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Operations Management: Processes and

Supply Chains
Twelfth Edition

Chapter 1
Using Operations to Create
Value

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Learning Goals (1 of 2)
1.1 Describe the role of operations in an organization and
its historical evolution over time.
1.2 Describe the process view of operations in terms of
inputs, processes, outputs, information flows, suppliers,
and customers.
1.3 Describe the supply chain view of operations in terms
of linkages between core and support processes.
1.4 Define an operations strategy and its linkage to
corporate strategy and market analysis.

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Learning Goals (2 of 2)
1.5 Identify nine competitive priorities used in operations
strategy, and explain how a consistent pattern of decisions
can develop organizational capabilities.
1.6 Identify the latest trends in operations management and
understand how, given these trends, firms can address the
challenges facing operations and supply chain managers in
a firm.
1.7 Understand how to develop skills for your career using
this textbook.

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

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

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What is Supply Chain Management?
• Supply Chain Management
– The synchronization of a firm’s processes with those
of its suppliers and customers to match the flow of
materials, services, and information with customer
demand

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

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Role of Operations in an Organization
Figure 1.1 Integration between Different Functional Areas of a
Business

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How Processes Work (1 of 2)
Figure 1.2 Processes and Operations

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How Processes Work (2 of 2)
• Every process and every person in the organization
has customers
– External customers
– Internal customers
• Every process and every person in the organization
relies on suppliers
– External suppliers
– Internal suppliers

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

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Service and Manufacturing Processes (1 of 2)
Differ Across Nature of Output and Degree of Customer Contact
Figure 1.3 Continuum of Characteristics of Manufacturing and
Service Processes

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Service and Manufacturing Processes (2 of 2)
• Physical, durable output • Output cannot be
inventoried
• Output can be inventoried
• High customer contact
• Low customer contact
• Short response time
• Long response time
• Labor intensive
• Capital intensive
• Quality not easily
• Quality easily measured
measured
• Intangible, perishable output

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The Supply Chain View (1 of 6)
Each activity in a process should add value to the preceding
activities; waste and unnecessary cost should be eliminated.
Figure 1.4 Supply Chain Linkages Showing Work and
Information Flows

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The Supply Chain View (2 of 6)
Supplier relationship process – A process that selects the
suppliers of services, materials, and information and facilitates
the timely and efficient flow of these items into the firm
Figure 1.4 [continued]

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The Supply Chain View (3 of 6)
New service/product development – A process that designs and
develops new services or products from inputs received from
external customer specifications or from the market in general
through the customer relationship process
Figure 1.4 [continued]

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The Supply Chain View (4 of 6)
Order fulfillment process – A process that includes the activities
required to produce and deliver the service or product to the
external customer
Figure 1.4 [continued]

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The Supply Chain View (5 of 6)
Customer relationship process – A process that identifies,
attracts and builds relationships with external customers and
facilitates the placement of orders by customers (customer
relationship management)
Figure 1.4 [continued]

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The Supply Chain View (6 of 6)
Support Processes - Processes like Accounting, Finance,
Human Resources, Management Information Systems and
Marketing that provide vital resources and inputs to the core
processes
Figure 1.4 [continued]

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Supply Chain Process
• Supply Chain Processes
– Business processes that have external customers or
suppliers
– Examples
▪ Outsourcing
▪ Warehousing
▪ Sourcing
▪ Customer Service
▪ Logistics
▪ Crossdocking

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Operations Strategy (1 of 3)
• Operations Strategy
– The means by which operations implements the
firm’s corporate strategy and helps to build a
customer-driven firm

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

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

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

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

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

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Order Winners and Qualifiers (1 of 3)
Table 1.3 Definitions, Process Considerations, and Examples of
Competitive Priorities
Cost Definition Process Considerations Example
1. Low-cost Delivering a service or Processes must be designed Costco
operations a product at the lowest and operated to make them
possible cost efficient

Quality Definition Process Considerations Example


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

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Order Winners and Qualifiers (2 of 3)
Table 1.3 [continued]
Time Definition Process Considerations Example
4. Delivery speed Quickly filling a Design processes to reduce Netflix
customer’s order lead time
5. On-time delivery Meeting delivery-time Planning processes used to United
promises increase percent of customer Parcel
orders shipped when Service
promised (UPS)
6. Development Quickly introducing a Process involve cross- Zara
speed new service or a functional integration and
product involvement of critical
external suppliers

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Order Winners and Qualifiers (3 of 3)
Table 1.3 [continued]
Flexibility Definition Process Considerations Example
7. Customization Satisfying the unique Processes typically have Ritz Carlton
needs of each low volume, close customer
customer by contact, and can be easily
changing service or reconfigured to meet
product designs unique customer needs
8. Variety Handling a wide Processes are capable of Amazon.com
assortment of larger volumes than
services or products processes supporting
efficiently customization
9. Volume Accelerating or Processes must be The United
flexibility decelerating the rate designed for excess States Postal
of production of capacity and excess Service (USPS)
services or products inventory
quickly to handle
large fluctuations in
demand

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Relationship of Order Winners to
Competitive Priorities
Figure 1.6 Relationship of Order Winners to Competitive
Priorities

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Relationship of Order Qualifiers to
Competitive Priorities
Figure 1.6 Relationship of Order Qualifiers to Competitive
Priorities

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Operations Strategy (3 of 3)
Table 1.5 Operations Strategy Assessment of the Billing and
Payment Process
Competitiv
e Priority Measure Capability Gap Action
Low-cost Cost per billing $0.0813 Target is $0.06 Eliminate microfilming and
operations statement storage of billing statements
Blank Weekly postage $17,000 Target is $14,000 Develop Web-based
process for posting bills
Consistent Percent errors in 90% Acceptable No action
quality bill information
Blank Percent errors in 74% Acceptable No action
posting payments
Delivery Lead time to 48 hours Acceptable No action
speed process merchant
payments
Volume Utilization 98% Too high to support Acquire temporary
flexibility rapid increase in employees
volumes Improve work methods

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Addressing the Trends and Challenges in
Operations Management (1 of 3)
• Measuring Productivity
Output
Productivity 
Input

• The Role of Management

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Example (1 of 2)
Calculate the productivity for the following operations:
a. Three employees process 600 insurance policies in a
week. They work 8 hours per day, 5 days per week.

Policies processed
Labor productivity 
Employee hours
600 policies

(3 employees)(40 hours employee)
 5 policies hour

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Example (2 of 2)
Calculate the productivity for the following operations:
b. A team of workers makes 400 units of a product, which
is sold in the market for $10 each. The accounting
department reports that for this job the actual costs are
$400 for labor, $1,000 for materials, and $300 for
overhead.
Value of output
Multifactor productivity =
Labor cost + Materials cost + Overhead cost

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


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

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Application (1 of 2)
Blank This Year Last Year Year Before Last
Factory unit sales 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,000
Sales of manufactured products ($) $49,363 $40,831 —
Total manufacturing cost of sales ($) $39,000 $33,000 —

• Calculate the year-to-date labor productivity:


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

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

Blank This Year Last Year


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

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Addressing the Trends and Challenges in
Operations Management (2 of 3)
• Global Competition
• Ethical, Workforce Diversity, and Environmental Issues

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Addressing the Trends and Challenges in
Operations Management (3 of 3)
• Internet of Things (IoT)
– The interconnectivity of objects embedded with
software sensors, and actuators that enable these
objects to collect and exchange data over a network
without requiring human intervention
– OM Applications
– Concerns and Barriers

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Solved Problem 1 (1 of 3)
Student tuition at Boehring University is $150 per semester
credit hour. The state supplements school revenue by $100
per semester credit hour. Average class size for a typical 3-
credit course is 50 students. Labor costs are $4,000 per
class, material costs are $20 per student per class, and
overhead costs are $25,000 per class.
a. What is the multifactor productivity ratio for this course
process?
b. If instructors work an average of 14 hours per week for
16 weeks for each 3-credit class of 50 students, what is
the labor productivity ratio?
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Solved Problem 1 (2 of 3)
a. Multifactor productivity is the ratio of the value of output to
the value of input resources.
 $150 tuition + 
 
 50 student   3 credit hours   $100 state support 
Value of output =   
 class   student  credit hour 
 
 
= $37,500 class
Value of inputs = Labor + Materials + Overhead
= $4,000 + ( $20 student  50 students class ) + $25,000
= $30,000 class
Output $37,500 class
Multifactor productivity = = = 1.25
Input $30,000 class

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Solved Problem 1 (3 of 3)
b. Labor productivity is the ratio of the value of output to labor
hours. The value of output is the same as in part (a), or
$37,500 / class, so

 14 hours  16 weeks 


Labor hours of input =   
 week   class 
= 224 hours class
Output $37,500 class
Labor productivity = =
Input 224 hours class
= $167.41 hour

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Solved Problem 2 (1 of 2)
Natalie Attire makes fashionable garments. During a
particular week employees worked 360 hours to produce a
batch of 132 garments, of which 52 were “seconds”
(meaning that they were flawed). Seconds are sold for $90
each at Attire’s Factory Outlet Store. The remaining 80
garments are sold to retail distribution at $200 each.
What is the labor productivity ratio of this manufacturing
process?

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Solved Problem 2 (2 of 2)

Value of output = (52 defective  90 defective )


+ (80 garments  200 garment )
= $20,680
Labor hours of input = 360 hours
Output $20,680
Labor productivity = =
Input 360 hours
= $57.44 in sales per hour

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