1. 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.

2. 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.
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3. The Operations Function Overview
What is Operations Management?
Transformation Processes and Value Chains
How Operations is Connected with Other Business Functions and with Suppliers
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4. 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).
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5. 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
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6. 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
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7. A Value Chain Manufacturer Customer Supplier
Flow of information: customer order and
delivery requirements
Flow of products: goods and services
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8. 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.
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9. 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.
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10. 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.

11. 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.
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12. 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
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13. 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
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14. 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.
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15. 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
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16. 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
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17. 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
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18. 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.

19. 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).

20. 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.

21. Strategic Planning Overview
Mission and strategy
Environmental scanning
Order qualifiers and order winners
Internal company analysis
Core competencies
Positioning the firm
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22. 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.

23. 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?
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24. 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
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25. 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.
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26. 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.

27. 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.
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28. 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.
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29. 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.
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30. 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.
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31. 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
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32. 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
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33. 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.
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34. 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.
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35. 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.

36. 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.
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37. 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
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38. 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.
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39. 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.
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40. 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.
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41. 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
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42. 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.

43. 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.
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44. Copyright 2009 John Wiley & Sons, Inc. All rights reserved
Copyright 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.
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