Chapter 14: Operations Management

Chapter 14 - Operations Management

CHAPTER 14 - OPERATIONS MANAGEMENT

LEARNING OUTCOMES

After reading this chapter students should be able to:

1.Define operations management and explain its role.

2.Define the nature and purpose of value chain management.

3.Describe how value chain management is done.

4.Describe contemporary issues in managing operations.

Opening Vignette—Smooth Ride

SUMMARY

One company that manufactures school buses is Blue Bird North Georgia. Schoolbuses are a product where quality is paramount. Achieving an organizational culture that’s dedicated to quality and to efficient manufacturing isn’t an easy thing to do. Blue Bird’s plant in Lafayette, Georgia, started on its “lean” journey—that is, having a lean, efficient operation system—in 2003. Under new management, Blue Bird got serious about tackling its quality issues and implemented specific programs including: a material review board that evaluates and monitorsmaterials usage; a quality control lab equipped with a computerized maintenance management system; an employee suggestion system; weekly management roundtable meetings; and a safety incentive program. One key contributor to the company’s success is measurement. The facility’s production manager said, “If you don’t measure something, you don’t know how well you’re doing.”

The customer reject rate is basically zero, with on-time delivery at 100 percent. The director of quality and risk management said, “Doing it right the first time takes a lot less time.” Safety has also improved. The company’s recordable injury rate was down 65 percent, and time lostdue to injuries was down by 87 percent. After four years of hard work, the company achieved initial ISO 9001-2000 certification in March 2007. In addition, the facility was named oneof Industry Week’s Best Plants for three years running.

Teaching Notes

1.What is operations management?

2.Why is measurement important?

3.What part do managers play?

I.WHY IS OPERATIONS MANAGEMENT IMPORTANT TO ORGANIZATIONS?

A.Described

1. Operations management refers to the design, operation, and control of the transformation process that converts such resources as labor and raw materials into goods and services that are sold to customers. (See Exhibit 14-1.)
2. Why is operations management so important to organizations and managers?

a)It encompasses processes in all organizations—services as well as manufacturing.

b)It’s important in effectively and efficiently managing productivity.

c)It plays a strategic role in an organization’s competitive success.

B.How Do Service and Manufacturing Firms Differ?

1.Transformation process—an operations system that creates value by transforming inputs into finished goods and service outputs.

a)Manufacturing organizations produce physical goods.

b)Service organizations produce nonphysical outputs in the form of services.

2.The economies of developed countries have gone from being dominated by the creation and sales of manufactured goods to the creation and sales of services.

a)Most of the world’s industrialized nations are predominantly service economies.

b)In the United States, nearly 80 percent of all private sector jobs are now in service industries.

C.How Do Businesses Improve Productivity?

1. Improving productivity has become a major goal in virtually every organization.

a)Productivity—the overall output of goods and services produced divided by the inputs needed to generate that output.

b)For countries, high productivity can lead to economic growth and development.

c)For individual organizations, increased productivity lowers costs and allows firms to offer more competitive prices.

1. Increasing productivity is key to global competitiveness.

a)Example, Japan’s economic prosperity in the 1980s.

b)Example, response of U.S. businesses.

1. Organizations that hope to succeed globally are looking for ways to improve productivity.

a)Example, Pella

b)Example, McDonald’s.

c)Example, Skoda AutoAS.

1. Productivity is a composite of people and operations variables.

a)W. Edwards Deming believed that managers, not workers, were the primary source of increased productivity.

b)The truly effective organization will maximize productivity by successfully integrating people into the overall operations system.

c)Example, Grove Madsen Industries in Las Vegas.

D.What Role Does Operations Management Play in a Company's Strategy?

1. From the late 1940s through the mid-1970s, manufacturing activities in the United States were taken for granted.
2. Meanwhile, managers in Japan, Germany, and other countries took the opportunity to develop modern, computer-based, and technologically advanced facilities.

a)U.S. manufacturers discovered that foreign goods were being made not only less expensively but also with better quality.

b)Today, successful manufacturers recognize the crucial role that operations management plays as part of the overall organizational strategy to establish and maintain global leadership.

Teaching Notes ______

From the Past to the Present
William Edwards Deming was an American statistician, professor, author, lecturer, and consultant.12 He is widely credited with improving production in the United States during World War II, although he’s probably best known for his work in Japan. From 1950 onward, he taught Japanese top managers how to improve product design, product quality, testing, and sales, primarily through applying statistical methods. His philosophy has been summarized as follows: “Dr. W. Edwards Deming taught that by adopting appropriate principles of management, organizations can increase quality and simultaneously reduce costs (by reducing waste, rework, staff attrition and litigation while increasing customer loyalty). The key is to practice continual improvement and think of manufacturing as a system, not as bits and pieces.”
Putting that philosophy into practice required following Deming’s 14 points for improving management’s productivity.
1.Which points are the most important? Why?
2.What was Deming's most important contribution?

Teaching Notes ______

II.WHAT IS VALUE CHAIN MANAGEMENT AND WHY IS IT IMPORTANT?

A.Introduction

1. Examples: Dell Computer, Siemens AG's Computed Tomography, Timken and Black & Decker.
2. The concepts of value chain management are transforming operations management strategies and turning organizations around the world into finely tuned models of efficiency and effectiveness.

B.What is Value Chain Management?

1. Every organization needs customers if it’s going to survive and prosper.
2. Customers want some type of value from the goods and services they purchase, or use, and these end users determine what has value.
3. Value is the performance characteristics, features and attributes, or any other aspects of goods and services for which customers are willing to give up resources (usually money).
4. How is value provided to customers?

a)Through the transformation of raw materials and other resources into some product or service that end users need or desire—in the form they want, when they want it.

5.The value chain is the entire series of organizational work activities that add value at each step, beginning with the processing of raw materials and ending with a finished product in the hands of end users.

1. Value chain management—the process of managing the entire sequence of integrated activities and information about product flows along the entire value chain.

a)Supply chain management is internally oriented and focuses on the efficient flow of incoming materials to the organization.

b)Value chain management is externally oriented and focuses on both incoming materials and outgoing products and services.

c)Supply chain management is efficiency oriented (its goal is to reduce costs and make the organization more productive).

d)Value chain management is effectiveness oriented and aims to create the highest value for customers.

C.What are the Goals of Value Chain Management?

1. Who has the power in the value chain?

a)Ultimately, customers are the ones with power.

b)They’re the ones who define what value is and how it’s created and provided.

1. Using value chain management, managers seek to find that unique combination in which customers are offered solutions that truly meet their needs and at a price that can’t be matched by competitors.

a)Example, Shell Chemical Company.

1. A good value chain is one in which a sequence of participants work together as a team, each adding some component of value such as faster assembly, more accurate information, or better customer response and service to the overall process.

a)When value is created for customers and their needs and desires are satisfied, everyone along the chain benefits.

b)Example, Iomega Corporation.

Right or Wrong?
What happens when one partner in a value chain wields its power and makes significant demands? For example, Wal-Mart required all its major suppliers to have RFID (radio frequency identification) tags installed on all their products. In doing so, Wal-Mart hoped to save more than $8 billion annually by reducing theft and stocking out of items. But it’s costing each supplier up to $23 million to meet this demand.
1.What do you think?
2.Is this ethical? Why or why not?

D.How Does Value Chain Management Benefit Businesses?

1. A survey of manufacturers noted four primary benefits of value chain management:

a)improved procurement

b)improved logistics

c)improved product development

d)enhanced customer order management

Teaching Notes ______

III.HOW IS VALUE CHAIN MANAGEMENT DONE?

A.Introduction

1. New solutions may be needed for the contemporary workplace in the form of anew business model or a strategic design for how a company intends to profit from its broad arrayof strategies, processes, and activities.
2. Example - IKEA

B.What are the Requirements for Successful Value Chain Management?

1. What does successful value chain management require? (See Exhibit 14-2.)

a)There are six main requirementslisted below.

2.Coordination and collaboration.

a)Comprehensive and seamless integration among all members of the chain is absolutely necessary.

b)All partners in the value chain must identify things that they may not value but that customers do.

c)Sharing of information and analysis requires open communication among the various value chain partners.

d)See Developing your Collaboration Skill

Developing Your Collaboration Skill

About the Skill

Collaboration is the teamwork, synergy, and cooperation used by individuals when they seek a common goal. Given that value chain management is contingent on all partners working together, collaboration is critically important to the process.

Steps in Practicing the Skill

1.Look for common points of interest.

2.Listen to others.

3.Check for understanding.

4.Accept diversity.

5.Seek additional information.

6.Don’t become defensive.

Practicing the Skill

Interview managers from three different organizations discuss how they collaborate with others. What specific tips have they discovered for effectively collaborating with others? What problems have they encountered when collaborating? How have they dealt with these problems?

Teaching notes

Ask students, either as individuals or in groups, to share information from their interviews.

Ask the class to compare and contrast the information provided from each interview. Consider what is similar and what might be different about the answers given. Why do the students think information was similar or different? Would this relate to the individuals being interviewed (their individual backgrounds, ages, experiences, industry, etc.) or to their perceptions of the value of or need for collaboration? Why?

1. Technology investment.

a)Successful value chain management isn’t possible without a significant investment in information technology.

(1)Example, Rollerblade, Inc.

b)What types of technology are important?

(1)The key tools include supporting enterprise resource planning software (ERP) system that links all of an organization’s activities, sophisticated work planning and scheduling software, customer relationship management systems, business intelligence capabilities, and e-business connections with trading network partners.

(2)Example, Dell Computer manages its supplier relationships almost exclusively online.

1. Organizational processes.

a)Organizational processes—the way organizational work is done.

b)Core competencies—the organization’s unique skills, capabilities, and resources.

c)Non-value-adding activities should be eliminated.

(1)Where can internal knowledge be leveraged to improve flow of material and information?

(2)How can we better configure our product to satisfy both customers and suppliers?

(3)How can the flow of material and information be improved?

(4)How can we improve customer service?

d)Three important conclusions about how organizational processes must change.

(1)Better demand forecasting is necessary and possible because of closer ties with customers and supplier.

(a)Example, Wal-Mart and Warner-Lambert’s Consumer Group (now a division of Pfizer, Inc.) collaborated to improve product demand forecast information. Their mutual efforts led to a $6.5 million increase in Wal-Mart’s sales of Listerine.

(2)Selected functions may need to be done collaboratively with other partners in the value chain. (See Ethical Dilemma in Management.)

(a)Example, Saint-Gobain Performance Plastics.

(3)New measures are needed for evaluating the performance of various activities along the value chain.

(a)Managers need a better picture of how well value is being created and delivered to customers.

(b)Example, Nestle USA—redesigned its measurement system to focus on one consistent set of factors, including accuracy of demand forecasts and production plans, on-time delivery, and customer service levels.

1. Leadership.

a)Successful value chain management isn’t possible without strong and committed leadership.

(1)J. Michael Hagan, CEO of Furon Company: “Value is a mind-set that not only has to be driven from the top down, but also from the bottom up. Everyone has to be asking whether a given task adds value; and if it doesn’t, why do it.”

(2)Managers must make a serious commitment to identifying what value is, how that value can best be provided, and how successful those efforts have been.

b)It’s important that leaders outline expectations for what’s involved in the organization’s pursuit of value chain management.

(1)This should start with a vision or mission statement that expresses the organization’s commitment to identifying, capturing, and providing the highest possible value to customers.

(2)Being clear about expectations also extends to partners.

1. Employee/human resources.

a)Three main human resources requirements for value chain management are flexible approaches to job design, an effective hiring process, and ongoing training.

(1)Flexibility is the key description of job design in a value chain management organization.

(a)Jobs need to be designed around work processes that link all functions involved in creating and providing value to customers.

(b)Focus needs to be on how each activity performed by an employee can best contribute to the creation and delivery of customer value.

(2)Flexible jobs require employees who are flexible.

(a)The organization’s hiring process must be designed to identify those employees who have the ability to quickly learn and adapt.

(3)The need for flexibility also requires that there be a significant investment in continual and ongoing employee training.

(a)Managers must see to it that employees have the knowledge and tools they need to do their jobs.

(b)Example, Alenia Marconi System, based in Portsmouth, England.

1. Organization culture and attitudes.

a)Having cultural attitudes that include sharing, collaborating, openness, flexibility, mutual respect, and trust.

(1)These attitudes encompass not only the internal partners in the value chain but external partners as well.

(a)Example, American Standard—lots of face time and telephone calls.

(b)Example, Dell Computer—almost exclusively through cyberspace.

(2)Both approaches reflect each company’s commitment to developing long-lasting, mutually beneficial, and trusting relationships that best meet customers’ needs.

C.What are the Obstacles of Value Chain Management?

1. Exhibit 14-3 highlights the obstacles of value chain management.
2. Organizational barriers.

a)Refusal or reluctance to share information, unwillingness to accept change, and security issues.

b)Reluctance or refusal of employees to accept change can impede efforts toward successful implementation of value chain management.

c)Because value chain management relies heavily on a substantial information technology infrastructure, system security and Internet security breaches are issues that need to be addressed.

1. Cultural attitudes.

a)An absence of cultural attitudes—especially trust and control—also can be obstacles to value chain management.

b)There must be mutual respect for, and honesty about, each partner’s activities all along the chain.

c)But too much trust can also be a problem.

(1)Many organizations are vulnerable to theft of intellectual property—proprietary information that’s critical to a firm’s efficient and effective operation.

d)Another cultural attitude that can be an obstacle to successful value chain management is the belief that when an organization collaborates with external and internal partners, it no longer controls its own destiny.

1. Required capabilities.

a)Capabilities that value chain partners must have include extreme coordination and collaboration, the ability to configure products to satisfy customers and suppliers, and the ability to educate internal and external partners.

b)These are essential to capturing and maximizing the value of the value chain, but often are difficult to achieve.

1. People.

a)Without unwavering commitment and willingness of an organization’s members to make it work, value chain management isn’t going to be successful.

b)Value chain management takes an incredible amount of time and energy on the part of an organization’s employees.

Teaching Notes ______

IV.WHAT CONTEMPORARY ISSUES DO MANAGERS FACE IN MANAGING OPERATIONS?

A.Introduction

1. Every aspect of the economy needs to be re-examined and many products must be redesigned for greater efficiency.

B.What Role Does Technology Play in Operations Management?

1. Smart companies are looking at ways to harness technology to improve operations management.

a)Example, McDonalds - boost accuracy by 11%.

1. Managers still need to realize that the organization’s production activities must be more responsive.

a)Operations managers need systems that can reveal available capacity, status of orders, and product quality while products are in the process of being manufactured—not just after the fact.