Introduction

Outlines for Introducing Operations Management What is OM? Why Study OM? Philosophy and New Trends in OM Operations in the Service Sector How would OM affect other functions in a firm? Ten Decisions of OM Achieving Competitive Advantage through Operations Defining Global Operations Why Global Operations are Important Achieving Global Operations

Background: Steve Peng EDUCATION Ph.D. York University, Toronto, Operations Management, 2001 M.Sc National Tsinghua University, Taiwan, Electrical Engineering, 1992 B.Sc National Tsinghua University, Taiwan, Electrical Engineering, 1990 RESEARCH INTERESTS  Risk control and financing mechanism design for new aircraft projects  Contract design for risk sharing and coordination in supply networks  Stochastic models for supply chain management INDUSTRIAL EXPERIANCE Consultant, Bombardier Aerospace, Toronto, 3/2001 – 6/1999 Risk management in new aircraft project R&D Engineer, S-Tech Inc, Toronto, 3/1994 – 6/1996 Design and manufacturing of industrial gas detecting system Project Engineer, General Instrument, 9/1992 – 12/1993 CATV system design and manufacturing

What is Operations Management Managing the activities that creates goods and services through the transformation of inputs into outputs Focusing on both manufacturing and service operations Modern OM often across organizational and geographical boundaries

Operations Management INPUTS _____________ Labor Materials Technology Capacity VALUE-ADDING ACTIVITIES _________________ Performed with tools, machines, techniques, and human skills OUTPUTS ____________ Goods and/or services Management Process (planning, organizing, staffing, leading, and controlling) embedded in IT infrastructures

Operations in Manufacturing Firm Consumer Retailer Manufacturing Material Flow VISA ® Credit Flow Supplier Supplier Wholesaler Retailer Cash Flow Order Flow Schedules

Operations in Different Firms United Airlines Dell Computer Bank of America Oracle

Organizational Charts Airline Operations Ground support equipment Maintenance Ground Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications Dispatching Management science Finance & Accounting Accounting Payables Receivables General Ledger Finance Cash control International exchange rates Marketing Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising

Organizational Charts Manufacturing Operations Facilities: Construction:maintenance Production & inventory control Scheduling: materials control Supply-chain management Manufacturing Tooling, fabrication,assembly Design Product development and design Detailed product specifications Industrial engineering Efficient use of machines, space, and personnel Process analysis Development and installation of production tools and equipment Finance & Accounting Disbursements/credits Receivables Payables General ledger Funds Management Money market International exchange Capital requirements Stock issue Bond issues and recall Marketing Sales promotions Advertising Sales Market research

Organizational Charts Commercial Bank Operations Teller Scheduling Check Clearing Transactions processing Facilities design/layout Vault operations Maintenance Security Finance Investments Security Real Estate Accounting Auditing Marketing Loans Commercial Industrial Financial Personal Mortgage Trust Department

Characteristics of Service Operations Intangible product Produced & consumed at same time Often unique High customer interaction Inconsistent demand Difficult to inventory Quality is difficult to measure Site of facility is important for customer contact Often difficult to automate

Why Study OM? OM is one of three major functions (marketing, finance, and operations) of any organization OM plays a crucial role in managing organizations effectively and efficiently, improving quality, increasing productivity, and reducing costs We want (and need) to know how goods and services are produced and managed OM will help you to better understand and manage other functions in organizations (marketing, finance, accounting, sales, human resources, purchasing, etc.)

The Role of OM during Business Turbulence

The Hard Rock Cafe First opened in 1971 Now – 110 restaurants in over 40 countries Rock music memorabilia Creates value in the form of good food and entertainment 3,500 + custom meals per day How does an item get on the menu? Role of the Operations Manager

Top Management’s Goal Profit Market Share Design new product quickly Achieve sustainable competitive advantages

Customer’s Requirements Quality Price Lead time (responsiveness) Flexibility Service What can a firm get after satisfying customer’s needs?

Business Mission and Operations Strategy Operations strategy is derived from the organization mission. Mission - where you are going Provides boundaries & focus for a company’s vision and represents the direction for the whole company to satisfy customer's needs Strategy - how you can get there Action plans to achieve the mission Company has overall business strategies and each functional area also has strategies

Sample Mission - Merck The mission of Merck is to provide society with superior products and services - innovations and solutions that improve the quality of life and satisfy customer needs - to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return

Mission of the Hard Rock Café To spread the spirit of Rock ‘n’ Roll by delivering an exceptional entertainment and dining experience. We are committed to being an important, contributing member of our community and offering the Hard Rock family a fun, healthy, and nurturing work environment while ensuring our long-term success.

Strategy Process Marketing Decisions Operations Decisions Fin./Acct. Decisions Company Mission Business Strategy Functional Area Functional Area Strategies

Webvan’s Mission and Operations Strategies Mission: Change the way how people do grocery shopping in the Internet era Operations strategies: introduce the service to 200 cities in 30 states within 3 years. In retrospect : Understand how to evaluate the consistency between a company’s mission and operations strategies is important

Notes on Business Mission and Operations Strategy Mission communicates and impress potential shareholders Mission presents vision to employees in different functions Mission provides the direction in which the strategy is designed to achieve. Strategies are specific and executable plans usually develop and known only by senior managers Operations strategies usually tie to the 10 OM decisions Similar strategy can be applied to different missions

Concepts for Developing Operations Strategies Exploit external opportunities and internal strengths Neutralize threat from competitors and avoid existing weaknesses Three concepts or options: Differentiation (unique or better) Cost leadership (cheaper) Quick response (flexible or responsive)

Advantage through Operations Competing on differentiation Uniqueness - can go beyond both the physical characteristics and service attributes to encompass everything that impacts customer’s perception of value. A company can differentiate from other competitors on the basis of superb quality, new products or services, product/service features, product service, etc.

Advantage through Operations Competing on cost Maximum value as defined by customer with the lowest possible cost Does not imply low value or low quality Competing on quick, flexible, and reliable Response Requires institutionalization within firm of ability to respond

Combination of Three Concepts Sound OM strategies usually include more than one strategic concept or option. The key is to make sure the secondary concept in the strategies will not conflict with the primary concept Achieve Differentiation , Low Cost , and Response via 10 OM decisions

Ten Critical Decisions Service, product design…………….. Quality management………………… Process, capacity design………….. Location ………….………………… Layout design ……………………….. Human resources, job design…….. Supply-chain management………… Inventory management ……………. Scheduling ……………………… Maintenance ……………………. Ch. 5 Ch. 6, 6S Ch. 7, 7S Ch. 8 Ch. 9 Ch. 10, 10S Ch. 11,11s Ch. 12, 14, 16 Ch. 3, 13, 15 Ch. 17

Strategic Decisions in OM (Designing Operations) Design of Goods and Services (from new aircraft to wrapping paper for Taco) What product or service should we offer? How to design these products and services? Quality Who is responsible for quality? How do we define and improve quality? Design Process and Capacity What processes will the products require and in what order? What equipment and technology is best for the processes?

Strategic Decisions in OM (Designing Operations) Location Where should we put the facilities (in a global view) On what criteria should we base for location decision Layout Design (e.g. semiconductor fab) How should we arrange the facility? How large a facility is required? Human Resources and Job Design (e.g. design course) How do we provide a reasonable work environment? How much can we expect our employees to produce?

Strategic Decisions in OM (Managing Operations) Supply Chain Management Should we make or buy this item? Who are our good suppliers and how many should we have? How to develop and deliver a product on-time? Inventory, Material Requirements Planning, Just-in-Time How much inventory of each item should we have? When do we re-order? What’s the tradeoffs? What is the best inventory schedule?

Strategic Decisions in OM (Managing Operations) Immediate, short term, and master scheduling How many employees do we need to schedule on a daily basis? What is best way to complete a job or project? What is the shortest time and lowest cost to accomplish a job? (e.g. staff scheduling for check in counters) Maintenance (machine and other resources) Who is responsible for maintenance? How to organize, schedule, and control maintenance?

Jobs in Operations Management Technology/methods Facilities/space utilization Strategic issues (e.g. technology selection) Response time People/team development Customer service Quality Cost reduction Inventory reduction Productivity improvement (e.g. Six Sigma)

Significant Events in Operations Management

The Heritage of Operations Management Division of labor (Adam Smith 1776 and Charles Babbage 1852) Standardized parts (Whitney 1800) Scientific Management (Taylor 1881) Coordinated assembly line (Ford/Sorenson/Avery 1913) Gantt charts (Gantt 1916) Motion study (Frank and Lillian Gilbreth 1922 Quality control (Shewhart 1924; Deming 1950) Computer (Atanasoff 1938) CPM/PERT (DuPont 1957)

The Heritage of Operations Management - Continued Material requirements planning (Orlicky 1960) Computer aided design (CAD 1970) Flexible manufacturing system (FMS 1975) Baldrige Quality Awards (1980) Computer integrated manufacturing (1990) Globalization(1992) Internet (1995)

LEVEL MANUFACTURING SERVICE ___________________________________________________________________ Upper V.P. of Manufacturing V.P. of Operations (airline) Regional Manager of Chief Administrator (hospital) Manufacturing Middle Plant Manager Store Manager Program Manager Facilities Manager (warehouse) Operations Manager Branch Manager (bank) Production Manager Materials Manager Quality Manager Lower Department Supervisor Operations Manager (bank) Foreman Department Supervisor Team Leader (insurance company) Staff Production Scheduler Procedures Analyst Inventory Analyst Purchasing Agent Quality Specialist Inspector Materials Specialist Customer Service Rep. Buyer/Planner

Productivity Measurement Measure of process improvement Represents output relative to input Labor Productivity Overall productivity (efficiency): Productivity growth improves standards of living Productivity increased in U.S. at a 2.5% annual rate between 1994 and 2004.

Reasons for Operating Globally TANGIBLE Reduce costs (labor, taxes, tariffs, etc.) Reduce risks (foreign exchange, etc.) Improve supply chain Provide better goods and services Attract new markets Learn to improve operations Attract and retain global talent INTANGIBLE

Examples of Global Operations Boeing - both its sales and subsystem production are world-wide Benetton - moves inventory to stores around the world faster than its competitors Sony - purchases components from suppliers in Thailand, Malaysia, etc. General Motors - simultaneously building four similar plants in Argentine, Poland, China, and Thailand so that they can learn from each other and drive down cost while increasing quality

Evolution of Komatsu’s Global Strategy 1960s – use international licensing to augment product line and improve quality 1970s – build export market, reduce cost, and set global service departments 1980s – start to manufacture outside of Japan due to strong yen 1990s – improve quality, reduce cost, use new technologies 2000s – use joint ventures to extend global OM

Issues in Global Service Operations For example, airline, fast food chain, banking, accounting, consulting, semiconductor foundry Capacity planning : due to difficult to set inventory Location planning : global presence but under limited resources Facility design and layout : to incorporate market or culture differences Scheduling : lead time and time difference increase complexity

Trade and Tariffs Maquiladoras - Mexican factories located along the U.S.-Mexico border that receive preferential tariff treatment WTO – World trade Organization has helped reduce tariffs from 40% in 1940 to 3% in 1995 NAFTA - a free trade agreement between Canada, Mexico, and the United States GATT, APEC, SEATO, MERCOSUR -international treaties that help promote world trade by lowering barriers to the free flow of goods across borders

Global Integration of Operations International strategy - engages in cross-border transactions Multidomestic strategy- has extensive involvement in international business, owning or controlling facilities in more than one country Global strategy - integrates operations from different countries, and views world as a single marketplace Transnational strategy - seeks to combine the benefits of global scale efficiencies with the benefits of local responsiveness

Considerations in Global Operations Global product design Integrate different technology and expertise Overcome social and cultural differences that affect customer’s needs Use modularized design to defer the differentiation Global process design and technology Information technology enables management of integrated, globally dispersed operation Production, purchasing, human resource, and financial planning

Considerations in Global Operations Global factory location analysis (long term planning) Cost advantage and risk control (e.g. exchange rates) Incentives or import restrictions from foreign government Productivity of workers and product liability laws Availability of raw materials and reduces time-to-market Impact of culture and ethics Concerns about globalization including third-world debt, environment damage, child labor, sweat factory, and so on Underlying question: Who will benefit from globalization?

Minit-Lube Inc Questions 1. What constitutes the mission of Minit-Lube. 2. How does the Minit-Lube operations strategy provide competitive advantage? Answer this question by evaluating how Minit-Lube’s traditional competitors perform the 10 decisions of operations management vs. how Minute-Lube performs them. 3. Is it likely that Minit-Lube has increased productivity over their more traditional competitors? Why? How would you measure productivity in this industry?

Issues in Minit-Lube Inc Type of product: goods vs. service Mission statement What’s Minit-lube’s operations strategy? How to create or maintain the sustainable advantage through the 10 OM decisions What are the competitors’ possible missions, advantages, and strategies/decisions

Competition Analysis Who are direct competitors? Who are potential entrants? Identify all competitor’s competitive advantages Analyze competitor’s operations strategies and 10 OM decisions Verify that Minit-Lube’s strategies are sustainable and can support its mission

Strength and Opportunity vs. Weakness and Threat Focused product line Economies of scale (achieved by franchise chain) on training and material purchasing Lower overhead investment than traditional garages Clean, friendly, and unified product image Imitation due to low entry barrier Inventory and technique challenges for serving multi-brands and models Limits (e.g.warrantee) imposed by dealer Operations are run by individual participant Certain parts are controlled by competitors

Mission Statement and Potential Competitive Advantage For a franchise chain, it is important to use mission statement to communicate parent company’s vision and to highlight the direction for the whole organization Minit-Lube may need to compete on all three dimensions but with different weights ( e.g. differentiation > response/flexibility > cost )

10 Strategic Operations Decisions in Minit-Lube Inc Goods and service design : define product line based on the competitive advantage Quality : set detail operations guide lines and standards to ensure the customer’s satisfaction Process and capacity design : select technology to optimize efficiency and cost; arrange resources and capital commitments with participants Layout design : to maximize throughput, minimize customer’s waiting, remove bottleneck Location selection : convenience vs. rent

10 Strategic Operations Decisions in Minit-Lube Inc Human resources and job design : develop training and evaluation system to unify the product quality delivered by each franchise Supply chain management : make or buy decisions; focus on quality and JIT Inventory : different policies for common parts and genuine parts Scheduling : identify demand patterns to optimize human resource and facility utilization Maintenance : for equipment and environment

Mission, Strategy and Ten OM Decisions in Kaiser Permanent’s New Facility Mission statement Define Kaiser’s overall strategy when establish new facility Develop and address 10 OM decision for Kaiser’s decision makers

10 Strategic OM Decisions in Kaiser’s New Hospital Goods and service design Quality Process and capacity design Layout design Location selection Human resources and job design Supply chain management Inventory Scheduling Maintenance

Introduction

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Introduction