Chapter 1

OM2
CHAPTER 1
GOODS, SERVICES, AND

OPERATIONS MANAGEMENT
DAVID A. COLLIER
AND
JAMES R. EVANS
OM2, Ch. 1 Goods, Services, and Operations Management
2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Chapter 1 Learning Outcomes
learning outcomes
LO1 Explain the concept of operations
management.
LO2 Describe what operations managers do.

LO3 Explain the differences between goods and
services.
LO4 Describe a customer benefit package.

LO5 Explain three general types of processes.
LO6 Summarize the historical development of
OM.
LO7 Describe current challenges facing OM.

posted to a publicly accessible website, in whole of in part.
Chapter 1 Goods, Services, and Operations Management
alt Disney clearly put us on the path toward
things like quality, great guest service, creativity and

innovation, said Mr. Bruce Jones, programming
director for the Disney Institute. Disney theme parks
and resorts are designed to create happiness by
providing the finest in entertainment for people of all
ages, everywhere. How do they accomplish this?
By meticulous attention to the management of
operations!
Disney theme parks and resorts, for example, focus on

training employees (cast members) to provide
exceptional guest service; on the use of technology both
for entertainment and operational efficiency; on the
physical setting (i.e., facility layout, lighting, signage,
music, appealing to all five senses), separating onstage
public areas from backstage work operations that
include a complex underground system to move
materials and people around the properties; on process
design issues like efficient waiting lines--and on
continuous improvement of everything they do.1

What do you think?

Describe one experience you had at a
theme park that illustrates either good or
bad customer service or operational
design. What can we learn from your
experience regarding how a theme park
can create a positive customer experience
or improve on a bad one through its
design and operations?

Operations management (OM) is the

science and art of ensuring that goods
and services are created and delivered
successfully to customers.
The principles of OM help one to view a
business enterprise as a total system,
in which all activities are coordinated,
not only vertically throughout the
organization, but
also horizontally across multiple
functions.

United Performance Metals

United Performance Metals (UPM), located in
Hamilton, Ohio, is a supplier of stainless steel and
high temperature alloys for the specialty metal
market.
UPMs primary production operations include
slitting coil stock and cutting sheet steel to
customer specifications with rapid turnaround
times from order to delivery.
Bob Vogel is the Vice President of Operations at
UPM. He is involved in a variety of daily activities
that draw upon knowledge of not only OM and
engineering, but also finance, accounting,
organizational behavior, and other subjects.


While understanding specialty metals is certainly a vital
part of Mr. Vogels job, the ability to understand customer
needs, apply approaches to continuous improvement,
understand and motivate people, work cross-functionally
across the business, and integrate processes and
technology within the value chain define Scotts job as an
operations manager.

OM in the Workplace
Brooke Wilson is a Process Manager for J.P.
Morgan Chase in the Credit Card Division.
Among his OM-related activities are:
Planning and budgeting: Representing
the plastic card production area in all
meetings, developing annual budgets and
staffing plans, and watching technology
that might affect the production of plastic
credit cards.
10
OM in the Workplace
Inventory management: Overseeing the
management of inventory for items such as
plastic blank cards, inserts such as
advertisements, envelopes, postage, and
credit card rules and disclosure inserts.
Scheduling and capacity: Daily to annual
scheduling of all resources (equipment,
people, inventory) necessary to issue new
credit cards and reissue cards that are up for
renewal, replace old or damaged cards, and
ones that are stolen.

11
OM in the Workplace
Brooke Wilson is a Process Manager for J.P.
Morgan Chase in the Credit Card Division.
Among his OM-related activities are:
Quality: Embossing the card with
accurate customer information and quickly
getting the card in the hands of the
customer.
Brooke was an accounting major in college.
12
Understanding Goods and Services

A good is a physical product that you can
see, touch, or possibly consume.
Examples of goods include: oranges,
flowers, televisions, soap, airplanes, fish,
furniture, coal, lumber, personal
computers, paper, and industrial
machines.
A durable good is a product that typically
lasts at least three years. Vehicles,
dishwashers, and furniture are some
13
examples of durable goods.


A non-durable good is perishable and
generally lasts for less than three years.
Examples are toothpaste, software, shoes,
and fruit.
A service is any primary or
complementary activity that does not
directly produce a physical product.

14
Similarities Between Goods and Services

1. Goods and services provide value and
satisfaction to customers who purchase
and use them.
2. They both can be standardized or
customized to individual wants and needs.
3. A process creates and delivers each good
or service, and therefore, OM is a critical
skill.
15
Differences Between Goods and Services

1. Goods are tangible while services are
intangible.
2. Customers participate in many service
processes, activities, and transactions.
3. The demand for services is more difficult to
predict than the demand for goods.
4. Services cannot be stored as physical
inventory.
5. Service management skills are paramount to
a successful service encounter.
6. Service facilities typically need to be in close
proximity to the customer.
7. Patents do not protect services.

16

Service management integrates
marketing, human resources, and
operations functions to
plan, create, and deliver goods and
services, and their associated service
encounters.
A service encounter is an interaction
between the customer and the service
provider.
17

A broader definition is:
Service encounters consist of one or more
moments of truth any episodes,
transactions, or experiences in which a
customer comes into contact with any aspect
of the delivery system, however remote, and
thereby has an opportunity to form an
impression.
Here, a service encounter includes the
impression an empty parking lot has on
whether the customer goes
into a facility or the interaction with other

18
Exhibit 1.1
How Goods and Services Affect Operations Management Activities

19
Customer Benefit Packages

A customer benefit package (CBP) is a
clearly defined set of tangible (goodscontent) and intangible (service-content)
features that the customer recognizes,
pays for, uses, or experiences.
In simple terms, a CBP is some
combination of goods and services
configured in a certain way to provide
value to customers.
A CBP consists of a primary good or
service, coupled with peripheral goods
and/or services.

20
Exhibit 1.2
A CBP Example for Purchasing a Vehicle

21

A primary good or service is the core
offering that attracts customers and
responds to their basic needs. For
example, the primary service of a personal
checking account is the capability to do
convenient financial transactions.
Examples of a primary good or
service: an airline flight, a personal digital
assistance (PDA) device, a checking
account, a brief case, a football game, tax
preparation advice, and so on.

22

Peripheral goods or services are those
that are not essential to the primary good or
service, but enhance it.
Examples of peripheral goods or
services for a personal checking
account: on-line access and bill payment,
debit card, designer checks, paper or
electronic account statement, etc.
Remember each primary or peripheral good
or service requires a process to create and
deliver it to customers.

23

A variant is a CBP attribute that departs
from
the standard CBP and is normally locationor firm-specific.
A variant allows for adding unique goods or
services such as a fishing pond or pool at an
automobile dealership where kids can fish
while the parents shop for vehicles.
Once a variant is incorporated and
standardized into all CBP delivery sites on a
continuous basis, it becomes a permanent
24
peripheral good or service.

Exhibit 1.2
A CBP Example for Purchasing a Vehicle

25
Exhibit 1.3
Examples of Goods and Service Content

26

It is very important that you understand
the difference between customer wants
and needs versus the CBP features
selected by management to fulfill those
needs.
Processes create CBP features such as
the (a) physical vehicle itself or (b) a
leasing package that fits what the customer
can afford. These CBP features fulfill
certain customers wants and needs such
as (a) physical transportation from point A
to B, or (b) how can I pay for the vehicle? 27

Exhibit Extra
Another Example of Consumer Benefit Package

28
Biztainment (Huh?)
Why would someone pay, for example, to
crush grapes with their feet? Might it be that
the process of doing this is as valuable to the
customer as the outcome itself?
Entertainment is the act of providing
hospitality, escapism, fun, excitement, and/or
relaxation to people as they go about their
daily work and personal activities. The
addition of entertainment to an organizations
customer benefit package provides unique
opportunities for companies to increase
customer satisfaction and grow revenue.
29
Biztainment (Huh?)
Biztainment is the practice of adding entertainment
content to a bundle of goods and services in order to gain
competitive advantage. The old business model of just
selling and servicing a physical vehicle is gone. For
example, a BMW automobile dealership in Fort Myers,
Florida, recently opened a new 52,000- square-foot facility
that offers a putting green, private work areas, a movie
theater, wireless Internet access, massage chairs, a golf
simulator, and a cafe, so that customers have multiple
entertainment options during their visits.
Build-A-Bear Workshop boasts an average of $600 per
square foot in annual revenue, double the U.S. mall
average, and Holiday Inns found that hotels with
holidomes have a 20% higher occupancy rate and room
OM2, rates
Ch. 1 Goods, Services,
Management $28 higher.
are and
onOperations
average
30
Exhibit 1.4 How Primary, Support, Supplier, and Management Processes Are Related

31
Exhibit Extra
Organization by Function versus Process

32
Pals Sudden Service

Pals Sudden Service is a small chain of
mostly drive-through quick service
restaurants located in Northeast
Tennessee and Southwest Virginia.
Pals competes against major national
chains and outperforms all of them by
focusing on important customer
requirements such as speed, accuracy,
friendly service, correct ingredients and
amounts, proper food temperature, and
safety.

33
Pals Sudden Service

Pals uses extensive market research to
fully understand customer requirements:
convenience; ease of driving in and out;
easy-to-read menu; simple, accurate
order-system; fast service; wholesome
food; and reasonable price.
Every process is flowcharted and
analyzed for opportunities for error, and
then mistake-proofed if at all possible.
34
Exhibit Extra

Pals Sudden Service Value Chain
35
Pals Sudden Service

Entry-level employees mostly high
school students in their first job receive
120 hours of training on precise work
procedures and process standards in unique
self-teaching, classroom, and on-the-job
settings, reinforced by a Caught Doing
Good program that provides recognition
for meeting quality standards and high
performance expectations.
Pals collect performance measures such
as complaints, profitability, employee
turnover, safety, and productivity.

36
Exhibit 1.5
Five Eras of Operations Management

37
Exhibit 1.6 U.S. Employment by Major Industry (slide 1)
* Durable goods are items such as instruments, vehicles, aircraft, computer and office equipment, machinery, furniture, glass, metals, and appliances.
** Nondurable goods are items such as textiles, apparel, paper, food, coal, oil, leather, plastics, chemicals, and books.
Source: United States Bureau of Labor Statistics

38
Exhibit 1.6 U.S. 2001 Employment and Projected Change by Major Industry (slide 2)
Source: United States Bureau of Labor Statistics

39
Todays Service Economy

Goods-producing industries (manufacturing,
construction, fishing, forestry, mining, and
agriculture) account for about 20 percent of the
jobs in the U.S. economy.
Service-providing industries account for about 80
percent of the jobs in the U.S. economy.
One-half of those jobs in goods-producing industries
involve service processes such as human resource
management, accounting, and financial.

40
Therefore, more than 90 percent of the

jobs in the U.S. economy involve designing
and managing service-, information- or
entertainment-intensive processes.
Most people in the United States are
working in the service sector or service
processes or in service-related aspects of
manufacturing firms.

41
Current Challenges in OM
Technology
Globalization
Changing cunsumer expectations
A changing workforce
Global manufacturing
Sustainability

42
Sustainability
Sustainability refers to an
organizations ability to strategically
address current business needs and
successfully develop a long-term
strategy that embraces
opportunities and manages risk for
all products, systems, supply chains,
and processes to preserve resources
for future generations.

43
Sustainability Three Dimensions
Environmental sustainability focuses on OM

activities such as remanufacturing, waste
management, green supply chains, and energy
conservation.
Social sustainability requires organizations to

continually evaluate the impacts of their products
and operations on society as a part of the
organizations overall corporate responsibilities,
such as creating a zero carbon footprint product
or supply chain.
Economic sustainability revolves around

making sound financial and operational decisions
about workforce capability and capacity, resource
acquisitions, technology, knowledge, core
competencies, work systems, facilities, and
equipment, as well as preparation for real-time or
short-term
emergencies.
OM2, Ch. 1 Goods, Services,
and Operations Management
44
Zappos Case Study

1. Draw and describe the customer benefit package that
Zappos provides. Identify and describe one primary
value creation, one support, and one general
management process you might encounter at Zappos
(see Exhibit 1.4).
2.Explain the role of service encounters and service
management skills at Zappos. How does Zappos
create superior customer experiences?
3.Describe how each OM activity in Exhibit 1.1 impacts
the management of both the goods that Zappos sells
and the services that it provides. (You might want to
build a table like Exhibit 1.1 to organize your answers.)
45

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OM2

GOODS, SERVICES, AND

Chapter 1 Learning Outcomes

LO2 Describe what operations managers do.

LO4 Describe a customer benefit package.

LO7 Describe current challenges facing OM.

Chapter 1 Goods, Services, and Operations Management

alt Disney clearly put us on the path toward

things like quality, great guest service, creativity and

Chapter 1 Goods, Services, and Operations Management

Disney theme parks and resorts, for example, focus on

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

What do you think?

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Operations management (OM) is the

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

United Performance Metals

Chapter 1 Goods, Services, and Operations Management

United Performance Metals

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

United Performance Metals

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Understanding Goods and Services

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Understanding Goods and Services

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Similarities Between Goods and Services

Chapter 1 Goods, Services, and Operations Management

Differences Between Goods and Services

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Understanding Goods and Services

Chapter 1 Goods, Services, and Operations Management

Understanding Goods and Services

OM2, Ch. 1 Goods, Services, and Operations Management

How Goods and Services Affect Operations Management Activities

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Customer Benefit Packages

OM2, Ch. 1 Goods, Services, and Operations Management

A CBP Example for Purchasing a Vehicle

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Customer Benefit Packages

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Customer Benefit Packages

OM2, Ch. 1 Goods, Services, and Operations Management

Chapter 1 Goods, Services, and Operations Management

Customer Benefit Packages

OM2, Ch. 1 Goods, Services, and Operations Management

A CBP Example for Purchasing a Vehicle

OM2, Ch. 1 Goods, Services, and Operations Management