to make a product line of related products. This can be done by designing standard modules and considering only the combinations of options t hat have significant market demand.

Chapter 3

Key Terms


Market pull 37 Technology push 37 Interfunctional view 37 Concept development 38 Product design 38 Pilot production/testing 38 Process design 39 Production prototypes 39

3D printing 40 Information package 40 Misalignment 40 Sequential process 40 Concurrent engineering 40 Collaboration 42 Quality function deployment 43

Product Design

49

House of quality 43 Customer attributes 44 Engineering characteristics 45 Trade-offs 45 Target value 46 Modular design 47

1. Japan Business Consultants www.mazur.net/publishe.htm Read how QFD was used to design various products or services. 2. Society of Concurrent Product Development www.scpdnet.org Read one of the papers on this site and come to class prepared to discuss your findings. 3. 3M Company www.3m.com Describe a unique product introduced by 3M. Search the 3M site for the word innovation to find example products.

Discussion Questions 1. Why is interfunctional cooperation important for newproduct design? What are the symptoms of a possible lack of interfunctional cooperation? 2. In what circumstances might a market-pull approach or a technology-push approach to new-product design be the best approach? 3. Describe the steps that might be required in writing and producing a play. Compare these steps to the three steps for NPD described in Section 3.2. Is there a correspondence? 4. Why has there been an increase in product variety in our economy? 5. How can the modular design concept control production variety and at the same time allow product variety? 6. What is the proper role of the operations function in product design? 7. What form does the product specification take for the following firms: a travel agency, a beer company, and a consulting firm? 8. Find examples of modular design of products in everyday life. 9. Work with one of your classmates as your customer; you are the supplier. Have your customer select a product and specify the customer attributes (CAs) that are desirable. Then you specify the engineering characteristics (ECs) required to meet the customer’s needs.

Complete the house-of-quality matrix by specifying the relationships in the matrix. Ask your customer if the resulting ECs will meet his or her needs. 10. What are the essential benefits of using a QFD approach to product design? Also, identify any negative effects that might apply to the use of QFD. 11. A student would like to design a backpack for student books and supplies. The CAs are a (1) comfortable backpack that is (2) durable with (3) enough room and (4) not too heavy to carry. Think of some ECs that can be used to measure these customer attributes. Then construct a QFD matrix showing the positive and negative relationships that you expect to see in this case. 12. An entrepreneur is designing a sub sandwich shop that would be located on campus. Define the CAs that you would like to see for the service (not the product) delivered at this location. Then specify some ECs that can be used for measurement of the service. 13. Suppose a car you want to buy has five choices for interior colors, three types of radios, three engine choices, two battery types (regular and heavy duty), 10 exterior colors, two transmission choices, and four types of wheel covers. How many possible combinations of the car are possible for the manufacturer? What can be done to limit the number of combinations without limiting customer choice?

� � � P

ii

Process Design

�.

Process Selection

�.


�.

Process-Flow Analysis

�.

Lean Thinking and Lean Systems

Among the most important decisions made by operations managers are those involving the design and improvement of the process for producing goods and services. These decisions include choice of process and technology, analysis of flows through operations, and the associated value added in operations. Two themes underlie and unify Part Two: first, the idea of designing and improving a process to enhance the flows of materials, customers, and information; second, the idea of eliminating waste in process design. These principles can be used to design and manage a process that not only is efficient but provides value for the customer.

�

� � � � � � �

Process Selection LEARNING OBJECTIVES After reading this chapter, you should be able to: LO�.�

Contrast and compare the five types of product-flow processes.

LO�.�

Describe the differences among order fulfillment processes.

LO�.�

Explain how companies should make process selection decisions.

LO�.�

Correctly place examples of products on the diagonal of the product-process matrix.

LO�.�

Describe the features of focused operations.

LO�.�

Discuss the advantages and disadvantages of mass customization and �D Printing.

LO�.�

Contrast pollution prevention, pollution control and pollution practices.

Process selection decisions determine the type of process used to make a product or service. For example, automobiles are made using an assembly-line type of process, wine making is a batch type of process, and a tailor shop is a job shop type of process. The considerations required for process selection include the volume of the product and whether the product is standardized or customized. Generally speaking, high-volume products that are standardized will be made on an assembly line, and low-volume customized products will be made using a batch or job shop process. This chapter describes the various types of processes that can be selected and the corresponding situations when one process or another is preferred. Two main types of classifications are provided. One classification is by the product flow, including continuous flow, assembly line, batch, job shop, and project. The second classification is by the type of order fulfillment: whether the product is made-to-order, assembled-to-order, or made-to-stock. 52

Chapter 4

Process Selection

53

After treating process types and order fulfillment, we discuss focused operations, mass customization, and 3D printing as process choices. We also discuss environmental concerns and the prominent role process selection plays in determining the impact of a fir m on its natural environment.

4.1

PRODUCT�FLOW CHARACTERISTICS

LO4.1 Contrast and compare the five types of product-flow processes.

There are five types of product flow: continuous process, assembly line, batch, job shop, and project. In manufacturing, the product flow is the f low of materials, since materials are being converted into the product. In services, there may not be a product flow, but there may be a flow of customers or information.

Continuous Processes Continuous process refers to the so-called process industries, such as sugar, paper, oil, and electricity. Here, the output is made in a continuous fashion and tends to be highly standardized and with very high volumes of production. Often continuous flow products are liquids or semisolids that can be pumped or that f low from one operation to another. For example, an oil refinery consists of miles of pipes, tanks, and distillation columns through which crude oil is pumped and refined into gasoline, diesel, oil, lubricants, and many other products. Continuous production tends to make commodity products. Since it is difficult to differentiate the product, low cost becomes the “order winner” for manufacturing to compete in very price-sensitive markets. Therefore, continuous production tends to be highly automated, operate at capacity, and minimize inventories and distribution costs to reduce the total cost of manufacturing. While cost per unit of output is low, flexibility to change product mix or product type is very limited in continuous processes.

Assembly Lines Here, we discuss traditional assembly lines that make only one or a few products and use inflexible equipment and labor. Later in this chapter, we describe mass customization that allows much more flexible assembly lines. Assembly-line flow is characterized by a linear sequence of operations. The product moves from one step to the next in a sequential manner from beginning to end. Unlike continuous processes, in which the products are liquids or semisolids, assembly lines make discrete products such as automobiles, refrigerators, computers, printers, and a vast array of mass-produced consumer products. Products are moved from one operation to the next, usually by a conveyor system. Figure 4.1 shows how an assembly-line process is used to make a metal bracket. The first step in production is to cut a rectangular metal blank in the required shape of the bracket. At the second workstation, two holes are drilled into the metal blank. Then t he bracket is bent at a 90-degree angle, and finally, it is painted. Notice how the workstations are placed in the proper sequence needed so that the product moves sequentially from one end of the line to the other. Like continuous production processes, traditional assembly-line operations are very efficient but also very inflexible. The assembly-line operation requires high-volume products that are standardized. At the same time, this makes it difficult to make changes in the product itself or the volume of flow, resulting in inflexibility of operations. For example, it takes several weeks to change over a traditional automobile assembly line to a new model. Also, the line runs at a constant speed, and so the volume can be altered only by changing the number of hours worked by the plant or redesigning the entire line. Assembly-line operations can be justified only in certain situations. They generally require large amounts of capital investment and must have high volume to justify the investment. For example, a modern plant that makes semiconductor wafers costs over

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FIGURE �.� Assembly-line flow.

The Product (a metal bracket)

Cut

Drill

Bend

Paint

Task or workstation

Product flow

$2 billion in initial investment, and an automobile assembly plant costs about $1 billion. An automobile assembly plant completes the production of a car every minute, or about 350,000 automobiles a year, if operated on a two-shift basis. Because of the significant amount of capital required, finance is concerned with the choice of an assembly-line process and works closely with operations in making these investments. Also, marketing must be geared toward the mass appeal of the resulting high-volume product.

Batch Flow Batch flow is characterized by production of the product in batches or lots. Each batch of the product travels together from one operation or work center to another. A work center is a group of similar machines or processes used to make the product. Most automobile manufacturing processes are assembly lines. © Dimas Ardian/Bloomberg via Getty Images

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55

FIGURE �.� Batch flow (metal brackets). Product A

Product B

Product C

Bend

Cut

Paint

Batch A Batch B Batch C

Drill

Task or work center

Figure 4.2 shows various low-volume brackets that are made using a batch process. In this simple example, three differently shaped brackets—A, B, and C—flow through the four work centers. Notice how bracket A requires work in all four work centers, bracket B requires only cutting, bending, and painting, and bracket C requires cutting, drilling, and painting. One characteristic of a batch operation is that it can be used to make many different types of products, and so more variety is typical than on an assembly line. Each of these products can have a different flow path, and some products actually skip certain work centers. As a result, the f low is jumbled and intermittent. Contrast this to the f low of a line process, which is regular and sequential. Batch operations often use general-purpose equipment that is not specialized to make just one particular product. This offers flexibility. Labor is more skilled and flexible in its ability to make different products. As a result, a batch operation is configured with both equipment and skilled labor to be more flexible than an assembly-line process. Lot sizes can be quite variable in size, from hundreds down to as few as one unit. As a result, batch processes can be configured to handle low-volume orders. The jumbled flow of a batch operation results in considerable production scheduling and inventory challenges. When loaded to nearly full capacity, the batch operation will typically have high inventories as jobs wait in line to be processed. High capacity utilization results in job interference between the various jobs as they wait for labor or equipment that is assigned to another job at the time. This results in a loss of efficiency in a batch operation. A batch operation uses a so-called process layout because the machines and labor are organized by process types into work centers. The assembly-line process, however, uses a product layout because the machines and labor are organized according to the product flow itself. An example of a process layout is the typical high school, where classrooms are organized according to subjects (or processes) such as English, math, and chemistry. The students flow through the facility in batches (classes), going from one process to the next.

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Batch operations are used when the volume is not high or there are many different products. Examples are furniture, boats, dishware, and other products with large variety and low to moderate volumes. Furniture making, for example, requires many different styles and options. Sofas are ordered by customers and also ordered for stock. Each sofa may have a different fabric and may have different features on the arms or back and different lengths. As a result, there are a tremendous number of variations that are made using a small batch process or even made one at a time.

Job Shop Job shops make products to customer order by using a process layout. Thus, we consider the job shop a special case of the batch process. In a job shop, the product is made in batches, usually in small lot sizes, but the product must be made to customer order. Like the batch process, a job shop uses general-purpose equipment and has a jumbled flow. It has high flexibility for product mix and volume of production, but the costs are generally higher since the volume and standardization are low. Typical products produced in a job shop include plastic parts, machine components, electronic parts, and sheet metal parts that are made-to-order.

Project The project form of operations is used for unique or creative products. Examples of projects are concerts, construction of buildings, and production of large aircraft. Technically speaking, the product doesn’t flow in a project since materials and labor are brought to the project site and the project itself is stationary. Projects are characterized by difficult planning and scheduling problems since the product may not have been made before. Also, projects are difficult to automate, though some general-purpose equipment may be used. Labor must be highly skilled because of the unique nature of the product or service being made. In the project form of operations, each unit is made individually and is different from the other units. Projects are used when the customer desires customization and uniqueness. Generally speaking, the cost of production for projects is high and sometimes difficult to control. This is the case because the project may be difficult to define in all its details. Boeing makes large aircraft by using a project process. Each airplane is assembled at a fixed site within the factory with mater ials and labor brought to the site. A complex schedule is made that must balance work across all the different aircraft being produced. The construction industry uses projects to construct buildings, roads, and dams. Service industries also use projects for fund-raising events, political campaigns, concerts, and art fairs.

Discussion of Process Types The characteristics of the five processes we have been discussing—continuous, assembly line, batch, job shop, and project—are summarized in Table 4.1. This table makes direct comparisons among the types of processes. Notice that continuous and assembly-line operations have relatively low-skilled operators and high automation, whereas batch, job shop, and project operations are the opposite. Also, the objectives and the product characteristics are at opposite extremes for these processes. One way to measure the efficiency of a process is the throughput ratio (TR): TR =

Total processing time for the job Total time in operations

× 100%

In the numerator of the throughput ratio is total processing time for the job, which includes only the time the job actually spends being processed by machines or labor, excluding any waiting time between operations. The denominator includes the total time the job spends in operations, including both processing and waiting time. Most batch and job shop operations have TRs of

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TABLE �.� Process Characteristics

Process Selection

Continuous and Assembly Line

Batch and Job Shop

Project

Order type

Continuous or very large batch

Batch

Single unit

Flow of product Product variety Market type Volume

Sequenced Low Mass High

Jumbled High Custom Medium to low

None Very high Unique Single unit

Low Repetitive Medium

High Nonroutine High

High Nonroutine High

High Low Special purpose

Medium High General purpose

Medium Little General purpose

Low Low Conformance On time

Medium Medium Conformance On time

High High Conformance On time

Characteristics

57

Product

Labor Operator Skills Task type Pay Capital Investment Inventory Equipment Objectives Flexibility Cost Quality Delivery

10 percent or 20 percent, rarely higher than 40 percent. This means that a typical job spends most of its time waiting to be processed relative to the actual processing time. In contrast, continuous and assembly-line processes have TRs of 90 to 100 percent. The throughput ratio represents the proportion of time in operations during which value is actively being added to the job. At this point, examples from the housing industry may help solidify some of the process choices. At the project end of the continuum is the custom-built house. A unique plan for it may be drawn by an architect, or existing plans may be modified for each house built. The process is labor-intensive, time-consuming, and costly, but it is very flexible. Generalpurpose equipment is used to complete the work. The batch process is characterized by the production of similar houses in groups. In this case, the customer can select one of several standard houses with only minor options for things, such as colors, fixtures, and carpets. Such a house is usually less expensive per square foot than a custom-built project house, but there is less flexibility in operations. The assembly-line method of house production is characterized by modular or factory operations. Standard houses are produced in sections, in a factory, by relatively cheap labor. The use of expensive plumbers, carpenters, and electricians is largely avoided by installing complete electrical and plumbing systems at the factory. After being built on an assembly line, the house sections are brought to the site and erected in a few days, using a crane. These modular houses are typically the least expensive of all and provide the least flexibility in customer choice. House construction can be completed using various types Obviously, a company faces a major strategic deciof processes. © David Buffington/Getty Images sion in choosing the type of process to use for the

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construction of houses. Most companies choose only one type of process, unless separate divisions are formed for different processes.

4.2 APPROACHES TO ORDER FULFILLMENT LO4.2 Describe the differences among order fulfillment processes.

Another critical decision for operations is how the orders from customers are fulfilled: whether the product is made-to-order, assembled-to-order, or made-to-stock. There are advantages and disadvantages to each of these. A make-to-stock (MTS) process can provide faster service to customers by delivering orders from available stock and at lower costs than a maketo-order (MTO) process. But the MTO process has higher flexibility for product customization. An assemble-to-order (ATO) process is like a hybrid of these, enabling relatively fast service to customers because there is limited work to complete once the customer order is received. It is also f lexible because the customer can specify some types of customization. In the MTO process, individual orders can be identified during production. As each order is made to the customer’s specification, each job in the process is associated with a particular customer. In contrast, the MTS process is building products for inventory, and the jobs in process are not identified for any particular customer. Thus, one can always identify an MTO or MTS process simply by looking at the jobs in production; if jobs are designated or labeled for specific customers then it’s an MTO process. In the MTO process, the cycle of production and order fulfillment begins with the customer order. After the order has been received, the design must be completed, if it is not already done, and materials are ordered that are not already on hand or on order. Once the materials begin to arrive, the order can be processed as materials and labor are added until the order is completed. Then the order is delivered to the customer. Once the customer pays for the order, the cycle is completed. The key performance measures of an MTO process are the lengths of time it takes to design, make, and deliver the product. This is often referred to as the lead time. Another measure of performance in an MTO environment is the percentage of orders completed on time. This percentage can be based on the delivery date the customer originally requested or the date that was promised to the customer. The date requested by the customer provides, of course, a stricter criterion. In contrast, the MTS process has a standard product line specified by the producer, not by the customer (see Figure 4.3). The products are carried in inventory to fulfill customer demand immediately. Everything in operations is keyed to producing inventory in advance of actual demand in order to have the proper products in stock when the customer calls. The critical management tasks are forecasting, inventory management, and production planning. The MTS process begins with the producer specifying and producing the product. The customer then requests a product from inventory. If the product is available in inventory, it is delivered to the customer. If it is not available, a back order may be placed or the order can be lost to the firm. A back order allows the firm to fill the order at a future date but requires the customer to wait for the order. Ultimately, once the order is received, the customer pays for the product and the cycle is completed. As was noted above, in an MTS process customer orders cannot be identified during production. The production cycle is being operated to replenish stock. Customer orders follow a completely separate cycle of stock withdrawal. What is being produced at any point in time may bear little resemblance to what is being ordered. Production is geared to future orders and replenishment of inventory. See the differences in the production cycles in Figure 4.3. Performance measures for an MTS process include the percentage of orders filled from inventory. This is called the service level or fill rate and is typically targeted in the range of 90 to 99 percent. Other measures are the length of time it takes to replenish inventory,

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FIGURE �.� MTS, MTO, and ATO comparison.

Make-to-Stock

Process Selection

59

Make-to-Order

Forecast orders

Customer Customer order

Customer Production

Product Production

Customer order Product

Finished Goods Inventory

Product

Assemble-to-Order Forecast orders Customer

Production of Subassemblies

Customer order Product Assembly of the order

Inventory of Subassemblies

Subassembly

inventory turnover, capacity utilization, and the time it takes to fill a back order. The objective of an MTS process is to meet the desired service level at minimum cost. In summary, the MTS process is keyed to replenishment of inventory with order fulfillment from inventory, whereas the MTO process is keyed to customer orders. An MTO process can provide higher levels of product variety and has greater flexibility. The performance measures of these two processes are completely different. The MTS process is measured by service level and efficiency in replenishing inventory, however, the MTO process is measured by its response time to customers and the ability to meet promised customer delivery dates. Assemble-to-order (ATO) processes are a hybrid of MTO and MTS. The subassemblies are made-to-stock, but the final assembly is made-to-order. The ATO process builds subassemblies in advance of demand. When the customer order is received, the subassemblies are taken from inventory and assembled together to fill the customer order. Figure 4.3 shows how the subassemblies are built to a forecast and placed in inventory. The product must be designed in a modular fashion for ATO to be used. The Operations Leader box describes how SUBWAY uses an assemble-to-order process. Some operations are moving toward assemble-to-order and make-to-order processes for standardized products, whenever possible, by reducing production lead times. If the standard product can be made quickly, it need not be placed in finished-goods inventory; instead, it can be made or quickly assembled when ordered by the customer. For example, Allen Bradley can make and ship a motor starter unit in over 300 different configurations in one day from when it is ordered. This product, which previously had been made-to-stock, can be assembled-to-order with large savings in inventory and improved customer service. Allen Bradley assembles the product with a fast and f lexible assembly line.

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Operations Leader

SUBWAY Uses Assemble-to-Order

There are more than ��,�� SUBWAY restaurants in �� countries around the world. The way they produce and serve food is an example of how a firm uses an assembleto-order process. Some sandwich ingredients, such as the bread, meatballs, and sauces, are made to stock as subassemblies. These items are produced either at individual SUBWAY restaurants or by suppliers © Tim Boyle/Getty Images and then held in stock at the restaurants. Batch processes are used to make these items as efficiently as possible while ensuring that standards of quality are met.

When a customer comes in to order a sandwich, an ATO process is used. The customer specifies the type of bread to use as well as each of the sandwich ingredients. Each sandwich can be customized to meet customer requests exactly. This is the advantage of an ATO process. Using an ATO process ensures that SUBWAY operates both efficiently and effectively. Some food is produced in batches, but the final product—the sandwich the customer receives—is produced one at a time. Source: www.subway.com, ��.

An example of the three types of processes involves the production of diamond rings for the jewelry business. A MTS process is used for rings that are carried in finished-goods inventory by the jewelry store. In this case, the customer buys one of the rings from the jeweler’s stock. An ATO process is used when the customer selects the stone and then makes a separate selection of a stock ring setting. The jeweler will then assemble the ring components in an ATO process. The MTO process is illustrated by jewelers who make custom settings to the customer’s design. The setting and the stone are matched to make a unique ring. The type of customer order, whether MTS, MTO, or ATO, determines the order penetration point in the supply chain where the product is linked to a specific customer order.1 There are four possibilities for the placement of the order penetration point, as shown in Figure 4.4. For MTS operations, the point is after final assembly is completed; therefore, the customer can only select the product from what is available in inventory. For ATO, the order penetration point is after fabrication and before final assembly. Since the product is assembled after the order is placed, the customer can specify some customization in terms of the modules he or she selects. For MTO operations, the order penetration point is either before fabrication or before ordering materials from the supplier in cases in which unique mater ials or components are needed. For MTO, ma ny types of customization are possible, but the lead time to the customer can be longer and the product is typically more costly.

�

Sometimes also called the customer order decoupling point.

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FIGURE �.�

61

Order penetration point.

MTO

MTO

Supplier

4.3

Process Selection

ATO

Fabrication

MTS

Assembly

Distribution

PROCESS SELECTION DECISIONS

LO4.3 Explain how companies should make process selection decisions.

We have been discussing two dimensions that can be used for process classification purposes: product flow and approaches to order fulfillment. These dimensions are used to construct the six-cell matrix shown in Table 4.2. This matrix contains the six combinations used in practice. Multiple combinations may be used by a single firm, depending on the products and volumes required by the market. However, if more than one process is used in a single facility, the plantwithin-a-plant concept may be employed to maintain focus, as described later in this chapter. All six combinations are encountered in industry. Although it is common for an assemblyline operation to make-to-stock, it can also assemble-to-order. For example, an automobile assembly line is used to produce a large variety of different automobile options for particular customers, as well as cars that are being made for dealer stock. Similarly, a project form of process commonly is used to make-to-order. However, a construction company can build a few speculation houses to stock that are sold later. In discussing the process selection decision, we shall begin with an example and generalize from there. Let us consider the contracting company mentioned in Section 4.1, which can choose to build houses using the project, batch, or assembly-line process. With any of these processes, the company can also choose to make the houses to stock or to order. What, then, are the factors that should be considered in making this choice? First, the company should consider market conditions. The assembly-line approach requires a mass market for inexpensive houses, the batch process requires a lower-volume market for medium-priced houses, and the project process requires a market for expensive houses. Which one of these is chosen will require discussions between marketing and operations, which are cross-functional since both market and process are affected. In the end, matching the process to the market will be a key strategic decision. Second, the company should consider capital requirements. The assembly-line process will require a great deal more capital than will the project or batch flow. The assembly line

TABLE �.� Process Characteristics Matrix

Make-to-Stock

Make-to-Order/Assemble-to-Order

Continuous and Assembly Line

Automobile assembly Oil refining Cannery Cafeteria

Automobile assembly Dell computers Electronic components Fast food

Batch and Job Shop

Machine shop Wine Glassware factory Costume jewelry

Machine shop Restaurant Hospital Custom jewelry

Project

Speculation homes Commercial paintings Noncommissioned art

Buildings Movies Ships

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requires capital to equip the factory and finance the partially completed or finished houses. By contrast, construction of custom project houses requires much less capital since only one house or a few houses are being built at any one time and no factory is needed. The finance function will be intimately involved with operations in making these capital decisions. The third factor that should be considered is the availability and cost of labor. The project and batch processes require costly skilled labor, such as plumbers, electricians, and carpenters. The factory line approach requires relatively inexpensive, low-skilled labor. Unionization may affect both the supply and the cost of labor. The human resources function will be involved in these decisions with operations because of the employee selection, training, and compensation issues involved. Finally, the company should consider the state of technology for both process and product. Are innovations likely to come along that will make a process obsolete before the costs are recovered? Assessment of these conditions is par t of risk evaluation for the process. In summary, four factors appear to influence process selection from among the processes shown in Table 4.2: 1. Market conditions 2. Capital requirements 3. Labor 4. Technology

4.4

PRODUCT�PROCESS STRATEGY

LO4.4 Correctly place examples of products on the diagonal of the product-process matrix

To this point, we have been treating process decisions as static, as if the organization makes the decision one time and then uses the selected process forever. Actually, process decisions are dynamic, since processes evolve over time. Furthermore, process decisions are closely related to product decisions. Hayes and Wheelwright have proposed a product-process matrix that describes the dynamic nature of product and process choices (see Figure 4.5). On the product dimension (horizontal) of the matrix is the life cycle of a typical product, ranging from a unique, oneof-a-kind product to a high-volume, standardized product. A product typically evolves from the left side to the right side of the matrix. On the process dimension (vertical) of the matrix the various processes are represented, ranging from the project to a continuous process. The process has a life cycle similar to the product life cycle, evolving from a unique project type of production at the top of the matrix to a continuous process at the bottom. Many products have followed the product and process life cycle. Automobiles were made in a job shop environment in the early 1900s before Henry Ford invented the moving assembly line. Electronics often are produced in batches until the volume becomes sufficient to support an assembly-line process. Most product life cycles will not require processes to evolve from project all the way to continuous, but processes often do need to change one category or more among those listed in Figure 4.5. Most organizations should position themselves on the diagonal of the matrix. This means that a low-volume product with high variety would be produced by a project or job shop, but a highly standardized product with high volume would be produced by an assemblyline or continuous process. The diagonal of the matrix represents a logical match between the product and the process. The product-process matrix represents the strategic choices available to firms in both product and process dimensions. Often, strategy is represented as consisting only of product choice. But the process can provide a unique capability that helps the f irm compete in the market. Thus, a position on the matrix represents a strategic combination of both

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FIGURE �.� Product-process matrix. Source: Adapted from Hayes, Robert H., and Steven C. Wheelwright. “Line Manufacturing Process and Product Life Cycles.” Harvard Business Review, January–February 1979, pp. 133–140.

Unique, one-of-a-kind product

Low volume, multiple products

Higher volume, few major products

Building

Project

High volume, high standardization, commodity

None

Printing

Job Shop

Heavy Equipment

Batch

Auto Assembly

Assembly Line

Continuous

Low volume, low standardization

None

Sugar Refinery

product and process. This type of strategic position requires cross-functional cooperation between marketing and operations to ensure that both product and process choices have been considered. For example, if a firm typically produces standard beverages in high volume, moving into a new market that requires small batches of a large variety of flavors may be at odds with its current production capabilities. The firm may need to invest in new equipment, alter existing equipment, or reconsider whether it is capable of competing in this new market. A firm might be tempted to move down the diagonal ahead of its competitors and thus gain competitive advantage at lower cost. This can be a good idea if t he customer is ready to accept a more standardized and higher-volume product. If the customer prefers more customization, the firm may be forced to move back up the diagonal to remain competitive. All firms in the industry, however, do not occupy the same spot on the diagonal of the product-process matrix. Some firms may choose to stay in the upper lef t-hand corner of the matrix; others may move down the diagonal. One example of this behavior is the hand-held calculator business. Hewlett-Packard has chosen to stay with low-volume, high-variety, and high-priced calculators while the rest of the industry has moved down the diagonal toward highly standardized, high-volume, and low-priced calculators. The Hewlett-Packard calculators, which are suited to various specialized market niches such as accounting, surveying, and electrical engineering, can command high prices at relatively low volumes.

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FOCUSED OPERATIONS

Often a company will have products that are produced in a variety of volumes and with various levels of standardization. When a company mixes all these products in the same factory, it can lead to disaster. Skinner, who originated the idea of the focused factory, tells the story of an electronic instrument company that made low-volume custom autopilot instruments and high-volume standardized fuel gauges in the same plant. 2 After years of losing money on the fuel gauges, management decided as a last resort to separate the fuel gauge production from the autopilot production by building a wall down the center of the plant. They also assigned separate quality control and materials management staff to each product as well as separate direct labor, supervision, and equipment. As a result of these changes, the fuel gauges became profitable in four months and the autopilots also improved their profitability. The problem essentially resulted from two different missions being mixed in operations: one of low cost for the fuel gauges and one of superior product performance and innovation for the autopilot. The autopilot production needed more stringent requirements in quality, materials, and skills than did the fuel gauges. Before focus, the fuel gauge costs were inflated and efforts were not directed to each product separately. When their production processes were separated, and thus the specific production needs of each product were separated, each production process could respond to its particular customer and market requirements. Services also can lose their focus by trying to “be all things to all people.” A service operation should have a well-defined mission such as low cost or innovation, not both. For example, Walmart is clearly focused on the low cost of its supply chain to support its “save money, live better” marketing strategy. Low cost is achieved at Walmart through economies of scale in purchasing, an efficient and well-managed supply chain, and economical store operations. For a time Kmart tried to attack Walmart by offering lower prices, but its costs were too high, subsequently forcing Kmart into bankruptcy. Kmart is an example of loss of focus in which operations strategy and capability did not match its marketing strategy. Lack of focus in manufacturing plants and service operations has resulted from attempting to accomplish too many different goals with the same facility or operation. In some cases, product proliferation in the markets served by the company has led to incompatible products being produced together in the same facility. The solution may be to arrange each product as a plant-within-a-plant (PWP), which entails setting up a process for one product or product line separately from other processes within the same facility. This is done by physically separating product flow, using separate workforces and equipment, and separate management and support staff. The result is two or more small plants within the larger plant. The firm may sacrifice some economies of scale while doing a better job of meeting market requirements and improving profitability. A refrigeration company used the concept of focused operations by organizing two PWPs inside the same building. It sepaHoneywell uses focused factories to compete rated compressor production for high-volume, standardized, and by using several PWPs within one building. © Spencer Platt/Getty Images mature products from compressor production for low-volume and LO4.5 Describe the features of focused operations.

�

W. Skinner, “The Focused Factory,” Harvard Business Review (May–June ��), pp. ��–��.

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customized products. In this case, one factory was divided into two separate focused factories, with consequent improvements in all measures of operations performance. Service operations also can be focused by assigning different types of service products to different facilities. For example, in an insurance business selling both highpriced, service-intensive policies and low-priced, commodity-style policies, using the same set of workers to serve both could cause trouble. The high-priced policies might get too little service while the low-priced policies receive too much service. The solution to this problem is to segment these policies into two different facilities or two different PWPs with separate workforces and appropriate service levels for each type of policy.

4.6

MASS CUSTOMIZATION

LO4.6 Discuss the advantages and disadvantages of mass customization and 3D Printing.

To this point, we have been discussing traditional forms of production processes. However, with the advent of flexible manufacturing, mass customization is now possible. Mass customization is a strategy to provide custom products in lot sizes of one in high volume. At first blush, mass customization (custom products and high volume) appears to be an oxymoron, two words that are incompatible, like jumbo shrimp or a deafening silence. But this dichotomy between mass production and customization can be overcome by using modern technologies, including computers, robotics, modular design, and the Internet. Traditional mass production is built on economies of scale by means of a high-volume standardized product with few options. With economies of scale, the more production the lower the average unit cost. By contrast, mass customization depends on economies of scope—that is, a high variety of products from a single process. Economies of scope also reduces the average unit cost due to production of several products by the same process. Consequently, mass customization comes from a different economic basis, a common process rather than a common product. Customization refers to making a different product for each customer. But mass customization is providing customized products at approximately the same cost as mass production. This is a stringent requirement and means that some products cannot be mass-customized because the cost would be higher. One of the early examples of mass customization is Paris Miki, the largest retailer of standard and mass customized eyeglasses in the world with over 1,000 stores in Japan, the United States, and Europe. The mass customization process begins with design of the eyewear by taking a digital photo of the customer and automatically recommending a style of lenses that fits the customer’s face. An optometrist then adjusts the lenses to fit the customer’s preference. Finally, the customer selects options for nose bridges, hinges, and ar ms for the frame. The customer receives a photo of the proposed eyewear. Finally, a technician makes the lenses and frames at the store within one hour. There are three forms of mass customization: 1. Modular production and assemble-to-order (ATO). 2. Fast changeover (nearly zero setup time between orders). 3. Postponement of options. Modular production can provide a variety of options by using an assemble-to-order process. For example, when Dell receives a computer order by phone or over the Internet, the company assembles standard modules or components rapidly to meet the customer’s order. The order is then shipped by overnight mail so that the customer receives

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it in as little as five days. But this requires modular design, as well as modular production. Dell also uses the same process to make standard computers for stock and shipment to retail stores. Fast changeover is the form of mass customization used by Paris Miki for its glasses. In this case, it is critical that production is computer controlled and each order is uniquely identified by a bar code, or other identifier, that specif ies the customer’s options. It is also essential to have nearly zero changeover time on equipment so that a lot size of one can be produced economically. Postponement is used to defer a portion of the production until the point of delivery. For example, customized T-shirt shops can put a unique design on a customer’s T-shirt at the point of purchase. Hewlett-Packard printers receive their final configuration for various voltages and power supplies at United States or overseas warehouses before delivery. Postponement makes it possible to ship standard units anywhere in the world and customize them at the last minute. From a manufacturing point of view, mass customization has changed the dynamics of the product-process matrix. Flexible automation makes it possible to make small lot sizes along with large lot sizes without a great cost penalty. Thus, with mass customization a firm can operate over a wider range of product choices without major changes to its process. This amounts to a wider horizontal operating position on the matrix. Nevertheless, mass customization does not make it possible to competitively make all volumes with all amounts of customization. There are limits to mass customization, too, but not as many limits as with the traditional forms of production. The Operations Leader Box describes how New Balance is using mass customization to offer men’s Mass customization is not for everyone. Automobile makers and women’s customized athletic shoes. have struggled to mass-customize cars. As some early mass customizers discontinue their © Monty Rakusen/Getty Images customized products, there is disagreement on whether mass customization is a viable strategy for most firms. For example, Land’s End was a widely cited mass customizer when it introduced its customized jeans. By 2011, however, it had discontinued this product line. Automobile producers have also struggled to make mass customization a reality. While they have successfully modularized the design of their cars and reduced changeover times,

Operations Leader

Mass Customization at New Balance

New Balance offers customized athletic shoes that can be ordered online and shipped to the customer in five days. The customer can select from a pallet of �� different colors for the base, upper panels, heel, and accent parts of the shoe. Of course, the shoes are also available in © McGraw-Hill Education

various standard styles and sizes. The customer can choose any combination of colors to design a unique shoe. New Balance produces over �� pairs of shoes each day from its U.S. factory in New England. This is only possible through use of the mass customization approach. Source: www.newbalance.com/nb�/explore.

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they have been less successful in linking customer preferences to the production process. For example, in most states, manufacturers cannot sell directly to customers, and so the factory must communicate with customers via the dealership network. Also, customers like to choose the color of the car, but painting occurs early in the production process and in batches, both characteristics that are at odds with mass customization. Recent research shows that cross-functional integration is a key enabler of mass customization. 3 Modular production alone does not result in mass customization, but rather modularity requires cross-functional cooperation in order to achieve mass customization. Modularity creates the increased need for information exchange and cooperation among R&D, manufacturing, and marketing functions. As a result, modularity will only result in mass customization if cross-functional integration is also present. This illustrates once again that contingencies are present when using new practices, such as mass customization. Most new practices are successful only in certain situations and conditions.

4.7

�D PRINTING AND ADDITIVE MANUFACTURING 3D printing is a relatively new technology and process that is now being used. Also called additive manufacturing this technology deposits successive layers of plastic, metal, or ceramic material to build a 3-dimensional solid object. An inkjet type of pr inter sprays the material on thin layers until the product is built up to its normal size. It can make complex shapes with holes, interior spaces, irregular contours, or other difficult dimensions. Prior to 3D printing these objects would have been machined from metal or made from expensive plastic injection molds. Regarding process type, additive manufacturing fits as a job shop in the product-process matrix. 3D printing has applications in a variety of fields including medical implants, aerospace, spare parts, apparel, architectural display models, prototypes, and art objects to name only a few. Ford and General Motors use it to make prototypes for new car designs. Medical and dental implants are made to fit a particular patient. Spare parts are another application since they can be made at the point of use rather than carried in inventory. In 2014 Swedish car manufacturer Koeningsegg made a variety of parts for its one:1 supercar. In additive manufacturing the product design is transmitted via a digital 3D model from the design department to the 3D printer. As a result the technology can be used for distributed manufacturing via use of the computer cloud. Designs can be transmitted to remote locations and produced there instead of shipping the parts or products long distances. Additive manufacturing is in its infancy. Rather than replacing traditional manufacturing it will probably complement it in specific situations. The ability to transmit a design around the globe and make it in many different countries is appealing. The price of 3D printers has been dramatically reduced to less than $1,000 for the most basic machine to hundreds of thousands for more advanced equipment. As the price of additive manufacturing is reduced it can support many low volume customized parts or products. Additive manufacturing will permit relocalization of production in both developed and developing countries. Countries and industries can build their additive manufacturing around digital technologies. This will result in shifts in investment, labor, and location of manufacturing. �

A. R. Sohel, R. G. Schroeder, and D. N. Mallick, “The Relationship among Modularity, Fundtional Coordination, and Mass Customization: Implications for Competitiveness,” European Journal of Innovation Management ��, no. � (��), pp. ��–��.

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�D printer and printed objects Both: © Victor J. Blue/Bloomberg via Getty Images

Already, UPS is experimenting with 3D printing. They have purchased 100 industrial grade 3D printers for their Louisville, Kentucky, air hub to make everything from air plane parts to iPhone parts. Since 3D printing can shorten supply chains and reduce inventory, UPS wants to understand whether to treat 3D printing as a threat or a service opportunity. FedEx and Amazon have their own studies underway.

4.8

ENVIRONMENTAL CONCERNS

LO4.7 Contrast pollution prevention, pollution control, and pollution practices.

More than any other area of the firm, operations affects the natural environment. From the selection of inputs into the transformation process to the process outputs and by-products, decisions about the production process can have a great environmental impact. With increasing regulation and consumer scrutiny, firms are continuously considering how to meet the demands of these stakeholders. When firms are making process selection decisions, they must consider the environmental impact. We can think about three areas of decisions that affect environmental impact. First, there are technologies for pollution prevention. These structural investments reduce or eliminate pollutants from the production process. Process choice decisions, for example, using solar power versus coal-based power, determine the types of pollution output the process will create. Pollution prevention investments might include designing the process to waste fewer raw materials, redesigning products or processes to reduce pollutants, or investing in equipment that requires less energy input. These are instances of preventing pollution from occurring. Second, pollution control technologies are also structural investments. They differ from pollution prevention technologies in that they are used to treat or dispose of pollutants and harmful by-products that are outputs from the process. These technologies most commonly are added to existing processes that were designed and purchased in t he past, perhaps when environmental regulations were less stringent. Pollution control extends an existing process by adding another step to deal with the waste by-products from the process. The third category of process decisions related to environmental impact is pollution practices that affect the way processes are used. Such practices include retraining workers to use the existing process in a new manner and increasing cross-functional coordination to seek creative and innovation improvements in environmental impact. These practices also include monitoring and reporting systems related to the way processes operate. Other practices may

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involve changes in the supply chain, for example, selecting new suppliers who certify their materials are obtained using sustainable methods. Many processes have been improved greatly over the years to lessen their impact on the environment. From changes in process inputs—for example, using consumer waste paper rather than trees to manufacture new paper—to innovative use of used materials—for example, making park benches out of recycled plastic bottles—operations plays a major role in managing environmental issues. Examples of firms employing these process decisions are abundant. In 2015, the U.S. Environmental Protection Agency recognized 128 organizations with ENERGY STAR awards for their sustained progress in reducing energy consumption in their facilities. These companies saved 2.5 billion tons of gre enhouse gas emissions. The leaders included Home Depot, Panasonic, Phillips, Des Moines Public Schools, and New York Presbyterian Hospital. Other environmental concerns related to process choice include the following: 1. Recycling outputs—finding uses for process by-products. Example: Public schools send their food waste to pig farms. 2. Recycled inputs—using materials from other processes as inputs into a process. Example: Andersen Windows uses wood shavings that are by-products of one process as input together with a thermoplastic polymer to form Fibrex, a composite material used to make window frames and other products. 3. Remanufacturing—restoring and reusing some product components in the production of new products. Example: Caterpillar salvages and reuses many parts in its industrial equipment.

4.9

CROSS�FUNCTIONAL DECISION MAKING There are many cross-functional interactions in process selection decisions. Marketing has a large stake in process selection decisions. Process choices require large capital investments and thus make it difficult to change the process quickly. In many cases, the markets the firm faces may be changing faster than the fir m can recover the capital investment from process choices. Thus, marketing should work closely with operations in these decisions to ensure that both current and future market demands can be met, along with environmental impacts. The critical role of marketing in estimating and managing future demand is apparent. Although forecasting is always an inexact science, some scenario planning should be done to estimate the appropriate product and process response for different demand scenarios. This will make it possible to manage the risk inherent in process choices and the associated capital investment. Marketing should also be aware of the process choice implications by managing demand to support the process choices that are made. Finance has a key role in process selection decisions because of the capital investment required. Process selection choices should be subjected to standard cash-flow and present value analysis. This will ensure that any contemplated process choices will provide the required returns on capital at an acceptable risk. Finance will also be required to raise the capital once the process selection decision is made and to provide capital for future investments as t he product, process, and environmental challenges evolve over time. The human resources function plays a key role in providing the human capital that is consistent with the process selection choices. Different processes require different labor from unskilled to highly skilled and different labor specialties. The human resources function must

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hire, train, and guide management of the workforce so that it is coordinated with the process choices made by operations. Information systems and accounting professionals should be aware that different processes have different performance measures and different data requirements. The information and accounting system designed for a MTO process will not work in a MTS operation; a job shop information system will not work in an assembly-line environment, since the information used for scheduling and inventory control depends on the type of process selected. Because large investments are required in hardware and software, information systems and accounting decisions must be closely coordinated with process selection choices. We have shown that process selection choices affect all parts of the firm. They are strategic decisions that determine the future capabilities of the firm and thus involve all functional areas along with general management. With proper cross-functional coordination, the processes selected can offer competitive advantage to the firm and will be supported by all functions.

4.10

KEY POINTS AND TERMS This chapter has emphasized how process design and selection can meet the strategic needs of the business. These key points have been made in the chapter: ∙ There are five types of processes: continuous, assembly line, batch, job shop, and project. The continuous and assembly-line processes are suited to high-volume standardized products that are produced at low cost with limited flexibility. The batch process and job shop processes are suited to low- to moderate-volume products that are customized or produced in a high variety. The disadvantage of batch processes is the jumbled flow, which reduces throughput and efficiency. The project process is best for unique or creative products that are made one at a time. It requires intensive planning and scheduling and generally results in costly products or services. ∙ The second dimension of process is the type of order fulfillment: make-to-stock, maketo-order, or the hybrid assemble-to-order. With MTS, the replenishment cycle for inventory is separate from the customer order cycle. In contrast, the MTO process is set in motion by customer orders and geared to delivery performance. The MTS process provides standard products, whereas the MTO process is suited to custom orders. The ATO process makes subassemblies in advance for inventory and assembles them into a final product when ordered by the customer. ∙ The order penetration point determines the point at which the customer order enters the production process. This is related to whether t he process is designed to be MTS, ATO, or MTO. ∙ The combination of product flow and type of order fulfillment provides six types of processes. Selection from among these six requires consideration of market conditions, capital requirements, labor, and technology. Taking into account these factors, the process selection decision is always strategic and cross-functional in nature. ∙ The product-process matrix provides a dynamic view of the process selection decision by considering the life cycle of both products and processes. Strategy is defined by a position on the matrix for the f irm’s product and process. The matrix helps provide coordination between marketing decisions about product and operations decisions concerning the process.

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∙ Focused operations are used to separate products and processes that have different requirements in terms of the production process or the markets served. Each type of process or product family should be assigned to a different facility or plant-within-a-plant. ∙ Mass customization is the ability to make a customized product at approximately the same cost as a mass-produced product. This can be done for some products by using flexible automation, robotics, modular design, and information systems. There are t hree types of mass customization: modular production/assemble-to-order, fast changeover, and postponement. ∙ 3D printing and adaptive manufacturing can rapidly produce prototypes or unique custom products from a 3D digital design. Rather than replace traditional manufacturing it will complement it. 3D printing has the ability to transmit the design around the globe and make the product in many different locations. ∙ Environmental concerns are a major challenge related to process design. When making decisions about processes, firms must consider whether they will develop structural processes to prevent or control pollution or pollution practices to manage these matters. Process decisions must account for plans to recycle and remanufacture products. ∙ Process selection decisions are highly cross-functional in nature because t hey affect human resources, capital, information systems, and the ability of the fir m to deliver products to the market. Therefore, all functions should be knowledgeable about process choices and the impact of process selection on their particular functional area and the environment.

Key Terms


Continuous process 53 Assembly line 53 Batch 54 General-purpose equipment 55 Jumbled flow 55 Process layout 55 Product layout 55 Job shop 56 Project 56 Throughput ratio 56

Make-to-stock 58 Make-to-order 58 Lead time 58 Back order 58 Service level 58 Assemble-to-order 59 Order penetration point 60 Product-process matrix 62 Focused factory 64 Plant-within-a-plant 64

Mass customization 65 Economies of scale 65 Economies of scope 65 Modular production 65 Fast changeover 66 Postponement 66 3D printing 67 Pollution prevention 68 Pollution control 68 Pollution practices 68

1. Jelly Belly Tour www.youtube.com/watch?v=Xa3rwBR7WyE Take the Jelly Belly plant tour and describe the process used. Is it a continuous, line, batch, job shop, or project form of process, and how much automation is used? 2. Vermont Soap Factory www.vermontsoap.com/about-us/virtual-factory-tour/ Take a tour of the Vermont Soap Factory and describe the process used. 3. Chrysler Factory Tour www.chrysler.com/en/200/factory-tour Review the process of assembly line manufacturing for Chrysler and describe it in your own words.

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Discussion Questions 1. Classify the following types of processes as continuous, assembly line, batch, job shop, or project: a. Doctor’s office b. Automatic car wash c. College curriculum d. Studying for an exam e. Registration for classes f. Electric utility 2. Why are assembly-line processes usually so much more efficient but less flexible than batch processes? Give three reasons. 3. The rate of productivity improvement in the service industries has been much lower than in manufacturing. Can this be attributed to process selection decisions? What problems would be involved in using more efficient processes in service industries? 4. Several industries—including those that produce furniture, houses, sailboats, and fashion clothing—have never progressed down the diagonal of the productprocess matrix to become highly standardized and efficient. Why do you think this is so? 5. Compare the expensive restaurant, fast-food restaurant, and cafeteria in terms of process characteristics, such as capital, product type, labor, planning, and control systems. 6. A company is in the business of making souvenir spoons to customer order. The customers select the size of the spoons and may specify the design to be embossed on them. One or more spoons may be ordered. The company is considering going into the make-to-stock spoon business for souvenir spoons and

everyday tableware as well. What will it have to do differently? How is the business likely to change? 7. What are the strategies of the following organizations? Is the strategy defined in terms of product or process or both? a. McDonald’s b. AT&T Telephone Co. c. General Motors d. Harvard Business School 8. Suppose that a firm is considering moving from a batch process to an assembly-line process to better meet evolving market needs. What concerns might the following functions have about this proposed process change: marketing, finance, human resources, accounting, and information systems? 9. Give an example of mass customization not discussed in the chapter. 10. What techniques or approaches can be used to achieve mass customization in practice? 11. Search the Internet to find applications of 3D printing. 12. What is the difference between economies of scale and economies of scope? How do firms consider these when investing in processes? 13. What are some of the classic signs of an unfocused operation? 14. What are the pros and cons of organizing a plantwithin-a-plant? 15. Why should operations be concerned with environmental issues? 16. What are the main ways in which processes are managed to accommodate environmental regulations?

� � � � � � � �

Service Process Design LEARNING OBJECTIVES After reading this chapter, you should be able to: LO�.�

Differentiate the characteristics of a service organization from a manufacturing organization.

LO�.�

Explain the elements of a service-product bundle.

LO�.�

Organize a variety of service offerings into the service delivery system matrix.

LO�.�

Describe the effect on the service delivery system of customer contact.

LO�.�

Explain service recovery and service guarantees.

LO�.�

Evaluate the role of technology and globalization in service management.

LO�.�

Define the attributes of the service-profit chain.

The service economy accounts for more than 80 percent of jobs in the United States and in most industrialized economies in Europe and Asia today. Yet service production often receives little emphasis in many business and operations management courses. Increased emphasis on service process design is needed to reflect the importance of services in modern economies. Unlike manufacturing processes, we see service processes every day. As customers, we participate in the process and immediately know whether we are receiving good or bad service. Unfortunately, world-class service is rare. For example, was your most recent retail service pleasant? Do you enjoy waiting in the doctor’s office? And what do you think of most airline service? Services are delivered by a wide variety of organizations—businesses selling services to consumers (restaurants, appliance repair) and to other businesses (consulting, accounting), nonprofit services (health care, education), and government services (licensing,police protection). 73

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Process Design

Operations Leader

Montgomery County Public Schools

The Montgomery County Public Schools (MCPS) in Maryland received the �� Malcolm Baldrige National Quality Award. MCPS operates �� schools, with more than ��,�� students and almost ��,�� employees. Its mission is to ensure that students “have the academic, creative problem solving, and social emotional skills to be successful in college and career.” MCPS “reverse engineered” their education process, first setting the goals of college and career readiness, and then building in the knowledge and skills students needed to reach those targets. MCPS’s success is reflected in outcome-based metrics of service excellence. Its graduation rate is ��.� percent, the highest for any large school district in the nation. The �� Class, with an average SAT score of ��, received $�� million in college scholarships. Two-thirds of graduates complete advanced placement coursework for college credits. Besides these student-centered, outcome-based metrics of service excellence, MCPS also tracked and improved performance metrics for resources and operational activities, such as availability and delivery of school supplies, maintenance and repair of equipment, satisfaction and retention of employees, and reduction in energy waste. Attention to improving operational and supply chain activities have not gone unnoticed. The MCPS Division of Procurement recently received the ��

Source: Montgomery County Public Schools

Achievement of Excellence in Procurement from the National Procurement Institute, Inc. Excellence in the service delivery system for education at MCPS did not occur overnight. The effort began in �� when the Our Call to Action: Pursuit of Excellence strategic plan was created. This strategic plan, with its periodic updates, became the guide to comprehensive reforms and continual improvements of all aspects of education delivery within MCPS. Source: Adapted from “Climb to the Top,” Quality Progress ��, no. � (April ��), pp. ��–��; http://www.

montgomeryschoolsmd.org/, ��.

The operations function in these organizations varies widely in the resources used to produce these services, but there are common elements that allow us to study the processes used in service organizations. What can be done to improve services? Service process design is an essential ingredient of better service delivery. We take the ideas of process selection and extend them to services. We expand the discussion into the domains of service product offerings, service system designs, globalization of services, service guarantees, and the important role played by employees in service organizations. For an example of world-class service, see the Operations Leader box on Montgomery County Public Schools.

5.1

DEFINING SERVICE

LO5.1 Differentiate

the characteristics of a service organization from a manufacturing organization.

Most definitions of service stress the intangibility of the offering. Services are indeed intangible; that is, their processes create value for customers by performing transformations that do not result in a physical entity (product). However, services can be difficult to define and cannot be easily quantified; for example, do hospital patients consume one service or multiple services as they receive tests and treatments—perhaps numerous in quantity? Rather than specify a formal definition of a service, it is important to consider the characteristics of such processes and their implications for both managers and c ustomers. Simultaneous production and consumption is a critical characteristic of services because it means that the customer may be in the production system while production takes

Chapter 5

TABLE �.� Differences Between a Product and a Service


A Product

A Service

A product is tangible Ownership is transferred at the time of purchase A product can be resold A product can be demonstrated before purchase A product can be stored in inventory Production precedes consumption A product can be transported

A service is intangible Ownership generally is not transferred No resale is possible A service does not exist before purchase A service cannot be stored Production and consumption are simultaneous A service cannot be transported (though producers can be)* The buyer can perform part of the production

The seller produces

75

*Exceptions are electricity and communications services.

place. The customer can introduce uncertainty into t he process by placing demands on the service provider at the time of production. Also, the simultaneity of production and consumption means that most services cannot be stored; and the service must often be located near the customer so that the customer can travel to the service provider or vice versa. Exceptions are communications such as call centers, TV, Internet services, and electricity services that can be provided over long distances. It is important to distinguish between service processes that are front office and those that are back office. Processes that require the presence of or interaction with the customer are front office service processes. The importance of simultaneous production and consumption therefore applies to front office services because t he customer is participating in the process. For example, retail assistants and dentists provide front office services when interacting with customers. This interaction within the service process between providers and customers is critical to service process design but quite foreign to manufacturers. Back office services, in contrast, can be performed separately from their consumption by the customer and, therefore, do not have to accommodate interaction with the customer. Most transaction processing in banks and testing patient samples in medical offices are back office processes that are not produced and consumed simultaneously but become valuable to the customer some time after t he work is performed. Because characteristics of services vary widely and the extent of interaction between the provider and the customer can also vary greatly, it is difficult to generalize about services. However, they are clearly different from products that are outputs of manufacturing. Some of the important contrasts between products and services are shown in Table 5.1.

5.2

SERVICE�PRODUCT BUNDLE

LO5.2 Explain

the elements of a service-product bundle.

Before the process to deliver a service is designed, the service-product bundle must be defined. The service-product bundle consists of three elements: 1. The service (explicit service). 2. The psychological benefits of the service (implicit service). 3. The physical goods (facilitating goods). Most services come bundled with explicit services, implicit services, and facilitating goods. For example, when customers go to a fast-food restaurant, they receive both an explicit service, which they hope is fast and accurate, and a facilitating good, the food. In this case, the implicit service is how customers feel about the interaction and the pleasantness of the surroundings. Many services have fixed facilitating goods, such as the building and equipment that are used but not consumed during delivery. In the case of a subway ride, the explicit service is the transportation from one place to another and includes customer perceptions and experiences, such as the sound, sight, smell, and feel of the ride. The implicit service is the sense of well-being and security that the

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subway ideally provides. Finally, the subway car is the facilitating good. It is important in the design of the service not to overemphasize one piece of the serviceproduct bundle and neglect the other elements. Most services require a more complex design than a subway ride. Consider, the explicit services, implicit services, and facilitating goods for a ski resort. The explicit service is the experience gathered by the five senses in the chalet, shops, and ski runs. This includes interactions with the resort employees, the visual experience, the grooming of the slopes, and the challenging nature of the runs. The implicit service is having fun and the exhilaration of skiing. The facilitating goods are the chair lifts, the buildings, and the mountain itself. The ski resort must ensure that it plans and manages all This skier is enjoying a complete service package. three aspects of the service-product bundle. © Purestock/SuperStock Figure 5.1 provides more examples of a variety of service-product bundles. Notice that most of the bundles typically are provided by service organizations, for example, self-service groceries, fastfood restaurants, and auto maintenance, whereas an automobile typically is considered a manufactured product. Here, we include the automobile as an example of a service-product bundle because the purchase of a new auto includes several service elements that customers recognize and pay for. The auto bundle includes not only the physical product but also the ability to test-drive and finance the product at the dealership in addition to the manufacturer warranty that covers the auto. The combination of these service elements with the product makes up what we consider a service-product (or product-service!) bundle. The task for the operations function, before delivering any services to customers, is to design the service delivery system. That system includes all the processes that will be used to deliver services, including details such as the technology used in the process design, the types of employees needed, and even the appearance of the employees and facilities. While operations can control both the explicit service and the facilitating goods, implicit services are obviously harder to control (and may vary greatly from one customer to another).

FIGURE �.� Comparison of various products and services packages.

Products 100%

75%

50%

Services 25%

0%

25%

50%

Self-service groceries Automobile Installed carpeting Fast-food restaurant Gourmet restaurant Auto maintenance Haircut Consulting services

75%

100%

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Therefore, it is important that management use the means it has available (e.g., technology or employees) to design the implicit services into the service delivery system. An important point to emphasize is that the design of the service to be delivered and the design of the service delivery system are intertwined and, often, should be designed concurrently. Also, the delivery of a service is a simultaneous marketing and operations act that requires both the right visual cues and well-functioning processes. Therefore, crossfunctional cooperation is essential to service design and delivery. Like products, services have supply chains, although they may be less concerned with the flow of the physical product and more concerned with the flow of work, customer, and information. Services cannot be stored, but they do use inventory, and so they rely on product-based supply chains to provide that inventory. For example, a hospital patient requires service processes for explicit services (surgery, perhaps) and additionally the work flow of outsourced lab tests, information and financial flows from insurers, and coordination of work and information as the patient is discharged from the hospital to a rehabilitation center. Such a complex network of supply chain activities mirrors the activities of product-based supply chains but usually includes both tangible product flows and intangible work flows.

5.3

SERVICE DELIVERY SYSTEM MATRIX

LO5.3 Organize a

variety of service offerings into the service delivery system matrix.

There are many ways to think about services, the options they offer customers, and the variety of ways in which they can be delivered. Some services can be delivered in only one standardized way and every customer gets more or less the same service. Other services are highly customized to customer requests, and exactly the same service is virtually never repeated for another customer. The challenge for management is to design the right service process so that the ser vice delivery system is matched to the requirements of its c ustomers. Both customer preferences and design requirements of the service delivery system are contained in the service delivery system matrix, which is shown in Figure 5.2. On the top of the matrix is the dimension of customer wants and needs, which captures the service package (or service-product bundle) customers are seeking. This dimension incorporates the uniqueness of demands from one customer to another, an indication of the uncertainty and variation introduced into operations by individual customers. Customers with basically the same wants and needs can be served by processes that are highly standardized and routinized, whereas customers with unique wants and needs must be served by processes t hat allow variety and high levels of customization. The vertical side of the service delivery system matrix represents the operations service system and denotes the number of different pathways that service customers can take in the service process. This can vary from a single pathway or small number of pathways to a virtually infinite number. A small number of pathways allows few options in how the service is delivered; however, an infinite number of pathways allows the service to be different each time it is delivered. When both dimensions of the service delivery system matrix are considered, three types of services can be identified. Customer-routed services are those in which customers want a unique, highly customized experience. Customers have a great deal of decisionmaking power to determine the components of the service as well as how and when and the sequence in which they are delivered. For these services, each customer wants a different set of experiences, and the service process must allow a great deal of personal discretion and interaction with the customer. These services are carr ied out using highly flexible processes and may rely on highly trained workers to deliver the right set of experiences to match customer wants and needs. Personal trainers, Internet shopping, and museums are

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FIGURE �.� Service delivery system matrix. Source: Adapted from Collier and Meyer (1998).

Customer Wants and Needs in the Service Package Highly customized with unique process sequence. Customer has great decision-making power. Many process pathways. Jumbled flows, complex work with many exceptions.

n g i s e D m e t s y S y r e v i l e D e c i v r e S

Moderate number of process pathways. Flexible flows with some dominant paths, moderate work complexity. Limited number of process pathways. Line flows, low work complexity.

Standard with options, using moderately repeatable sequence. Customer has some decision-making power.

Standardized with highly repeatable process sequence. Customer has low decision-making power.

Customer-routed Estate planning

Co-routed Stock brokerage

Provider-routed ATM

examples of customer-routed services. Customer-routed services are similar to those delivered by job shops for manufacturing products, in terms of allowance for customization. In the midranges of both customer wants and needs and service delivery system design, co-routed services offer customers a moderate number of choices, using moderately standardized processes. Medical and stockbroker services fit in t his category. A golf course is another example of a co-routed service in which management has designed the course to be played in a standardized sequence (from Hole 1 to Hole 18), but within the service delivery system customers have a reasonable degree of decision-making power in how they choose to play. Finally, highly standardized services are delivered using a design for provider-routed services. These services are characterized by processes that allow few options during service delivery and are designed for customers whose needs are very similar to one another. An automatic teller machine (ATM) is a service delivery system with a very limited number of pathways from which customers may choose. An ATM provides a limited set of

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services, and there is little customer discretion in using it. Customers whose needs are not met by an ATM must interact with the bank via other means, such as calling or visiting a branch office. Eating at McDonald’s and getting a blood test are other examples. Providerrouted services are therefore similar in nature to a manufacturing assembly-line process. We refer to them as provider-routed because the provider, either an individual or an organization, decides how a particular service will be carried out. The service delivery system matrix is intended not only to classify the different types of services but also to indicate how the operations function task differs among services. For example, provider-routed services may require management attention to automation and capital investment, but customer-routed services may require more attention to management of human resources and f lexible technology issues. The service delivery system matrix suggests that service firms will generally be located on the diagonal, indicating alignment between the service package and the service process. Both the choice of which customer segments to serve (horizontal dimension) and decisions regarding design of the service delivery system (vertical dimension) are strategic in nature. Marketing, operations, and human resources functions must work closely to ensure that external opportunities and internal capabilities have been considered during strategic planning. The major difference between the service delivery system matrix and the productprocess matrix that guides the selection and design of manufacturing processes is that the design of the service delivery system generally does not vary with customer volume. In the product-process matrix, the volume and customization of the product offering are the major factors in determining the most appropriate production process. In contrast, services often are delivered using the same process whether they are produced in small or large volumes. For example, very similar processes are used for a medical service such as setting a broken leg regardless of whether the service is delivered at a large 2000-bed hospital, which has many such patients, or in a smaller 120-bed hospital. Similarly, fast-food restaurants treat customers the same way regardless of the number of customers they serve and regardless of customer order size. To increase volume, fast-food restaurants simply open more locations, but the service process is the same. The degree of customization of a service, rather than volume, is the main characteristic that affects the design of the service process and the way the service is delivered. Self-service by customers is also a consideration in service delivery system design. Customers may serve as labor at key points in a service process, such as bagging their own groceries, or they may complete an entire service process independently, as occurs when they fill their tanks at a self-service gas station. Self-service usually benefits the firm as customers provide “free” labor during service delivery. For self-service to be a successful component of service delivery system design firms must design their service processes carefully for both simplicity and customer satisfaction. Self-service is possible for any of the types of services defined in the service delivery system matrix, from simple standardized services to highly customized services. A key issue for operations managers is designing self-service opportunities that customers are both ATM self-service appeals to many customers willing and able to perform. While the relatively simple self-service while providing efficiency. offered at ATMs appeals to a wide range of customer segments, © Jupiterimages/Thinkstock/Alamy

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having to pull one’s retail selections from warehouse shelving (e.g., at IKEA stores) may limit the appeal of the retail service for some segments. An understanding of the needs of a firm’s target customer segments must serve as a guide to the right service delivery system design.

5.4

CUSTOMER CONTACT

LO5.4 Describe the

effect on the service delivery system of customer contact.

We now look at interactions between customers and service organizations in detail to understand how the extent of customer contact relates to service processes. With lowcontact services, it is possible to separate a ser vice into two portions: a service creation or production portion and a service consumption or delivery portion. By doing so, the customer can be removed from the service creation portion. Separating the customer from the service production portion allows for greater standardization of processes and therefore better efficiency. Examples of low-contact services are processing of online orders and ATM transactions. As indicated above, these services are usually designed using a provider-routed approach. See Figure 5.3, in which low-contact services are referred to as buffered core because these services are designed to be buffered or removed from interactions with the customer. At the other end of the contact spectrum, high-contact services involve the customer during the production of the service. Examples are dentistry, haircutting, and consulting.

FIGURE �.� Customer contact matrix. Source: Adapted from Chase, Jacobs, and Aquilano, Operations Management for Competitive Advantage, 10th ed. (New York: McGraw-Hill, 2004).

Degree of customer/server contact Buffered core (none)

Permeable system (some)

Reactive system (much)

High

Low Face-to-face total customization Face-to-face loose specs Face-to-face tight specs Phone contact

Sales opportunity

Production efficiency

Internet and on-site technology Mail contact

Low

High

Worker Requirements

Clerical skills

Helping skills

Verbal skills

Procedural skills

Trade skills

Diagnostic skills

Focus of Operations

Paper handling

Demand mgmt.

Scripting calls

Flow control

Capacity mgmt.

Client mix

Office automation

Routing methods

Computer databases

Electronic aids

Selfserve

Client/ worker teams

Innovations

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In these services, the customer can introduce uncertainty into the process with a resulting loss of efficiency. For example, a customer may impose unique requirements on the service provider, resulting in a need for more processing time. In this case, the service delivery system design typically will be customer-routed unless customization has been limited by the provider. These interactions are referred to as reactive in Figure 5.3 because the service delivery system must react to customer requests. In the middle ground of customer contact, permeable systems have processes that are penetrated by customers in fairly restricted ways, usually via telephone or limited face-toface contact. Here, limited interaction with customers allows some customer preferences to be met. But such accommodation is restricted to maintain process eff iciency. Operations managers must be concerned with the amount of customer contact because higher levels of customer contact can introduce variability into a process. Variability is a challenge for operations managers because it makes capacity planning more difficult and can result in waiting lines. Table 5.2 defines five types of customer-introduced variability. Service firms that try to accommodate all types of customer-introduced uncertainty may find that the cost of delivering the service begins to spiral out of control. Instead, they must learn to manage the uncertainty, either by using creative means to reduce it or by finding low-cost means of accommodating it. A few examples provide insight into managing variability. Arrival variability results in empty restaurant seats at certain times of day and full seats and a waiting line at other times. Customer arrivals are somewhat random, but usually clustered around standard meal times. A reservation system can help to manage arrival variability by shifting some customers to somewhat earlier and later than peak standard times. Thus, reservation systems can be effective for managing customer arr ival uncertainty. Capability variability, on the other hand, is observed in hospital patients’ varying abilities to move about, feed themselves, and take care of their basic needs such as getting a drink or using the bathroom. Hospitals usually hire low-wage staff to assist with these needs to keep costs low while reserving more expensive labor (like nurses) for tasks that require more extensive licensing. The relationship between customer contact and process efficiency can be stated as follows: Potential inefficiency = f (degree of customer contact) The measure of the degree of customer contact is the amount of time it t akes for the service to be produced, delivered, and consumed by the customer. As this time increases, the delivery process is increasingly inefficient. High contact may be costly in terms of lost efficiency, but it may offer opportunities to increase sales to customers, resulting in increased revenue for the service fir m, as shown in Figure 5.3. For example, consultants often have a high degree of contact with clients, and such interactions provide them with opportunities for additional consulting work and therefore additional revenue. When possible, high-contact and low-contact portions of service delivery systems should be separated to create front office (high contact) and back office (low contact) processes. TABLE �.� Types of CustomerIntroduced Variability Source : Frei, F. “Breaking the Trade-off Between Efficiency and Service.” Harvard Business Review November 2006, pp. 92–101.

� � � � �

Arrival variability—uncertainty in when customers will arrive to consume a service. Request variability—uncertainty in what customers will ask for in the service-product bundle. Capability variability—uncertainty in the ability of customers to participate in a service. Effort variability—uncertainty in the willingness of customers to perform appropriate actions. Subjective-preference variability—uncertainty in the intangible preferences of customers in how service is carried out.

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Front office operations require intensive customer interactions, whereas the back office can operate more efficiently away from the customer. The separation of high-contact and low-contact services is an application of the principle of focused operations. There are several characteristics of high-contact and low-contact services:

Airline service is a high-contact service with some customer variability. © Ryan McVay/Getty Images

∙ Low-contact services are used when face-to-face interaction is not required, for example, shipping operations or check processing in banks. ∙ Low-contact services should use employees with technical skills, efficient processing routines, and standardization processes. High-contact services require employees who are flexible, personable, and willing to work with the customer (the smile factor). ∙ Low-contact operations can work at average demand levels and smooth out the peaks and valleys in demand. Providers of high-contact service must respond immediately as demand occurs in peak situations. ∙ High-contact services generally require higher prices and more customization due to the variability that customers introduce into the service.

While customer contact is an important ingredient of service delivery system design, it is not the only consideration. Contact wit h customers becomes increasingly challenging to manage with increases in the total duration of interactions and the richness of the information exchanged during interactions. The nature of uncertainty introduced by the customer is also of critical importance. For example, contact can be high, but if the customer interface is standardized or the customer provides self-service, efficiency is still possible. In fast-food restaurants the degree of customer contact is relatively high, but the nature of the contact is highly controlled in contrast to a fine-dining restaurant, where there is more uncertainty in what the customer may request. Thus, high contact by itself is not always inefficient; it becomes ineff icient when customers introduce uncertainty or do not provide self-service.

5.5

SERVICE RECOVERY AND GUARANTEES

LO5.5 Explain

service recovery and service guarantees.

Service recovery is an important element of service management when there is a service failure—in other words, when something goes wrong during the delivery of a service. Service recovery consists of the actions necessary to compensate for the failure and restore, if possible, the service requested by the customer. For example, when there is a power failure, service recovery includes the time it takes for the electric company to restore power. In a restaurant, if the waiter spills soup on a customer’s lap, service recovery includes helping to dry the clothes with napkins, an apology, and perhaps an offer to dry-clean the clothes at the restaurant’s expense. Often when the service recovery is swift, properly performed and appropriate in the customer’s eyes, the customer accepts the service failure and recovery and is satisfied with the overall service experience. Because service failure from time to time is nearly inevitable, service firms must design recovery processes to ensure that such

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UPS Service Recovery

A customer who usually received packages at the office ordered a large storage unit and needed it delivered to her house. Tara Hunt, then an Intuit executive, called UPS to check on it and was told that during the holiday rush, some packages are not delivered until as late as � p.m.

Agitated, she posted a message on Twitter about waiting for UPS and that she could not walk her dog while she waited, not wanting to miss the delivery. Tony Hsieh, CEO of Zappos, was following her Tweets after having met her previously. He was having dinner with the UPS president and relayed her frustration to him. Five minutes later, the UPS executive called and connected her with an operations manager to arrange delivery for the following morning. At � a.m. sharp, the doorbell rang. Not only was the package delivered, but the UPS employee brought flowers and chocolates, along with treats and toys for her dog! Ms. Hunt says she now goes out of her way to use UPS, and she bought shoes at Zappos the very next day. Tara Hunt has since moved on to a successful career as a digital marketing professional, researcher, author, and speaker. She i s passionate about helping businesses grow by leveraging social networks. Source: Adapted

from: “A Social Networker’s Story,”

BusinessWeek, March �, ��, p. ��; www.tarahunt.com, © Luke Sharrett/Bloomberg via Getty Images

��.

actions are taken consistently. See the Operations Leader box on UPS for an example of a satisfying service recovery. Many companies solidify their service recovery processes by offering service guarantees as a way to define the service and ensure its satisfactory delivery to the customer. A service guarantee is like a product guarantee, except customers cannot return a service if they do not like it. For example, if you do not like your haircut because it’s too short, you have to live with it until your hair grows out. A service guarantee has two components: (a) a promise of what service will be delivered and (b) what the payout or service recovery will be if the promise is not fulfilled. The value of the guarantee to the service firm offering it is that the promise defines exactly what service needs to be delivered correctly. The firm must design its processes and train its workers to meet the expected service every time it is delivered. FedEx Corporation, for example, has a money-back service guarantee for its shipping services within the United States. Packages will be delivered by the time promised (e.g., 10:30 a.m. the next business day) or the service price will be refunded to the customer. This service guarantee defines exactly what the organization must achieve and what happens when a service failure occurs. Another example is Atlantic Fasteners, a distributor of hardware in Massachusetts, whose service guarantee for on-time delivery is: “We deliver defect-free in-stock fasteners on time as promised or we give you a $100 credit.” Atlantic Fasteners posts on its Web site more than a decade of data on the number of payouts it has made, as well as their causes. Other companies may offer somewhat less-precise service guarantees. For example, hotels may give you a fr ee night’s stay if you are not satisfied. A restaurant server may give you a free dessert or a free meal if you are not satisfied with the food. These service guarantees are not as precise in guiding operational activities as the

[Roger G Schroeder, M. Johnny Rungtusanatham, Susa(B-ok.xyz)

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