Chapter 1: The Nature of Operations 1

Chapter 1
The Nature of Operations
Chapter 1: The Nature of Operations 2
Introduction
Chapter 1: The Nature of Operations 3
McDonalds Corp
Facing increased competition
Smarter and more demanding
customers
Less brand loyal
Switched to hamburger bun that does
not require toasting.
Customers prefer taste of new bun
Saves time and money
Chapter 1: The Nature of Operations 4
Olympic Flame
10,000 runners
15,000 miles through 42 states in 84
days
Two years of planning
Must plan for no-show runners and
rush hour traffic
Cost of this operation in the
neighborhood of $20 million
Chapter 1: The Nature of Operations 5
Kmart Versus Wal-Mart
Both chains started in 1962
In 1987, Kmart had 2,223 stores to
Wal-Marts 1,198.
Kmarts sales were $25.63 billion to
Wal-Marts $15.96 billion
By 1991, Wal-Marts sales exceeded
Kmarts
Kmart still had more stores
Chapter 1: The Nature of Operations 6
Kmart Versus Wal-Mart continued
In year ending January 1996, Wal-
Marts sales were $93.6 billion to
Kmarts $34.6 billion.
During this time Kmart emphasized
marketing and merchandising (such as
national TV ad campaigns).
Wal-Mart was investing millions in its
operations to lower cost.
Chapter 1: The Nature of Operations 7
Kmart Versus Wal-Mart
continued
Wal-Mart developed sophisticated
distribution system that integrated its
computer system with its distribution
system.
Kmarts employees lacked skills needed to
plan and control inventory.
Period from 1987 to 1995 Kmart's market
share declined from 34.5 percent to 22.7
percent.
Wal-Mart's increased from 20.1 percent to
41.6 percent
Chapter 1: The Nature of Operations 8
Kmart Versus Wal-Mart continued
Fast forward to 2004
Kmart appears to have adopted a new
strategy
Merge with Sears, Roebuck & Co.
Potential synergies between Kmarts
convenient locations and Sears strong
brands
Chapter 1: The Nature of Operations 9
Diversity and Importance of
Operations
Improvements in operations can
simultaneously lower costs and
improve customer satisfaction.
Improving operations often dependent
on advances in technology.
Can obtain competitive advantage by
improving operations.
Diversity of operations
Chapter 1: The Nature of Operations 10
Operations
Heart of every organization
Operations are the tasks that create
value


Chapter 1: The Nature of Operations 11
The Production System
Chapter 1: The Nature of Operations 12
Systems Perspective
Inputs
Transformation System
Alter
Transport
Store
Inspect
Outputs
Environment
Chapter 1: The Nature of Operations 13
Inputs
Inputs include facilities, labor, capital,
equipment, raw materials, and
supplies.
A less obvious input is knowledge of
how to transform the inputs into
outputs.
Chapter 1: The Nature of Operations 14
Transformation System
The part of the system that adds value
to the inputs.
Four major ways
Alter physical change
Transport - relocate
Store - protect
Inspect better understanding
Chapter 1: The Nature of Operations 15
Outputs
Two types of outputs commonly result
from a production system
Services (abstract or nonphysical)
Products (physical goods)
Chapter 1: The Nature of
Operations
16
Chapter 1: The Nature of Operations 17
Facilitating Good Concept
Often confusion in trying to classify
organization as manufacturer or service
Facilitating good concept avoids this
ambiguity
All organizations defined as service
The tangible part of the service is
defined as facilitating good
Pure services
Chapter 1: The Nature of Operations 18
The Range From Services to Products
Chapter 1: The Nature of Operations 19
Classification and Evolution of Economic
Offerings
Chapter 1: The Nature of Operations 20
Comparison of Alternative
Economic Offerings
Economic
Offering Commodities Goods Services Experiences
Value added
by
Extracting Producing Delivering Staging
Form of output Fungible Tangible Intangible Memorable
Key
characteristics
Natural Standardized Customized Personalized
Buyer Market User Client Guest
Chapter 1: The Nature of
Operations
21
Chapter 1: The Nature of Operations 22
Operations Activities
Strategy
Output Planning
Capacity Planning
Facility Location
Facility Layout
Aggregate
Planning
Inventory
Management
Materials
Requirements
Planning
Scheduling
Quality Control
Chapter 1: The Nature of Operations 23
Functional View of Organizations
Three Core Functions
Operations
Marketing
Finance/Accounting
Other Important Functional Activities
Human Resource Management
Information Systems
Engineering
Chapter 1: The Nature of Operations 24
Chapter in Perspective
Two alternative ways for organizing
work activities
Functional approach, companies
organize activities on the basis of the
type of work performed
Organizing activities on the basis of
specific value-creating processes.
Chapter 1: The Nature of Operations 25
Process View of
Organizations
An Evolution
Chapter 1: The Nature of Operations 26
Traditional Functional Organization
Chapter 1: The Nature of Operations 27
Value Chain Approach