Chapter One

The Nature and Context of Operations Management

1.1 What Is Operations Management?

Every business is managed through three major functions: finance, marketing, and operations
management. Figure 1.1 illustrates this by showing that the vice presidents of each of these
functions reports directly to the president or CEO of the company. Other business functions—
such as accounting, purchasing, human resources, and engineering—support these three major
functions. Finance is the function responsible for managing cash flow, current assets, and capital
investments. Marketing is responsible for sales, generating customer demand, and understanding
customer wants and needs. Most of us have some idea of what finance and marketing are about,
but what does operations management do?

Operations management (OM) is defined as the design, operations, and improvement of the
systems that create and deliver the firm’s primary products and services. Like marketing and
finance, OM is a functional field of business with clear line management responsibilities. This
point is important because operations management is frequently confused with operations
research and management science (OR/MS) and industrial engineering (IE). The essential
difference is that OM is a field of management, whereas OR/MS is the application of quantitative
methods to decision-making in all fields, and IE is an engineering discipline. Thus, while

1
operations managers use the decision making tools of OR/MS (such as critical path scheduling)
and are concerned with many of the same issues as IE (such a factory automation) OM’s distinct
management role distinguishes it from these other disciplines.

In other way, Operations management (OM) is the business function that plans, organizes,
coordinates, and controls the resources needed to produce a company’s goods and services.
Operations management is a management function. It involves managing people, equipment,
technology, information, and many other resources. Operations management is the central core
function of every company. This is true whether the company is large or small, provides a
physical good or a service, is for profit or not for profit. Every company has an operations
management function. Actually, all the other organizational functions are there primarily to
support the operations function. Without operations, there would be no goods or services to sell.
Consider a retailer such as Gap that sells casual apparel. The marketing function provides
promotions for the merchandise, and the finance function provides the needed capital. It is the
operations function, however, that plans and coordinates all the resources needed to design,
produce, and deliver the merchandise to the various retail locations. Without operations, there
would be no goods or services to sell to customers.

The role of operations management is to transform a company’s inputs into the finished goods
or services. Inputs include human resources (such as workers and managers), facilities and
processes (such as buildings and equipment), as well as materials, technology, and information.
Outputs are the goods and services a company produces. Figure 1.2 shows this transformation
process. At a factory, the transformation is the physical change of raw materials into products,
such as transforming leather and rubber into sneakers, denim into jeans, or plastic into toys. At
an airline, it is the efficient movement of passengers and their luggage from one location to
another. At a hospital it is organizing resources such as doctors, medical procedures, and
medications to transform sick people into healthy ones.

Operations management is responsible for orchestrating all the resources needed to produce the
final product. This includes designing the product; deciding what resources are needed; arranging
schedules, equipment, and facilities; managing inventory; controlling quality; designing the jobs
to make the product; and designing work methods. Operations management is responsible for all

2
aspects of the process of transforming inputs into outputs. Customer feedback and performance
information are used to continually adjust the inputs, the transformation process, and
characteristics of the outputs. As shown in Figure 1.2, this transformation process is dynamic in
order to adapt to changes in the environment. Proper management of the operations function has
led to success for many companies.

Dear Student, have you tried the questions? We hope you have. Table 1.1 gives you examples of
productive systems and their transformation process.

System Primary Resources Primary Typical Desired

Inputs Transformation Output
Functions
Hospital Patients MDS, Nurses,
Medical supplies, Health care Healthy
Equipment (physiological) individual
Restaurant Hungry Food, chef, wait- Well prepared
Customers staff, environment well served food Satisfied
agreeable customers
environment
(physical and
exchange
Automobile Sheet steel, Tools, equipment, Fabrication and High quality
factory engine parts workers assembly of cars
physical)
College of High school Teachers book, Imparting Educated
university graduates classrooms knowledge and individuals
skills
(informational)

3
 Department Shoppers Displays, stocks of Attract Sales to
store goods, sales clerks customers satisfied
promote customers
products fill
orders
(exchange)
Distribution Stock keeping Storage bins, stock Storage and Fast delivery
center units (skills) pickers redistribution availability of
skills
Table 1-1 Examples of productive systems and transformation process

For operations management to be successful, it must add value during the transformation
process. We use the term value added to describe the net increase between the final value of a
product and the value of all the inputs. The greater the value added, the more productive a
business is. An obvious way to add value is to reduce the cost of activities in the transformation
process. Activities that do not add value are considered a waste; these include certain jobs,
equipment, and processes. In addition to value added, operations must be efficient. Efficiency
means being able to perform activities well, and at the lowest possible cost. An important role of
operations is to analyze all activities, eliminate those that do not add value, and restructure
processes and jobs to achieve greater efficiency. Today’s business environment is more
competitive than ever, and the role of operations management has become the focal point of
efforts to increase competitiveness by improving value added and efficiency.

1.2 Why Study Operations Management

(1) Operations Management creates an understanding of modern approaches to managing
operations. Every organization produces some product or service. It is becoming equally
important in services, both public and private. It has long been true in manufacturing. For
example, “reinventing government” initiatives draw heavily on total quality management,
business process reengineering, and just – in- time delivery – are concepts that fall under the OM
umbrella.
(2) Operations Management provides a systematic way of looking at organizational processes.
OM uses analytical thinking to deal with real world problems like competition. It sharpens our
understanding of the world around us whether we are talking about how to compete with Japan
or how many lines to have at the bank teller’s window

4
(3) Operations Management presents interesting career opportunities. These can be in direct
supervision of operations or in staff positions in operations management specialties such as
supply chain management and quality assurance.
(4) The concepts and tools of Operations Management are widely used in managing other
functions of a business. All managers have to plan work, control quality, and ensure productivity
of individuals under their supervision.

1.3 Differences between Service and Manufacturing Organizations

Organizations can be divided into two broad categories: manufacturing organizations and
service organizations, each posing unique challenges for the operations function. There are two
primary distinctions between these categories. First, manufacturing organizations produce
physical, tangible goods that can be stored in inventory before they are needed. By contrast,
service organizations produce intangible products that cannot be produced ahead of time.
Second, in manufacturing organizations most customers have no direct contact with the
operation. Customer contact is made through distributors and retailers. For example, a customer
buying a car at a car dealership never encounters the automobile factory. However, in service
organizations the customers are typically present during the creation of the service. Hospitals,
colleges, theaters, and barbershops are examples of service organizations in which the customer
is present during the creation of the service. The differences between manufacturing and service
organizations are not as clear-cut as they might appear, and there is much overlap between them.
Most manufacturers provide services as part of their offering, and many service firms
manufacture physical goods that they deliver to their customers or consume during service
delivery.

For example, a manufacturer of furniture may also provide shipment of goods and assembly of
furniture. On the other hand, a barbershop may sell its own line of hair care products. You might
not know that General Motors’ greatest return on capital does not come from selling cars but
rather from post-sales parts and service. The differences between manufacturing and services are
shown in Figure 1.3, which focuses on the dimensions of product tangibility and the degree of

5
customer contact. Pure manufacturing and pure service extremes are shown, as well as the
overlap between them.

FIGURE 1.3 Characteristics of manufacturing and service organizations

Even in pure service companies, some segments of the operation may have low customer contact
while others have high customer contact. The former can be thought of as “back room” or
“behind the scenes” segments. Think of a fast-food operation such as Wendy’s, for which
customer service and customer contact are important parts of the business. However, the kitchen
segment of Wendy’s operation has no direct customer contact and can be managed like a
manufacturing operation. Similarly, a hospital is a high-contact service operation, but the patient
is not present in certain segments, such as the lab where specimen analysis is done.

In addition to pure manufacturing and pure service, there are companies that have some
characteristics of each type of organization. For these companies it is difficult to tell whether
they are actually manufacturing or service organizations. Think of a post office, an automated
warehouse, or a mail-order catalog business. These companies have low customer contact and
are capital intensive, yet they provide a service. We call these companies quasi-manufacturing
organizations.
1.4 Operations Management Decisions

6
Dear Student! In this section, we look at some of the specific decisions that operations managers
have to make. The best way to do this is to think about decisions we would need to make if we
started our own company—say, a company called Gourmet Wafers that produces praline– pecan
cookies from an old family recipe. Think about the decisions that would have to be made to go
from the initial idea to actual production of the product: that is operations management. Table
1.2 breaks these down into the generic decisions that would be appropriate for almost any good
or service, the specific decisions required for our example, and the formal terms for these
decisions that are used in operations management.

Long-term decisions that set the direction for the entire organization are called strategic
decisions. They are broad in scope and set the tone for other, more specific decisions. They
address questions such as: What are the unique features of our product? What market do we plan
to compete in? What do we believe will be the demand for our product? Short-term decisions
that focus on specific departments and tasks are called tactical decisions. Tactical decisions
focus on more specific day-to-day issues, such as the quantities and timing of specific resources.
Strategic decisions are made first and determine the direction of tactical decisions, which are
made more frequently and routinely. Therefore, we have to start with strategic decisions and then
move on to tactical decisions. This relationship is shown in Figure 1.4. Tactical decisions must
be aligned with strategic decisions, because they are the key to the company’s effectiveness in
the long run. Tactical decisions provide feedback to strategic decisions, which can be modified
accordingly.

No. General Decisions To Be Operations Management Term

7
 Made
1 What are the unique features of the
business that will make it Operations strategy
competitive?
2 What are the unique features of the
Product design
product?
3 What are the unique features of the
process that give the product its Process selection
unique characteristics?
4 What sources of supply should we use
to ensure regular and timely receipt
of the exact materials we need? How Supply chain managements
do we manage these sources of
supply?
5 How will managers ensure the
quality of the product, measure Quality management
quality, and identify quality
problems?
6 What is the expected demand for the
product? Forecasting

7 Where will the facility be located?

Location analysis
8 How large should the facility be? Capacity planning
9 How should the facility be laid out?
Where should the kitchen and ovens
be located? Should there be seating Facility layout
for customers?

10 What jobs will be needed in the

facility, who should do what task, and
Job design and work measurement
how will their performance be
measured?
11 How will the inventory of raw
materials be monitored? When will
Inventory management
orders be placed and how much will be
kept in stock?
12 Who will work on what schedule? Scheduling
Table 1-2 Operations Management Decisions

1.5 Operations as Service

8
The emerging model in industry is that every organization is in the service business. This is true
whether the organization makes big planes or Big Macs. From this, we must recognize that
manufacturing operations, as well as every other part of the organization, are also in the service
business even if the customer is an internal one. In manufacturing, such services can be divided
into core and value-added services that are provided to internal and external customers of the
factory.

The core services customers want are products that are made correctly, customized to their
needs, delivered on time, and priced competitively. These are commonly summarized as the
classic performance objectives of the operations function: quality, flexibility, speed, and price (or
cost of production).

Value added services are services that simply make the external customer’s life easier or, in the
case of internal customers, help them to better carry out their particular function. Value-added
factory services can be classified into four broad categories: information, problem solving, sales
support, and field support.

1. Information is the ability to furnish critical data on product performance, process

parameters, and cost to internal groups (such as R&D) and to external customers, who
then use the data to improve their own operations or products. For example, Hewlett-
Packard’s Fort Collins quality department provides quality data sheets and videotapes
documenting actual product testing and field quality performance to field sales and
service personnel.
2. Problem solving is the ability to help internal and external groups solve problems,
especially in quality. For example, Raritan Corporation, an metal rod fabricator, sends
factory workers out with salespeople to troubleshoot quality problems. Those factory
workers then return to the factory and join with shop-floor personnel on remedial efforts.
3. Sales support is the ability to enhance sales and marketing efforts by demonstrating the
technology, equipment, or production systems the company is trying to sell. Sometimes
sales are enhanced by the factory showing off its workforce’s skills.

9
 4. Field support is the ability to replace defective parts quickly or to replenish stocks
quickly to avoid downtime or stock outs.

Value-added services provided to external customers yield two benefits. First, they differentiate
the organization from the competition. Indeed, in many cases it is easier to copy a firm’s product
than it is to create the value-added service infrastructure to support it. Second, these services
build relationships that bind customers to the organization in a positive way.

The design and ongoing management of the operations of a firm have as significant if not crucial
impact on the financial success of the firm. The strategy of the firm is implemented with a design
that is portrayed financially in the assets of the firm. Each asset, be it a plant, a warehouse, an
operations center, or the inventory carried in these facilities, is owned by the firm and requires a
significant investment. The firm’s owners and shareholders want a return on this investment.

Decisions such as how big a plant should be, how many plants there should actually be and
where they should be located, and whether or not certain operations should be outsourced are
major topics of operations management. Other decisions such as how much inventory will be
required to meet required service levels relate directly to the asset investment required to deliver
the products and service of the firm.

1.7 Historical Development

When we think of what operations management does—namely, managing the transformation of
inputs into goods and services—we can see that as a function it is as old as time. Think of any
great organizational effort, such as organizing the first Olympic games, building the Great Wall
of China, or erecting the Egyptian pyramids, and you will see operations management at work.
Operations management did not emerge as a formal field of study until the late 1950s and early
1960s, when scholars began to recognize that all production systems face a common set of
problems and to stress the systems approach to viewing operations processes. Many events
helped shape operations management. We will describe some of the most significant of these
historical milestones and explain their influence on the development of operations management.

10
Later we will look at some current trends in operations management. These historical milestones
and current trends are summarized in Table 1.3.

The Industrial Revolution

The Industrial Revolution had a significant impact on the way goods are produced today. Prior
to this movement, products were made by hand by skilled craftspeople in their shops or homes.
Each product was unique, painstakingly made by one person. The Industrial Revolution changed
all that. It started in the 1770s with the development of a number of inventions that relied on
machine power instead of human power. The most important of these was the steam engine,
which was invented by James Watt in 1764.

Concept Time Explanation

Industrial Revolution Late 1700s Brought in innovations that changed
production by using machine power
instead of human power
Brought the concepts of analysis and
Scientific management Early 1900s
measurement of the technical aspects
of work design, and development of
moving assembly lines and mass
production
Focused on understanding human
Human relations 1930s to 1960s elements of job design, such as worker
movement motivation and job satisfaction

Focused on the development of

Management science 1940s to 1960s quantitative techniques to solve
operations problems
Enabled processing of large amounts
Computer age 1960s of data and allowed widespread use
of quantitative procedures
Designed to achieve high-volume
Just-in-time systems 1980s production with minimal inventories
(JIT)
Sought to eliminate causes of production
Total quality 1980s defects
management (TQM)
Reengineering 1980s Required redesigning a company’s
processes in order to provide greater
efficiency and cost reduction

11
 Considered waste reduction, the need
Environmental issues 1980s for recycling, and product reuse
Offered customization on a
Flexibility 1990s
mass scale.
Time-based competition 1990s Based on time, such as speed of
delivery
Supply chain 1990s Focused on reducing the overall cost of the
management system that manages the flow of
materials and information from
suppliers to final customers
Designed operations to compete in the
Global competition 1990s global market
Electronic commerce Late 1990s; early Used the Internet for conducting business
twenty-first century activity
Table 1-3 Historical Development of Operations Management

The steam engine provided a new source of power that was used to replace human labor in
textile mills, machine-making plants, and other facilities. The concept of the factory was
emerging. In addition, the steam engine led to advances in transportation, such as railroads, that
allowed for a wider distribution of goods. About the same time, the concept of division of labor
was introduced. First described by Adam Smith in 1776 in The Wealth of Nations, this important
concept would become one of the building blocks of the assembly line. Division of labor means
that the production of a good is broken down into a series of small, elemental tasks, each of
which is performed by a different worker. The repetition of the task allows the worker to become
highly specialized in that task. Division of labor allowed higher volumes to be produced. This,
coupled with advances in transportation, enabled distant markets to be reached by steam-
powered boats and railroads.

A few years later, in 1790, Eli Whitney introduced the concept of interchangeable parts. Prior to
that time, every part used in a production process was unique. With interchangeable parts, parts
are standardized so that every item in a batch of items fits equally. This concept meant that we
could move from one-at-a-time production to volume production, for example, in the
manufacture of watches, clocks, and similar items.

Scientific Management

12
Scientific management was an approach to management promoted by Frederick W. Taylor at the
turn of the twentieth century. Taylor was an engineer with an eye for efficiency. Through
scientific management, he sought to increase worker productivity and organizational output. This
concept has two key features. First, it is assumed that workers are motivated only by money and
are limited only by their physical ability. Taylor believed that scientific laws govern worker
productivity, and that it is up to management to discover these laws through measurement,
analysis, and observation. Workers are to be paid in direct proportion to how much they produce.
The second feature of this approach is the separation of the planning and doing functions in a
company, which means the separation of management and labor. Management is responsible for
designing productive systems and determining acceptable worker output. Workers have no input
into this process—they are permitted only to work.

Many people did not like the scientific management approach. This was especially true of
workers, who thought that management used these methods to unfairly increase output without
paying them accordingly. Still, many companies adopted the scientific management approach.
Today many see scientific management as a major milestone in the field of operations
management, and it has had many influences on operations management. For example, piece rate
incentives, in which workers are paid in direct proportion to their output, came out of this
movement. Also, a widely used method of work measurement, stopwatch time studies, was
introduced by Frederick Taylor. In stopwatch time studies, observations are made and recorded
of a work performing a task over many cycles. This information is then used to set a time stan-
dard for performing the particular task. This method is still used today to set a time standard for
short, repetitive tasks.

The scientific management approach was popularized by Henry Ford, who used the techniques in
his factories. Combining technology with scientific management, Ford introduced the moving
assembly line to produce Ford cars. Ford also combined scientific management concepts with
division of labor and interchangeable parts to develop the concept of mass production. These
concepts and innovations helped him increase production and efficiency at his factories.

The Human Relations Movement

13
The early twentieth century was dominated by the scientific management movement and its
philosophy. However, this changed with the publication of the results of the Hawthorne studies.
The Hawthorne studies were conducted at a Western Electric plant in Hawthorne, Illinois, in the
1930s. The purpose was to study the effects of environmental changes, such as changes in
lighting and room temperature, on the productivity of assembly-line workers. The findings from
the study were unexpected; the productivity of the workers continued to increase regardless of
the environmental changes made. Elton Mayo, a sociologist from Harvard, analyzed the results
and concluded that the workers were actually motivated by the attention they were given. The
idea of workers responding to the attention they are given came to be known as the Hawthorne
effect.

Many sociologists and psychologists went to Hawthorne to study these findings, which led to the
human relations movement, an entirely new philosophy based on the recognition that factors
other than money can contribute to worker productivity. The impact of these findings on the
development of operations management has been tremendous. The influence of this new
philosophy can be seen in the implementation of a number of concepts that motivate workers by
making their jobs more interesting and meaningful. For example, the Hawthorne studies showed
that scientific management had made jobs too repetitive and boring. Job enlargement is an
approach in which workers are given a larger portion of the total task to do. Another approach
used to give more meaning to jobs is job enrichment, in which workers are given a greater role in
planning. Recent studies have shown that environmental factors in the workplace, such as
adequate lighting and ventilation, can have a major impact on productivity. However, this does
not contradict the principle that attention from management is a positive factor in motivation.

Management Science
While one movement was focusing on the technical aspects of job design and another on the
human aspects of operations management, a movement called management science was
developing that would make its own unique contribution. Management science focused on
developing quantitative techniques for solving operations problems. The first mathematical
model for inventory management was developed by F. W. Harris in 1913. Shortly thereafter,
procedures were developed for statistical sampling theory and quality control.

14
World War II created an even greater need for the ability to quantitatively solve complex
problems of logistics control, weapons system design, and deployment of missiles.
Consequently, management science grew during the war and continued to grow after the war was
over. Many quantitative tools were developed to solve problems in forecasting, inventory
control, project management, and other areas. Management science is a mathematically oriented
field that provides operations management with tools that can be used to assist in decision
making. A popular example of such a tool is linear programming.

The Computer Age

The 1970s witnessed the advent of the widespread use of computers in business. With
computers, many of the quantitative models developed by management science could be used on
a larger scale. Data processing was made easier, with important effects in areas such as
forecasting, scheduling, and inventory management. A particularly important computerized
system, material requirements planning (MRP), was developed for inventory control and
scheduling. A material requirement planning was able to process huge amounts of data to
compute inventory requirements and develop schedules for the production of thousands of items.
This type of processing was impossible before the age of computers. Today the exponential
growth in computing capability continues to impact operations management.

Just-in-Time
Just in time (JIT) is a major operations management philosophy, developed in Japan in the
1980s, that is designed to achieve high-volume production using minimal amounts of inventory.
This is achieved through coordination of the flow of materials so that the right parts arrive at the
right place in the right quantity; hence the term, just in time. However, JIT is much more than the
coordinated movement of goods. An all-inclusive organizational philosophy employs teams of
workers to achieve continuous improvement in processes and organizational efficiency by
eliminating all organizational waste. Although JIT was first used in manufacturing, it has seen
use in the service sector, for example, in the food service industry. JIT has had a profound impact
on changing the way companies manage their operations. It is credited with helping turn many
companies around and is used by companies including Honda, Toyota, and General Motors. JIT
promises to continue to transform businesses in the future.

15
Total Quality Management
As customers demand ever-higher quality in their products and services, companies have been
forced to focus on improving quality in order to remain competitive. Total quality management
(TQM) is a philosophy, promulgated by “quality gurus” such as W. Edwards Deming, which
aggressively seeks to improve product quality by eliminating causes of product defects and
making quality an all-encompassing organizational philosophy. With TQM everyone in the
company is responsible for quality. TQM was practiced by some companies in the 1970s and
became pervasive in the 1990s. This is an area of operations management that no competitive
company has been able to ignore. The number of companies joining the ranks of those achieving
ISO 9000 certification demonstrates the importance of this movement. ISO 9000 is a set of
quality standards developed for global manufacturers by the International Organization for
Standardization (ISO) to control trade into the then-emerging European Economic Community
(EEC). Today many companies require their suppliers to meet these standards as a condition for
obtaining contracts.

Business Process Reengineering

Business process reengineering means redesigning a company’s processes to increase efficiency,
improve quality, and reduce costs. In many companies things are done in a certain way that has
been passed down over the years. Often managers say, “Well, we’ve always done it this way.”
Reengineering requires asking why things are done in a certain way, questioning assumptions,
and then redesigning the processes. Operations management is a key player in a company’s
reengineering efforts.

Flexibility
Traditionally companies competed by either mass-producing a standardized product or offering
customized products in small volumes. One of the current competitive challenges for companies
is the need to offer a greater variety of product choices to customers of a traditionally
standardized product. This is the challenge of flexibility, which means being able to offer a wide
variety of products to customers. For example, Procter and Gamble offers 13 different product
designs in the Pampers line of diapers. Although diapers are a standardized product, the product

16
designs are customized to the different needs of customers, such as the age, sex, and
development of the child using the diaper.

One example of flexibility is mass customization, which is the ability of a firm to highly
customize its goods and services to different customers. Mass customization requires designing
flexible operations and using delayed product differentiation, also called postponement. This
means keeping the product in generic form as long as possible and postponing completion of the
product until specific customer preferences are known.

Time-Based Competition
One of the most important trends in companies today is competition based on time. This includes
developing new products and services faster than the competition, reaching the market first, and
meeting customer orders most quickly. For example, two companies may produce the same
product, but if one is able to deliver it to the customer in two days whereas the other delivers it in
five days, the first company will make the sale and win over the customers. Time-based
competition requires specifically designing the operations function for speed.
Supply Chain Management
Supply chain management (SCM) involves managing the flow of materials and information from
suppliers and buyers of raw materials all the way to the final customer. The objective is to have
everyone in the chain work together to reduce overall cost and improve quality and service
delivery. Supply chain management requires a team approach, with functions such as marketing,
purchasing, operations, and engineering all working together. This approach has been shown to
result in more satisfied customers, meaning that everyone in the chain profits. SCM has become
possible with the development of information technology (IT) tools that enable collaborative
planning and scheduling. The technologies allow synchronized supply chain execution and
design collaboration, which enables companies to respond better and faster to changing market
needs. Numerous companies, including Dell Computer, Wal-Mart, and Baxter Healthcare, have
achieved world-class status by effectively managing their supply chains.
Global Marketplace
Today businesses must think in terms of a global marketplace in order to compete effectively.
This includes the way they view their customers, competitors, and suppliers. Key issues are

17
meeting customer needs and getting the right product to markets as diverse as the Far East,
Europe, or Africa. Operations management is responsible for most of these decisions. OM
decides whether to tailor products to different customer needs, where to locate facilities, how to
manage suppliers, and how to meet local government standards. Also, global competition has
forced companies to reach higher levels of excellence in the products and services they offer.
Regional trading agreements, such as the North American Free Trade Agreement (NAFTA), the
European Union (EU), and the global General Agreement on Tariffs and Trade (GATT), guaran-
tee continued competition on the international level.
Environmental Issues
There is increasing emphasis on the need to reduce waste, recycle, and reuse products and parts.
Society has placed great pressure on business to focus on air and water quality, waste disposal,
global warming, and other environmental issues. Operations management plays a key role in
redesigning processes and products in order to meet and exceed environmental quality standards.
The importance of this issue is demonstrated by a set of standards termed ISO 14000. Developed
by the International Organization for Standardization (ISO), these standards provide guidelines
and a certification program documenting a company’s environmentally responsible actions.
Electronic Commerce
Electronic commerce (e-commerce) is the use of the Internet for conducting business activities,
such as communication, business transactions, and data transfer. The Internet developed from a
government network called ARPANET, which was created in 1969 by the U.S. Defense
Department. Since the late 1990s the Internet has become an essential business medium,
enabling efficient communication between manufacturers, suppliers, distributors, and customers.
It has allowed companies to reach more customers at a speed infinitely faster than ever before. It
also has significantly cut costs as it provides direct links between entities.

Electronic commerce can occur between businesses, known as B2B (business to business)
commerce, and makes up the highest percentage of transactions. The most common B2B
exchanges occur between companies and their suppliers, such as General Electric’s Trading
Process Network. A more commonly known type of e-commerce occurs between businesses and
their customers, known as B2C exchange, as seen with on-line retailers such as Amazon.com. E-
commerce can also occur between customers, known as C2C exchange, like consumer auction

18
sites such as eBay. E-commerce is creating virtual marketplaces that continue to change the way
business functions.

1.8 Operations Strategy

Operations strategy is concerned with setting broad policies and plans for using the resources of
a firm to best support its long-term competitive strategy. A firm’s operations strategy is
comprehensive through its integrating with corporate strategy. The strategy involves a long-term
process that must foster inevitable change. An operations strategy involves decisions that relate
to the design of a process and the infrastructure needed to support the process. Process design
includes the selection of appropriate technology, sizing the process over time, the role of
inventory in the process, and locating the process. The infrastructure decision involve the logic
associated with the planning and control systems, quality assurance and control approaches,
work payment structures, and the organization of the operation function.

Operations strategy can be viewed as part of planning process that coordinates operational goals
with those of the larger organization. Since the goals of the larger organization change over time,
the operations strategy must be designed to anticipate future needs. The operations capabilities of
a firm can be viewed as portfolio best suited to adapt to the changing product and/or service
needs of the firm’s customers.

Looking at operations strategy from a historical perspective, U.S. companies, for example in the
post-World War II era, experienced tremendous consumer demand that had been pent up during
the war. As a result, manufacturing in the United States emphasized turning out high volumes of
products to satisfy this demand. In contrast, during the same period, Japanese manufacturing
companies focused on the quality of their products. Priorities needed to remain competitive were
different for companies in the different countries. Keys to success in operation strategy lie in
identifying what the priority choices are in understanding the consequences of each choice, and
in navigating the ensuring trade-offs.
Operations competitive Dimensions
Given the choices that customers face today, how do they decide which product or service to
buy? Different customers are attracted by different attributes. Some customers are primarily

19
interested in the cost of a product or service, and correspondingly some companies attempt to
position themselves to offer the lowest price. The major competitive dimensions that form the
competitive position of a company include the following.

Cost – “Make it Cheap” Within every industry, there is usually a segment of the market that
buys solely on the basis of low cost. To successfully compete in this niche, a firm must be the
low-cost producer, but even doing this does not always guarantee profitability and success.
Products sold strictly on the basis of cost are typically commodity like; in other words, customers
cannot distinguish the product of one firm from those of another.

This segment of the market is frequently very large, and many companies are lured by the
potential for significant profits, which they associate with the large unit volumes of product.
Therefore, however, competition in this segment is fierce-and so is the failure rate. After all,
there can be only one low-cost producer, which usually establishes the selling price in the
market.

Product Quality and Reliability-“Make it Good” Quality can be divided into two
categories: product quality and process quality. The level of quality in a product’s design will
vary with the market segment at which it is aimed. Obviously, a child’s first two-wheeled bicycle
is of significantly different quality than the bicycle of a world-class cyclist. The use of special
aluminum alloys and special lightweight sprockets and chains is important to the performance
needs of the advanced cyclist. These two types of bicycle are designed for different customers’
needs. The higher-quality cyclist product commands a higher price in the marketplace due to its
special features.

The goal in establishing the proper level of product quality is to focus on the requirements of the
customer. Over designed products with too much quality will be viewed as prohibitively
expensive. Under designed products, on the other hand, will lost customers to products that cost
a little more but are perceived by the customers as offering greater value.

20
Process quality is critical because it relates directly to the reliability of the product. Regardless of
whether the product is a child’s first two-wheeler or a bicycle for an international cyclist,
customers want products without defects. Thus, the goal of process quality is to produce error-
free products. Product specifications, given in dimensional tolerances, precisely define how the
product is to be made. Adherence to these tolerances is essential to ensure the reliability of the
product as defined by its intended use.

Delivery Speed-Make it Fast” In some markets, a company’s ability to deliver more quickly
than its competitors may be critical. Take for example, a company that offers a repair service for
computer-networking equipment. A company that can offer on-site repair in only 1 or 2 hours
has a significant advantage over a competing firm that guarantees service only within 24 hours.

Delivery Reliability- “Deliver it When Promised” This dimension relates to the ability of
the firm to supply the product or service on or before a promised delivery due date. For an
automobile manufacturer, it is very important that their supplier of tires provide the needed
quantity and types for each day’s car production. If the tires needed for a particular car are not
available when the car reaches the point on the assembly line where the tires are installed, the
whole assembly line may have to be shut down until they arrive. The focus during the 1980s and
1990s on reducing stocks of inventory to lower cost has placed increasing emphasis on delivery
reliability as a criterion for evaluating alternative vendors.

Coping with Changes it Demand- “Change its Volume” in many markets, a company’s
ability to respond to increases and decreases in demand is an important factor in its ability to
compete. It is well known that a company with increasing demand can do little wrong. When
demand is strong and increasing, costs are continuously reduced due to economies of scale, and
investments in new technologies can be easily justified. But scaling back when demand
decreases may require many difficulty decisions relating to laying off employees and related
reductions in assets. The ability to effectively deal with dynamic market demand over the long
term is an essential element of operations strategy.

21
Flexibility and New Product Introduction Speed- “Change it” Flexibility from a
strategic perspective, refers to the ability of a company to offer a wide variety of products to its
customers. An important element of this ability to offer different products is the time required for
a company to develop a new product and to convert its processes to offer the new product.

Other Product-Specific Criteria-“Support It” the competitive dimensions just described

are certainly the most common. However, often other dimensions relate to specific products or
situations. Notice that most of the dimensions listed next are primarily service in nature. Often
special services are provided to augment the sales of manufactured products.

1. Technical liaison and support. A supplier may be expected to provide technical assistance
for product development, particularly during the early stages of design and
manufacturing.
2. Meeting a launch date. A firm may be required to coordinate with other firms on a
complex project. In such cases, manufacturing may take place while development work is
still being completed. Coordinating work between firms and working simultaneously on a
project will reduce the total time required to complete the project.
3. Supplier after-sale support. An important competitive dimension may be the ability of a
firm to support its product after the sale. This involves the availability of replacement
parts and possibly, the modification of older, existing products to new performance
levels. Speed of response to these after-sale needs is often important as well.
4. Other dimensions. These typically include such factors as colors available, size, weight, location
of the fabrication site, customization available, and product mix options.

1.9 Measuring Productivity

Sound business strategy and supporting operations strategy make an organization more
competitive in the marketplace. However, how does a company measure its competitiveness?
One of the most common ways is by measuring productivity. In this section, we will look at how
to measure the productivity of each of a company’s resources as well as the entire organization.

1.9.1 Measuring Productivity

22
Recall that operations management is responsible for managing the transformation of many
inputs into outputs, such as goods or services. A measure of how efficiently inputs are being
converted into outputs is called productivity. Productivity measures how well resources are
used. It is computed as a ratio of outputs (goods and services) to inputs (e.g., labor and
materials). The more efficiently a company uses its resources, the more productive it is:

We can use this equation to measure the productivity of one worker or many, as well as the
productivity of a machine, a department, the whole firm, or even a nation. The possibilities are
shown in Table 1-4.

Table 1-4 Productivity Measures

When we compute productivity for all inputs, such as labor, machines, and capital, we are
measuring total productivity. Total productivity describes the productivity of an entire
organization. For example, let us say that the weekly dollar value of a company’s output, such as
finished goods and work in progress, is $10,200 and that the value of its inputs, such as labor,
materials, and capital is $8,600. The company’s total productivity would be computed as
follows:

23
Often it is much more useful to measure the productivity of one input variable at a time in order
to identify how efficiently each is being used. When we compute productivity as the ratio of
output relative to a single input, we obtain a measure of partial productivity also called single-
factor productivity. Following are two examples of the calculation of partial productivity:
1. A bakery oven produces 346 pastries in 4 hours. What is its productivity?

2. Two workers paint tables in a furniture shop. If the workers paint 22 tables in 8 hours,
what is their productivity?

Examples of select partial productivity measures are shown in Table 1-5.

Sometimes we need to compute productivity as the ratio of output relative to a group of inputs,
such as labor and materials. This is a measure of multifactor productivity. For example, let us
say that output is worth $382 and labor and materials costs are $168 and $98, respectively. A
multifactor productivity measure of our use of labor and materials would be:

Table 1-5 Examples of Partial Productivity Measures

Dear Student, have you understood our discussion? Good! Now, to support your further
understanding, let us add one more example.

24
1.9.4 Productivity and Competitiveness
Productivity is essentially a scorecard of how effectively resources are used and a measure of
competitiveness. Productivity is measured on many levels and is of interest to a wide range of
people. As we showed in earlier examples, productivity can be measured for individuals,
departments, or organizations. It can track performance over time and help managers identify
problems. Similarly, productivity can be measured for an entire industry and even a country.

The economic success of a nation and the quality of life of its citizens are related to its
competitiveness in the global marketplace. Increases in productivity are directly related to
increases in a nation’s standard of living. That is why business and government leaders
continuously monitor the productivity at the national level and by industry sectors.

25
1.9.5 Productivity and the Service Sector
Service sector companies have a unique challenge when trying to measure productivity. The
reason is that traditional productivity measures tend to focus on tangible outcomes, as seen with
goods-producing activities. Services primarily produce intangible products, such as ideas and
information, making it difficult to evaluate quality. Consequently, accurately measuring
productivity improvements can be difficult. A good example of the difficulty in using traditional
productivity measures in the service sector is that of an emergency room. Here inputs are the
medical staff, yet outputs may not exist if no one needed treatment on that shift. In that case,
using traditional measures, productivity would be zero! The real issue in this type of
environment is the level of readiness, and the challenge is to adequately measure it.
1.10 Current issues in Operations Management
Today’s OM environment is very different from what it was just a few years ago. Customers
demand better quality, greater speed, and lower costs. In order to succeed, companies have to be
masters of the basics of operations management. To achieve this many companies are
implementing a concept called lean systems. Lean systems take a total system approach to
creating an efficient operation and pull together best practice concepts. This includes concepts
such as just-in-time (JIT), total quality management (TQM), continuous improvement, resource
planning, and supply chain management (SCM). The need for increasing efficiency has also led
many companies to implement large information systems called enterprise resource planning
(ERP). ERP systems are large, sophisticated software programs used for identifying and
planning the enterprise-wide resources needed to coordinate all activities involved in producing
and delivering products to customers.

Applying best practices to operations management is not enough to give a company a

competitive advantage. The reason is that in today’s information age best practices are quickly
passed to competitors. To gain an advantage over their competitors companies are continually
looking for ways to better respond to customers. This requires companies to have a deep
knowledge of their customers and to be able to anticipate their demands. The development of
customer relationship management (CRM) has made it possible for companies to have this
detailed knowledge of their customers. CRM encompasses software solutions that enable the

26
firm to collect customer-specific data. This type of information can help the firm identify profiles
of its most loyal customers and provide customer-specific solutions. Also, CRM software can be
integrated with ERP software to connect customer requirements to the entire resource network of
the company.

Another characteristic of today’s OM environment is the increased use of cross functional

decision making, which enquires coordinated interaction and decision making between the
different business functions of the organization. Until recently employees of a company made
decisions in isolated departments, called “functional silos.” Today many companies bring
together experts from different departments into cross-functional teams to solve company
problems. Employees from each function must interact and coordinate their decisions. This
requires employees to understand the roles of other business functions and the goals of the
business as a whole, in addition to their own expertise.

We conclude our introductory chapter with a summary of current issues facing OM executives.
These interrelated issues are interesting points for discussion as we move through the OM topics:

1. Effectively consolidating the operations resulting from mergers. There is an interest

today in mergers, particularly of large companies. examples include Hewlett-Packard
and Compaq Computer, TRW and Northrop Grumman, and many others. Often these
mergers seem to offer great promise for economies of scale and operations efficiency.
However, the reality is often different due to differences in culture and technology
infrastructure.

2. Developing flexible supply chains to enable mass customization of products and

services. Virtually every industry is broadening its product lines to provide the variety of
choices that customers want. The challenge is not only to produce so many different
products but also to distribute the products to a global customer base.

3. Managing global supplier, production, and distribution networks. The

implementation of global enterprise resource planning systems, now common in large

27
 companies, has challenged managers to use all of this I formation optimally. This
requires a careful understanding of where control should be centralized and where
autonomy is important, among other issues.

4. Increased “commoditization” of suppliers. Often there are many suppliers that can
provide the material needed by a company. Take the case of still suppliers- in particular,
those that supply the auto industry. In the past, the movement was toward long-term
contracts between an automobile manufacturing company and its supplier of steel. In
order to justify the investment in integrating information systems and other activities, a
long-term agreement was forged. Now, with the use of standard internet communications
and with advances in production technology in the steel industry, there is little cost in
switching from one supplier to another. Suppliers use a computer term, plug compatible,
to describe this interchangeability. Sell companies can now be much more aggressive in
pursuing different business partners. Internet business-to-business auction sites are
dramatically changing how business between companies is conducted.

5. Achieving the “service factory.” This term refers to the growing movement to ward
developing personalized service for each customer, even though the company may have
millions of customers. Retail consumer products companies such as lands’ End and L.L.
Bean have developed this type of service while still maintaining a highly efficient
operation, much like a high-volume manufacturing plant.

6. Enhancing value-added services. As discussed earlier, it is no longer sufficient to just

ship good products. Business customers want to be kept abreast of production progress,
receive advance warning of model changes, have on-sit help in installing modifications
and have access to well-staffed help lines.

7. Making efficient use of Internet technology. Virtually all major companies use the
Internet throughout their production processes. Smoothly integrating the Web to each
production stage requires a coherent overall structure that smoothly blends what should
be viewed as a portfolio of websites.

28
8. Achieving good service from service firms. Manufacturing operations typically focus
on the efficient use of resources to create the product. While service operations seek to be
efficient as well, they also must be concerned with managing the customer’s experience
during the service encounter. The contrast between a manufacturing focus and a service
focus is seen in a case where extending a service encounter may be inefficient from the
point of view of strict resource allocation, but is critical to service quality as perceived by
the customer. Understanding this trade-off is where so many service quality as perceived
by the customer.

29