Introduction to Operations and Supply Chain Management Chapter 1 Introduction to Operations and Supply Chain Management Operations Management - 6th Edition Roberta Russell & Bernard W. Taylor, III Beni Asllani University of Tennessee at Chattanooga Copyright 2009 John Wiley & Sons, Inc.

Lecture Outline The Operations Function Evolution of Operations and Supply Chain Management (SCM) Globalization Productivity Overview Strategic Planning and Operations Strategy Outline of this Textbook Some slides include notes beneath them. Copyright 2009 John Wiley & Sons, Inc.

The Operations Function Overview What is Operations Management? Transformation Processes and Value Chains How Operations is Connected with Other Business Functions and with Suppliers Copyright 2009 John Wiley & Sons, Inc.

What is Operations Management? design, operation, and improvement of productive systems 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 not needed and should be eliminated A company's outputs are the goods and/or services that it produces and sells. Companies buy goods and services from suppliers (also called vendors). Copyright 2009 John Wiley & Sons, Inc.

Operations as a Transformation Process Figure 1.1 INPUT Material Machines Labor Management Capital OUTPUT Goods Services TRANSFORMATION PROCESS Feedback is the use of data to improve a company's transformation process and its inputs, thereby improving the outputs. Operations managers monitor data on costs, quality, the number of products produced or customers served, and timeliness (on-time delivery, service time, fast delivery). Feedback & Requirements Copyright 2009 John Wiley & Sons, Inc.

Transformation Process Physical: as in manufacturing operations Locational: as in transportation or warehouse operations Exchange: as in retail operations Physiological: as in health care Psychological: as in entertainment Informational: as in communication Copyright 2009 John Wiley & Sons, Inc.

A Value Chain Manufacturer Customer Supplier Flow of information: customer order and delivery requirements Flow of products: goods and services Copyright 2009 John Wiley & Sons, Inc. Copyright 2006 John Wiley & Sons, Inc. 1-7

How Operations is Connected with Other Business Functions and with Suppliers Marketing Finance and Accounting Human Resources Outside Suppliers This slide illustrates some of the ways that Operations connects with other functional areas of an organization. You will be a more effective business professional if you understand the strengths and limitations of your company's Operations function, the information that you receive from Operations, and how Operations uses information from your department. Also, you will benefit by understanding the operations of your suppliers and customers. For example, a loan officer who understands the operations of a business customer can make better judgments about the credit-worthiness of the customer. The following two slides give other examples of how operations is relevant to other functional areas of the organization. Copyright 2009 John Wiley & Sons, Inc. 1-8 8

Evolution of Operations and Supply Chain 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. Division of labor is used to design assembly lines. Interchangeable parts standardization of parts. A necessary step toward mass production This slide and the next two summarize major historical developments in manufacturing and supply chain management. Copyright 2009 John Wiley & Sons, Inc.

Evolution of Operations and Supply Chain Management (cont.) Scientific management systematic analysis of work methods Mass production high-volume production of a standardized product for a mass market Lean production an adaptation of mass production that emphasizes quality, flexibility, and reduced costs Mass production greatly reduced the cost of consumer goods, ranging from cars to packaged foods. This change provided a much higher standard of living for many people. Copyright 2009 John Wiley & Sons, Inc.

Evolution of Operations and Supply Chain Management (cont.) management of the flow of information, products, and services across a network of customers, enterprises, and supply chain partners In every chapter of our textbook, you will find one or more boxes entitled "Along the Supply Chain". Chapters 10 and 11 focus on Supply Chain strategy, design, and management. Copyright 2009 John Wiley & Sons, Inc.

Globalization Overview Globalizing business functions Why companies globalize Risks of globalization Global statistics Hourly compensation costs for production workers Trade in goods as % of Gross Domestic Product Copyright 2009 John Wiley & Sons, Inc.

Globalizing Business Functions Almost any business function can be performed outside a company's home country Marketing Operations Purchasing from foreign suppliers Obtaining financing from overseas banks Having products designed in another country Having customer service or technical service performed in another country Copyright 2006 John Wiley & Sons, Inc. Copyright 2009 John Wiley & Sons, Inc. 1-13

Why Companies Globalize Reduce labor costs Reduce material costs Gain access to new suppliers Gain access to international markets The fastest-growing markets are emerging markets such as China and India. These markets have an emerging middle class and high demand for goods and services Gain access to skilled people Price has a major impact on purchasing decisions made by businesses and consumers. In many industries, it is difficult or impossible to compete without purchasing from foreign suppliers or service providers. Copyright 2009 John Wiley & Sons, Inc. Copyright 2006 John Wiley & Sons, Inc. 1-14

Why Companies Globalize (2) Understand the requirements of overseas customers Electrical devices must meet different standards for voltage and plug design in various countries McDonalds sells beer in Germany BMW, a German company, built its first SUV's for the U. S. market Gain access to new technologies Low-cost cars designed for India and eastern Europe may find a market elsewhere Copyright 2009 John Wiley & Sons, Inc.

Risks of Globalization Quality problems Supply chain and delivery problems Foreign suppliers that use child labor or do not comply with labor laws in their country Foreign suppliers that make and sell unauthorized copies of your product. In China, this has happened to New Balance, GM, and Volkswagen, among many others Copyright 2006 John Wiley & Sons, Inc. Copyright 2009 John Wiley & Sons, Inc. 1-16

Risks of Globalization (2) Product safety problems, such as lead paint on toys made in China Public concern about jobs lost as a result of outsourcing overseas Poor corporate image Unexpected changes in the value of a foreign currency may increase costs or reduce revenue Copyright 2009 John Wiley & Sons, Inc.

Hourly Compensation Costs for Production Workers Facility location decisions should be based on total costs. Productivity in low-wage countries is often much lower than in the United States, and labor costs per hour may be misleading. Shipping costs, tariffs, and administrative costs also affect location decisions. Companies should also evaluate overseas suppliers on quality, product safety, and the ability to meet delivery requirements. Many companies, such as Nike, Adidas, and Disney, monitor the labor practices of foreign suppliers.

Trade in Goods as % of GDP (sum of merchandise exports and imports divided by GDP, valued in U.S. dollars) A manufacturing company must consider the effects of Chinese production on prices and competition in its industry. Some companies, such as Nike, choose to outsource production to several countries. Oil and gas are the primary exports of the Russian Federation (Russia).

Measures of Productivity In total factor productivity, the usual inputs are labor, capital, energy, and materials. Productivity measures efficiency and is an important measure of Operations performance. However, it should not be the only measure used to evaluate Operations. In deciding which measures of productivity to use, a company should consider its cost drivers. For instance, Alcoa has high energy and capital costs. Focusing only on labor productivity would not help Alcoa reduce its highest costs. This course will show you many ways to design, manage, and improve Operations and Supply Chain Management. These techniques can dramatically increase productivity.

Strategic Planning Overview Mission and strategy Environmental scanning Order qualifiers and order winners Internal company analysis Core competencies Positioning the firm Copyright 2009 John Wiley & Sons, Inc.

Strategic Planning Company mission or primary task: what is the company in business to do? Examples: Levi-Strauss: We will market and distribute the most appealing & widely worn apparel brands. Dell: Dell listens to customers and delivers technology they trust and value. A business strategy explains how a company will achieve its mission. This presentation of strategy is consistent with the one in our textbook, but this discussion includes additional information. If you have taken a course in marketing or business policy, most of this material will be familiar to you. If you have questions about this material, please contact me. Copyright 2009 John Wiley & Sons, Inc.

Key Inputs to a Business Strategy Mission statement Environmental scanning (opportunities and threats) What is going on outside the company that will affect your business? Internal analysis of strengths and weaknesses What is going on inside the company that affects your strategic options? Copyright 2009 John Wiley & Sons, Inc.

Environmental Scanning - Current Situation and Future Trends The company should look at what is going on outside the company with respect to: Product and process technology in the industry Laws and regulations that could affect the company Economic trends Social and demographic trends Market trends and customer data Industry and competitor strategies Copyright 2009 John Wiley & Sons, Inc.

Environmental Scanning (2) Identify opportunities and threats Examples of opportunities Laws requiring use of ethanol in gasoline created opportunities for ethanol producers Growing markets in China and India may create opportunities for your company. Examples of threats A competitor is introducing a product that your company cannot match. New banking regulations are being proposed. An economic recession The effects of an environmental factor may affect some industries more than others. For instance, new banking regulations would have the greatest impact on banks. However, those regulations might also affect they types of financing that are available to businesses in other industries. Copyright 2009 John Wiley & Sons, Inc.

Environmental Scanning (3) Order qualifiers and winners Order qualifier: what qualifies a good or service to be considered for purchase? Order winner: what characteristic of a good or service persuades customers to buy. Order qualifiers and order winners: Change over time Depend on the target market Depend on positioning in the marketplace When cell phones with cameras were introduced, a camera was often an order winner. Now a camera is a standard cell phone feature and an order qualifier for many customers. To see how positioning affects order qualifiers and order winners, compare your order qualifiers and winners for a fast food restaurant and a fine dining restaurant. Copyright 2009 John Wiley & Sons, Inc.

Internal Company Analysis Evaluate the company's financial, managerial, technical, and material strengths and weaknesses. Look for core competencies that the company has or could develop. Copyright 2009 John Wiley & Sons, Inc.

Core Competencies Core competency (distinctive competence) What does the firm do better than anyone else? Should create a sustainable (long-term) competitive advantage. Should be hard to imitate. Usually requires cooperation and information sharing among different business functions Often includes partnerships with suppliers or customers. A truly innovative product, such as the Apple iPhone, can command a premium price and grab market share for several months or a few years. These competitive advantages are worth seeking. However, a product is usually NOT a core competency, since competitors are likely to introduce similar or better products eventually. The Motorola Droid phone and the Google Nexus One are likely to take market share away from the iPhone. In other words, the competitive advantage that Apple gained from the iPhone is probably not sustainable. Eventually, Apple will need an even better product. Copyright 2009 John Wiley & Sons, Inc. Copyright 2006 John Wiley & Sons, Inc. 2-28

Examples of Core Competencies Wal-Mart has maintained "everyday low prices" for decades. Nordstrom's is known for superior customer service. The Mayo Clinic is known for excellent medical care, at a low cost. Copyright 2009 John Wiley & Sons, Inc.

How Wal-Mart Keeps Prices Low Demands very low prices from suppliers Limits inventory by Requiring suppliers to deliver most merchandise directly to stores just as it is needed (vendor-managed inventory) Merchandise delivered to Wal-Mart distribution centers goes directly onto trucks for delivery to stores (cross-docking) Stocks a limited number of brands in each product category Headquarters closely monitors sales and inventory at each store No-frills store layouts and product displays Tight controls on staffing and employee compensation Most of the tactics that Wal-Mart uses to keep prices low are part of Operations and Supply Chain Management. The exceptions are controls on staffing and employee compensation (human resources management) and stocking a limited number of items in each product category (merchandising). However, these decisions affect the way that store operations are managed. Copyright 2009 John Wiley & Sons, Inc.

Order Qualifiers, Winners, and Core Competencies - Summary Order qualifiers and order winners define customer requirements A company should satisfy order qualifiers in its target market A company's core competency should be an order winner in its target market Copyright 2009 John Wiley & Sons, Inc.

Strategic Positioning (also called Positioning) How the company chooses to compete Sets competitive priorities for the company Considerations in Positioning Strengths and weaknesses of the firm Present and future needs of customers Strategies of competitors Potential of technology to help the firm get and keep customers Copyright 2006 John Wiley & Sons, Inc. Copyright 2009 John Wiley & Sons, Inc. 2-32

Competitive Priorities that Operations Supports Cost – also called competing on price Quality Flexibility Speed We will discuss these priorities throughout the semester. It is hard to excel at more than two of these. Copyright 2006 John Wiley & Sons, Inc. Copyright 2009 John Wiley & Sons, Inc. 2-33

Positioning the Firm: Competing on Cost Waste elimination relentlessly pursuing the removal of all waste Examination of cost structure looking at the entire cost structure for reduction potential – not just direct labor High-volume production and automation are sometimes the best alternatives. In other cases, lean production is more efficient. Companies that compete on low cost have "no frills" product or service design specifications. Bic pens and Little Caesar Pizza meet their design specifications, and they are low-cost leaders in their markets. Copyright 2009 John Wiley & Sons, Inc.

Positioning the Firm: Competing on Speed There are several ways to compete on speed. Rapid service delivery: Lens Crafters, FedEx Build-to-order production: Dell can produce a computer to order in two days Rapid new product introduction Zara can design a new garment, manufacture it, and have it in stores in 9 – 15 days. If you purchase a desktop computer from Dell, you will be offered a menu of options, such as processor speed, number of gigabytes that will fit on your hard drive, quality of speakers, and type of monitor. This is called build-to-order production. You do not have unlimited choices, but must chose from the options that the company offers. Copyright 2009 John Wiley & Sons, Inc.

Positioning the Firm: Quality Conformance quality ensures the consistency of a good or service. Any good or service can have conformance quality. Conformance quality is usually an order qualifier. Since competitors are also likely to have conformance quality, this type of quality is usually not an order winner. Copyright 2009 John Wiley & Sons, Inc.

Positioning the Firm: Quality (2) Companies that compete on quality focus on pleasing or delighting the customer. These companies often offer luxury goods or services with high design quality. Nordstrom's stores Ritz Carlton Hotels Rolls-Royce automobiles Rolex watches Copyright 2009 John Wiley & Sons, Inc.

Positioning the Firm: Flexibility Flexibility is the ability to adjust to changes in product mix, production volume, or product design One approach to flexibility involves responding to general changes in demand. Benetton constantly monitors sales. Production of hot-selling items will be increased, and they may be offered in new colors. Production of items that are not selling well will cease. Zara responds to changing demand by introducing more than 20,000 items per year. (Zara competes on both speed and flexibility). We will study Zara again in Chapters 6 and 10. Copyright 2009 John Wiley & Sons, Inc.

Positioning the Firm: Flexibility (2) Mass customization is the mass production of customized products using computer-aided design (CAD) and computer-aided manufacturing (CAM). This is another approach to flexibility. National Bicycle offers more than 11 million combinations of product options for bicycles. The customized bicycles are shipped within two weeks and cost only 10% more than standard bicycles. Like Dell, National Bicycle uses a build-to-order system. Copyright 2009 John Wiley & Sons, Inc.

Technology and Methods for Mass Customization Here are some of the technologies and methods that make mass customization work at Dell Computer-aided design (CAD) and computer-aided-manufacturing (CAM). Frequent deliveries from suppliers so that Dell has the parts it needs Supply Chain Management (SCM) information systems so that suppliers know what to deliver Since Dell also ships finished computers in two days, it is competing on both technology and speed. Copyright 2009 John Wiley & Sons, Inc.

Operations Strategy Services Process and Technology Products Human Resources Quality Capacity A company's Operations function must be set up and managed to deliver the firm's competitive priorities to customers. The different parts of the Operations function, which are shown above, must fit together like the pieces of a puzzle. Operations must also coordinate its strategy with other business functions (Marketing, Finance, Human Resources Management, Information Technology) and with suppliers. Finally the Operations strategy, and the strategies of other business functions, must be implemented effectively and efficiently. Sourcing Operating Systems Facilities Copyright 2006 John Wiley & Sons, Inc. Copyright 2009 John Wiley & Sons, Inc. 2-41

Organization of This Text: Part I – Operations Management Intro. to Operations and Supply Chain Management: Chapter 1 Quality Management: Chapter 2 Statistical Quality Control: Chapter 3 Product Design: Chapter 4 Service Design: Chapter 5 Processes and Technology: Chapter 6 Facilities: Chapter 7 Human Resources: Chapter 8 Project Management: Chapter 9 Chapter 8 will not be covered in this course. Copyright 2009 John Wiley & Sons, Inc.

Organization of This Text: Part II – Supply Chain Management Strategy and Design: Chapter 10 Global Supply Chain Procurement and Distribution: Chapter 11 Forecasting: Chapter 12 Inventory Management: Chapter 13 Sales and Operations Planning: Chapter 14 Resource Planning: Chapter 15 Lean Systems: Chapter 16 Scheduling: Chapter 17 Chapters 12 and 17 will not be covered in this course. Copyright 2009 John Wiley & Sons, Inc.

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