Chapter 1

Operations and
Competitiveness
Operations
Operations Management
Management -- 55thth Edition
Edition
Roberta Russell & Bernard W. Taylor, III

Lecture outline

What do operations managers do?

Operations function
Evolution of operations management
Operations management and ebusiness
Globalization and competitiveness
Primary topics in operations management
Learning objectives for this course

What Do Operations
Managers Do?
What is operations?

a function or system that transforms inputs into outputs

of greater value

What is a transformation process?

a series of activities along a value chain extending from

supplier to customer
activities that do not add value are superfluous and
should be eliminated

What is operations management?

design, operation, and improvement of productive

systems

Transformation Process
Physical: as in manufacturing operations
Locational: as in transportation
operations
Exchange: as in retail operations
Physiological: as in health care
Psychological: as in entertainment
Informational: as in communication

Operations as a
Transformation Process
INPUT
Material
Machines
Labor
Management
Capital

TRANSFORMATION
PROCESS

OUTPUT
Goods
Services

Feedback

Operations
Function

Operations
Marketing
Finance
and
accounting
Human
resources
Outside
suppliers

How is operations relevant to

my major?
Accounting
Information
Technology
Management

As an auditor you must

understand the fundamentals of
operations management.
IT is a tool, and theres no better
place to apply it than in
operations.
We use so many things you learn
in an operations class
scheduling, lean production,
theory of constraints, and tons of
quality tools.

How is operations relevant to

my major?
Economics

Marketing

Finance

Its all about processes. I

live by flowcharts and
Pareto analysis.
How can you do a good
job marketing a product if
youre unsure of its quality
or delivery status?
Most of our capital
budgeting requests are
from operations, and most
of our cost savings, too.

Evolution of Operations
Management
Craft production

process of handcrafting products or

services for individual customers

Division of labor

dividing a job into a series of small tasks

each performed by a different worker

Interchangeable parts

standardization of parts initially as

replacement parts; enabled mass
production

Evolution of
Operations
Management
(cont.)

Scientific management

systematic analysis of work methods

Mass production

high-volume production of a
standardized product for a mass
market

Lean production

adaptation of mass production that

prizes quality and flexibility

Historical Events in
Operations
Management
Era
Industrial
Revolution

Events/Concepts
Steam engine
Division of labor
Interchangeable parts
Principles of scientific

management
Time and motion studies

Scientific
Management Activity scheduling chart
Moving assembly line

Dates
1769
1776
1790

Originator
James Watt

Adam Smith
Eli Whitney

1911

Frederick W. Taylor

1911
1912

Frank and Lillian

Gilbreth
Henry Gantt

1913

Henry Ford

Historical Events in
Operations Management
(cont.)
Era

Events/Concepts

Human
Relations

Motivation theories

Operations
Research

Hawthorne studies

Linear programming
Digital computer
Simulation, waiting
line theory, decision
theory, PERT/CPM
MRP, EDI, EFT, CIM

Dates

Originator

1950s

Operations research
groups

1930
1940s
1950s
1960s
1947
1951

1960s,
1970s

Elton Mayo
Abraham Maslow
Frederick Herzberg
Douglas McGregor
George Dantzig
Remington Rand

Joseph Orlicky, IBM

and others

Historical Events in
Operations Management
(cont.)
Era
Quality
Revolution

Events/Concepts Dates Originator

JIT (just-in-time)
TQM (total quality
management)
Strategy and
operations
Business process
reengineering

1970s
1980s
1990s
1990s

Taiichi Ohno (Toyota)

W. Edwards Deming,
Joseph Juran
Wickham Skinner,
Robert Hayes
Michael Hammer,
James Champy

Historical Events in
Operations Management
(cont.)
Era

Globalization
Internet
Revolution

Events/Concepts

WTO, European Union,

and other trade
agreements
Internet, WWW, ERP,
supply chain
management

Dates Originator
1990s

Numerous countries

2000s

and companies

1990s

ARPANET, Tim
Berners-Lee SAP,
i2 Technologies,
ORACLE,

E-commerce

2000s

PeopleSoft
Amazon, Yahoo,
eBay, and others

Continuum from
Goods to Services

Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff,

Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.

Business

B2B
Commerceone.com

B2C
Amazon.com

Consumer

Operations
Management and EBusiness
Business
Consumer

C2B
Priceline.com

C2C
eBay.com

Categories of E-Commerce

An Integrated Value
Chain

Value chain: set of activities that create and deliver

products to customer

Customer

Manufacturer

Supplier

Flow
Flow of
of information
information (customer
(customer order)
order)
Flow of product (order fulfillment)

Impact of E-Business on
Operations Management
Benefits of E-Business
Comparison shopping
by customers
Direct contact with
customers
Business processes
conducted online

Impact on Operations
Customer expectations escalate;
quality must be maintained and
costs lowered
No more guessing about demand
is necessary; inventory costs go
down; product and service design
improves; build to-order products
and services is made possible
Transaction costs are lower;
customer support costs decrease;
e-procurement saves big bucks

Impact of E-Business on
Operations Management
(cont.)
Benefits of E-Business

Impact on Operations

Access to customers Demand increases; order fulfillment

and logistics become major issues;
worldwide
production moves overseas
Middlemen are
eliminated
Access to suppliers
worldwide

Logistics change from delivering to a

store or distribution center to delivering
to individual homes; consumer demand
is more erratic and unpredictable than
business demand
Outsourcing increases; more alliances
and partnerships among firms are
formed; supply is less certain; global
supply chain issues arise

Impact of E-Business on
Operations Management
(cont.)
Benefits of E-Business

Impact on Operations

Online auctions and emarketplaces

Better and faster
decision making

Competitive bidding lowers cost

of materials; supply needs can be
found in one location
More timely information is
available with immediate access
by all stakeholders in decisionmaking process; customer orders
and product designs can be
clarified electronically; electronic
meetings can be held;
collaborative planning is
facilitated

Impact of E-Business on
Operations Management
(cont.)
Benefits of E-Business
IT synergy

Expanded supply
chains

Impact on Operations
Productivity increases as
information can be shared more
efficiently internally and between
trading partners
Order fulfillment, logistics,
warehousing, transportation and
delivery become focus of
operations management; risk is
spread out; trade barriers fall

Globalization and
Competitiveness
Favorable cost
Access to international
markets
Response to changes
in demand
Reliable sources of
supply
14 major trade
agreements in 1990s World Trade Compared to World GDP
Source: Real GDP and Trade Growth of OECD Countries, 2001
Peak: 26% in 2000
03, International Trade Statistics 2003, World Trade Organization,
www.wto.org

Globalization and
Competitiveness (cont.)
Germany:
Germany: $26.18
$26.18

USA:
USA: $21.33
$21.33

Taiwan:
Taiwan: $5.41
$5.41

Mexico:
Mexico: $2.38
$2.38
Hourly Wage Rates for Selected Countries
Source: International Comparisons of Hourly Compensation Costs for Production Workers in
Manufacturing, Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003.

China:
China: $0.50
$0.50

Globalization and
Competitiveness (cont.)

Trade with China: Percent of each countrys trade

Source: Share of China in Exports and Imports of Major Traders, 2000 and 2002, International Trade Statistics
2003, World Trade Organization, www.wto.org

Risks of Globalization
Cultural differences
Supply chain logistics
Safety, security, and
stability
Quality problems
Corporate image
Loss of capabilities

Competitiveness and
Productivity
Competitiveness

degree to which a nation can produce goods and

services that meet the test of international markets

Productivity

ratio of output to input

Output

sales made, products produced, customers served,

meals delivered, or calls answered

Input

labor hours, investment in equipment, material

usage, or square footage

Competitiveness and
Productivity (cont.)

Measures of Productivity

Changes in Productivity for

Select Countries
Internet-enabled
Internet-enabled
productivity
productivity

-- Dot
Dot com
com bust
bust
-- 9/11
9/11 terrorist
terrorist attacks
attacks

Source: International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002, Bureau of Labor
Statistics, U.S. Department of Labor, September 2003. U.S. figures for 20022003 from Major Sector Productivity and
Costs Index, Bureau of Labor Statistics, U.S. Department of Labor, March 2004

Productivity Increase
Become efficient

output increases with little or no increase in input

Expand

both output and input grow with output growing

more rapidly

Achieve breakthroughs

output increases while input decreases

Downsize

output remains the same and input is reduced

Retrench

both output and input decrease, with input

decreasing at a faster rate

Competitiveness and
Productivity
Breakthrough
Breakthrough
Performance
Performance

More
More Efficient
Efficient

Retrench
Retrench

Productivity as a Function of Inputs and Outputs, 20012002

Source: International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002, Bureau of
Labor Statistics, U.S. Department of Labor, September 2003

Global Competitiveness
Ranking
1. Finland
2. United States
3. Sweden
4. Denmark
5. Taiwan
6. Singapore
7. Switzerland
8. Iceland
9. Norway
10.Australia

Source: Global Competitiveness Report

20032004, World Economic Forum,
January 2004, www.weforum.org

OperationsOriented
Barriers to Entry

Economies of Scale
Capital Investment
Access to Supply and Distribution
Channels
Learning Curve

Primary Topics in
Operations
Management

Primary Topics in
Operations Management
(cont.)

Operations Strategy
Strategy: Chapter 2

Maintaining an operations strategy to support firms

competitive advantage

Quality: Chapters 3 and 4

Focusing on quality in operational decision making

Product and Services: Chapter 5

Designing quality products and services

Processes, Technologies, and Capacity:

Chapter 6

Setting up process so that it works smoothly and

efficiently

Operations Strategy (cont.)

Facilities: Chapter 7

Setting up facility so that it works smoothly

and efficiently

Human Resources: Chapter 8

Designing jobs and work to produce quality

products

Project Management: Chapter 9

Managing complex projects

Supply Chain Management

Supply Chain: Chapter 10

Managing supply chain

Forecasting: Chapter 11

Predicting customer demand

Aggregate Planning: Chapter 12

How much to produce and when to produce

it

Inventory Management: Chapter 13

How much to order and when to order

Supply Chain Management

(cont.)
Resource Planning: Chapter 14

Planning capacity and other resources

Lean Production: Chapter 15

Designing efficient production lines

Scheduling: Chapter 16

Job and task assignments

Waiting Lines: Chapter 17

Minimizing waiting time of customers and

products

Learning Objectives of this

Course

Gain an appreciation of strategic importance of

operations in a global business environment
Understand how operations relates to other
business functions
Develop a working knowledge of concepts and
methods related to designing and managing
operations
Develop a skill set for quality and process
improvement