MGMT 707 Operations Management
Break Even case
Jana and Marla, two recent college graduates, have decided to open their own
copy-service business on a part-time basis. They estimate that their annual
fixed costs are $32,000 and their average variable costs for each copy sold
at $0.03. They expect their selling price to average $0.07 per copy.
A Draw the break-even chart for their business.
B What is their break-even point, in number of copies and in dollars?
C After their 1st year of operations, in which they generated $84,000 in
revenues, Jana and Marla decide to pay themselves $5,000 each per year in
salaries. What do their annual sales have to be in the second year if they
want to make the same amount of profit as they did in their 1st year.
Hint: A: use 1,000,000 copies to determine the high end point.
B: Just multiply the number of copies by $0.07 to get the dollar amount.
C: #1, calculate the profit they made in year one.
#2, add profit from #1 to fixed costs.
#3, treat salaries as fixed costs.
Ellisson Seafood Company
DECISION TREE Assignment
Ellisson Seafood Company ships fresh seafood to customers in the local area. The logistics manager has developed 3 alternatives to ship the seafood.
Part A
#1 Each time a shipment is ready, call a common carrier. While there is no fixed costs the variable cost per shipment is $750.
#2 Enter into a contract with a common carrier. While the variable cost would be $300 per shipment, the fixed cost would be $5,000 per year.
#3 Lease their own refrigerated trucks. The fixed cost would be $21,000 per year and the variable costs would be $50 per shipment.
Now Ellisson does not know what the number of shipment will be per year. But a review of past years history provided the following information:
Part B
Ellisson Seafood does not know how many shipments there will be per year. However an analysis of the previous years’ data revealed the following:
Demand |
Shipments per year |
Probability |
Low |
30 |
25% |
Medium |
50 |
60% |
High |
80 |
15% |
Question: Given the costs and probability, which option should Ellisson select?
A payout table and a decision tree are required for this assignment.
Hint: Decision tree has 3 main branches each with 3 branches of their own. The payout table will have 9 columns; Carrier options, # of shipments, cost per shipment, fixed annual cost, per shipment cost total per year, combined total costs, % probability, decision cost and final weighted costs.
Assignment: Dell Computer – Make to Order (MTO), Make to Stock (MTS) & Assemble to Order (ATO)
1. Dell Computer’s Business Model was ATO for small orders; mostly for students and/or home use and MTO for large clients. Please define each process focusing on its advantages and disadvantages for Dell.
2. Dell’s competitors have been successful in taking market share away from Dell over the last few years. Dell has since entered into marketing agreements with several large retailers to sell several specific models of their computers. Most notably with Wal-Mart and Best Buy among others. Again please define MTS that Dell’s is using to build these computers. Again focusing on the advantages and disadvantages for Dell.
3. What problems can you foresee for Dell in mixing different types of processes onto the manufacturing floor?
GRADUATE SCHOOL |
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MGMT 707 OPERATIONS STRATEGY |
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FORECASTING ASSIGNMENT SUMM 1, 2016 |
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DYNASOL, A ACTIVE SOLAR WATER HEATING EQUIPMENT MANUFACTURER |
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Dynasol is in a rapidly growing and highly competitive field of Solar Water Heating. |
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It needs a forecast for based on their sales history and on the total solar heating market sales history |
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The forecast is needed as Dynasol is at manufacturing capacity and needs information to determine how much to expand. |
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The assignment is to develop a 6 month forecast for their sales and for the total market sales. |
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DynaSol |
Total Market |
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Month |
Sales in Units |
Sales in units |
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2014 |
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September |
24 |
223 |
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October |
28 |
228 |
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November |
31 |
2 30 |
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December |
32 |
231 |
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2015 |
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January |
30 |
229 |
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February |
35 |
235 |
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March |
39 |
2 40 |
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April |
40 |
265 |
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May |
43 |
281 |
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June |
47 |
298 |
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July |
51 |
314 |
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August |
54 |
354 |
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59 |
389 |
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62 |
421 |
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67 |
466 |
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69 |
501 |
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2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
74 |
529 |
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79 |
573 |
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Hint #1 a simple moving average will not work. Moving Average methods can only forecast for the next time period. |
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Hint #2 a trend analysis can work |
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Hint #3 a graphic analysis can work. |
FORECASTING ASSIGNMENT |
The Data: |
INSTRUCTIONS: |
There are 2 simple methods to use for this assignment: |
A) A modified trend analysis: |
#1 Determine the average monthly difference in Dynasol’s sales in units. |
#2 Add that difference to Feb. ’16 and repeat until you have the future 6 months data. |
#3 Chart the data (highlight the data, open the “insert tab” in charts select a line chart). |
#4 Does it look like it belongs? |
#5 Repeat the same 4 steps for Total Market. |
B) The graphics approach: |
#1 Use the same data under part A). |
#2 Prepare a chart of the 18 months. |
#3 Take a straight edge and line it up so that it “fits”. |
#4 Do not move the straight edge and extend the line for another 6 months. |
#5 Does It looks like it belongs? |
#6 Repeat the same steps for Total Market. |
???
Sayfa
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17.04.2020, 09:23:05
Sayfa /
The Restwell Scheduling Assignment, #9 on page 244
Use Problem #2 with solution on pages 238-240 as a guide.
SEVENTH EDITION
Operations Management
in the Supply Chain
DECISIONS AND CASES
Roger Schroeder | Susan Meyer Goldstein
Operations
Management in the
Supply Chain
Decisions and Cases
The McGraw-Hill Education Series Operations and Decision Sciences
OPERATIONS MANAGEMENT
Beckman and Rosenfield
Operations Strategy: Competing in the
21st Century
First Edition
Benton
Purchasing and Supply Chain
Management
Third Edition
Bowersox, Closs, and Cooper
Supply Chain Logistics Management
Fifth Edition
Brown and Hyer
Managing Projects: A Team-Based
Approach
Second Edition
Burt, Petcavage, and Pinkerton
Supply Management
Ninth Edition
Cachon and Terwiesch
Operations Management
First Edition
Cachon and Terwiesch
Matching Supply with Demand: An
Introduction to Operations Management
Fourth Edition
Finch
Interactive Models for Operations and
Supply Chain Management
First Edition
Fitzsimmons and Fitzsimmons
Ser
vi
ce Management: Operations,
Strategy, Information Technology
Eighth Edition
Gehrlein
Operations Management Cases
First Edition
Harrison and Samson
Technology Management
First Edition
Hayen
SAP R/3 Enterprise Software: An
Introduction
First Edition
Hill
Manufacturing Strategy:
Text & Cases
Third Edition
Hopp
Supply Chain Science
First Edition
Hopp and Spearman
Factory Physics
Third Edition
Jacobs, Berry, Whybark, and Vollmann
Manufacturing Planning & Control for
Supply Chain Management
Sixth Edition
Jacobs and Chase
Operations and Supply Chain
Management
Fourteenth Edition
Jacobs and Chase
Operations and Supply Chain
Management: The Core
Fourth Edition
Jacobs and Whybark
Why ERP?
First Edition
Johnson, Leenders, and Flynn
Purchasing and Supply
Management
Fifteenth Edition
Larson and Gray
Project Management: The Managerial
Process
Sixth Edition
Schroeder and Goldstein
Operations Management in the Supply
Chain: Decisions and Cases
Seventh Edition
Simchi-Levi, Kaminsky,
and Simchi-Levi
Designing and Managing the
Supply Chain: Concepts, Strategies,
Case Studies
Third Edition
Sterman
Business Dynamics: Systems
Thinking and Modeling for a
Complex World
First Edition
Stevenson
Operations Management
Twelfth Edition
Swink, Melnyk, Cooper,
and Hartley
Managing Operations Across
the Supply Chain
Third Edition
Thomke
Managing Product and Service
Development: Text and Cases
First Edition
Ulrich and Eppinger
Product Design and
Development
Sixth Edition
Zipkin
Foundations of Inventory
Management
First Edition
QUANTITATIVE METHODS AND
MANAGEMENT SCIENCE
Hillier and Hillier
Introduction to Management Science: A
Modeling and Case Studies Approach
with Spreadsheets
Fifth Edition
Stevenson and Ozgur
Introduction to Management Science
with Spreadsheets
First Edition
Operations
Management in the
Supply Chain
Decisions and Cases Seventh Edition
Roger G. Schroeder
Susan Meyer Goldstein
Carlson School of Management
University of Minnesota
OPERATIONS MANAGEMENT IN THE SUPPLY CHAIN: DECISION AND CASES, SEVENTH EDTION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill
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Library of Congress Cataloging-in-Publication Data
Schroeder, Roger G., author. | Goldstein, Susan Meyer, author. |
Operations management in the supply chain : decisions and cases /
Roger G. Schroeder, Susan Meyer Goldstein, Carlson School of Management,
University of Minnesota.
Operations management
Seventh edition. | Dubuque : McGraw-Hill Education, 2016.
LCCN 2016043564 | ISBN 9780077835439 (alk. paper) |
ISBN 0077835433 (alk. paper)
LCSH: Production management. | Production management—Case studies. |
Decision making.
LCC TS155 .S334 2016 | DDC 658.5—dc23 LC record available at https://lccn.loc.gov/2016043564
The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does
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guarantee the accuracy of the information presented at these sites.
mheducation.com/highered
To our families, whose encouragement and love we appreciate
—Roger G. Schroeder
—Susan Meyer Goldstein
About the Authors
Roger G. Schroeder
is the Frank A. Donaldson Chair in Operations Management Emeritus at the Curtis L.
Carlson School of Management, University of Minnesota. He received a B.S. degree in
Industrial Engineering with high distinction and a MSIE degree from the University of
Minnesota, and a Ph.D. from Northwestern University. He held positions in the Carlson
School of Management as Director of the Ph.D. program, Chair of the Operations and
Management Science Department, and Co-Director of the Joseph M. Juran Center for
Leadership in Quality. Professor Schroeder has obtained research grants from the National
Science Foundation, the Ford Foundation, and the American Production and Inventory
Control Society. His research is in the areas of quality management, operations strategy,
and high-performance manufacturing, and he is among the most widely published and
cited researchers in the field of operations management. He has been selected as a member
of the University of Minnesota Academy of Distinguished Teachers and is a recipient of
the Morse Award for outstanding teaching. Professor Schroeder received the lifetime
achievement award in operations management from the Academy of Management, and he
is a Fellow of the Decision Sciences Institute and a Fellow of the Production and Opera-
tions Management Society. Professor Schroeder has consulted widely with numerous orga-
nizations, including 3M, Honeywell, General Mills, Motorola, Golden Valley Foods, and
Prudential Life Insurance Company.
Susan Meyer Goldstein
is Associate Professor in the Supply Chain and Operations Department at the Curtis L.
Carlson School of Management, University of Minnesota. She earned a B.S. degree in
Genetics and Cell Biology and an M.B.A. at the University of Minnesota and worked in the
health care industry for several years. She later obtained a Ph.D. in operations management
from Fisher College of Business at The Ohio State University. She has served on the
faculty at the University of Minnesota since 1998 and was a Visiting Professor at the Olin
Business School at Washington University in St. Louis for two years. Her current research
investigates the link between service process design and process performance, and she is
currently working with a Minnesota hospital that has been achieving one of the lowest
heart attack mortality rates in the United States. She is also interested in issues related to
aging service workers, operations strategy, and service quality. Her research has been pub-
lished in Decision Sciences, Journal of Operations Management, and Production and
Operations Management, among others. She is Associate Editor at Decision Science
Journal, Quality Management Journal, and Service Industries Journal and serves on the
editorial boards of many operations and service journals. She is the recipient of several
research awards and research grants, and received the 2011 Carlson School of Management
Teaching Award.
vi
vii
Preface
FEATURES
Operations management is an exciting and vital field in today’s complex business world.
Therefore, students in both MBA and undergraduate courses have an urgent need to under-
stand operations—an essential function in every business.
This textbook on operations management in the supply chain emphasizes decision mak-
ing in operations with a supply chain orientation. The text provides materials of interest to
general business students and operations and supply chain management majors. By stress-
ing cross-functional decision making, the text provides a unique and current business per-
spective for all students. This is the first text to incorporate cross-functional decision
making in every chapter.
A unique decision framework organizes the material by grouping decisions into five
major categories: process, quality, capacity, inventory, and supply chain. This framework is
intended to make it easy for students to understand the decision role and responsibilities of
operations and supply chain management in relation to functions such as marketing and
finance. See the illustration below. The text also provides a balanced treatment of both
service and manufacturing firms. We continue to emphasize operations in the supply chain
with new chapters on sourcing and logistics.
The most current knowledge is incorporated, including global operations, supply chain
management, e-operations, service blueprinting, competency-based strategy, Six Sigma, lean
systems, 3D printing, sustainability, supply chain risk, and mass customization. Complete
coverage is also provided on traditional topics, including process design, service systems,
quality management, ERP, inventory control, and scheduling.
While covering the concepts of operations and supply chain management in 18 chapters,
the book also provides 18 case studies. The cases are intended to strengthen problem for-
mulation skills and illustrate the concepts presented in the text. Long and short case studies
are included. The cases are not just large problems or examples; rather, they are substantial
management case studies, including some from the Northwestern, Sheffield, Cranfield,
and The Case Centre collections.
The softcover edition with fewer pages than most introductory books covers all the
essentials students need to know about operations management in the supply chain, leaving
out only superfluous and tangential topics. By limiting the size of the book, we have
condensed the material to the basics. The book is also available for the first time in digital
formats in Connect and LearnSmart versions.
Decision-making
framework for
operations in the
supply chain. Process
Quality
Capacity
Inventory
Supply
Chain
Decisions
Human
Resources Finance
Marketing
Accounting
Information
Systems
Suppliers Customers
viii Preface
This book is ideal for regular operations management courses and also case courses and
modular courses. It is particularly useful for those who desire a cross-functional and
decision-making perspective that reaches across the supply chain. Instructors can easily
supplement the text with their own cases, readings, or course materials as desired.
The Connect Library and Instructor Resources contain 20 Excel templates designed to
assist in solving problems at the end of chapters and the case studies. These resources also
contain technical chapters on linear programming, simulation, transportation method, and
queuing, which can be assigned by the instructor, if desired. The resources have Power-
Point slides, solutions manual, the test bank, and web links to companies cited in the Stu-
dent Internet Exercises in the text. Access to these web resources can be obtained from
your McGraw-Hill sales representative or directly in the Connect Library.
A number of pedagogical features are contained in this book.
∙ Operations Leader boxes are included in each chapter to illustrate current practices
being implemented by leading firms.
∙ Each chapter contains at least three Student Internet Exercises. These exercises allow
for extended learning about concepts discussed in the chapter.
∙ Points of cross-functional emphasis are noted in each chapter by a special symbol—a
handshake. This highlights the locations of cross-functional aspects of operations
decisions.
∙ Solved problems are included at the end of quantitative chapters to provide addi-
tional examples for students.
∙ Excel spreadsheets are keyed to specific problems at the end of chapters.
KEY CHANGES IN THE SEVENTH EDITION
This book is known for its decision orientation and case studies. We have strengthened the
decision-making framework by addressing new decisions in sourcing, logistics, sustain-
ability, and global supply chains. We also added new cases to address these decisions.
1. Supply Chain Management. This edition added a new section on Supply
Chain. It contains two new chapters on Sourcing and Global Logistics. The Sourcing
chapter contains material on sourcing goals, outsourcing, offshoring, reshoring, supply
base optimization, the purchasing cycle, and scorecard weighting. The Global Logis-
tics chapter contains material on the role of logistics, transportation modes, distribu-
tion centers, logistics networks, location, third-party logistics, and logistics strategy. In
addition, the Supply Chain Management chapter was moved to this section and up-
dated to add a new section on supply chain risk and another new section on supply
chain sustainability. This edition now has the latest and best supply chain material
available.
2. Sustainability. More emphasis is given to sustainability. It is now covered in the chapters
on The Operations Function, Operations and Supply Chain Strategy, Process Selection, and
Supply Chain Management. A new case study is added on Murphy Warehouse: Sustainable
Logistics.
3. Global. More material is provided on global operations and supply chains. With the
addition of the Sourcing and Global Logistics chapters, global emphasis now moves
beyond operations to the entire supply chain. New material on outsourcing, offshoring, and
managing global supply chains has been added. New cases on global sourcing, global plant
location, and global logistics are added.
e celx
Preface ix
4. Other Additions. We have added materials on lean Six Sigma, 3D Printing, big
data, analytics, ethics in sourcing, and disaster logistics.
5. Digital Versions. Digital versions of the text in McGraw-Hill’s Connect and
LearnSmart have been developed. The Connect version provides a complete course man-
agement system for the instructor and pdf content for students. It can be used to customize
the course by selecting learning objectives for course coverage, using the test bank for
multiple choice questions, automatic grading for selected quantitative problems, and access
to all instructor support materials. The LearnSmart version provides feedback to students
via multiple choice probes for each learning objective. The student is directed to return to
readings where retention is weak.
6. Cases. Eighteen case studies are provided including cases from The Case Centre,
and Northwestern, Sheffield, and Cranfield Universities. Existing cases have been revised
to add current information. Ten new cases are added:
Altimus Brands: Managing Procurement Risk;
Murphy Warehouse Company: Sustainable Logistics;
Polaris Industries Inc.—Global Plant Location;
Shelter Box: A Decade of Disaster Relief;
The Westerfield Physician Practice: Value Stream Mapping;
Journey to Perfect: Mayo Clinic and the Path to Quality;
The Evolution to Lean Six Sigma in 3M, Inc.;
Sage Hill Above Onion Creek: Focusing on Service Process and Qualilty;
Toledo Custom Manufacturing: Quality Control;
Best Homes: Forecasting
INSTRUCTOR RESOURCES
Instructor Resource Center www.mhhe.com/schroeder7e
The Instructor Resource Center provides complete materials for study and review. At this
book’s website, instructors have access to teaching support such as electronic files of the
ancillary materials: Solutions Manual, Technical Chapters, Excel Spreadsheets, Power-
Point Lecture Slides, Digital Image Library, and Test Bank.
Solutions Manual. Prepared by the authors, this manual contains solutions to all the
end-of-chapter problems and cases.
Test Bank. The Test Bank includes true/false, multiple-choice, and discussion questions/
problems at varying levels of difficulty.
EZ Test Online. All test bank questions are available in EZ Test Online, a flexible elec-
tronic testing program. The answers to all questions are given, along with a rating of the
level of difficulty, chapter learning objective met, Bloom’s taxonomy question type, and
the AACSB knowledge category.
PowerPoint Lecture Slides. The PowerPoint slides draw on the highlights of each chapter
and provide an opportunity for the instructor to emphasize the key concepts in class discussions.
Digital Image Library. All the figures in the book are included for insertion in Power-
Point slides or for class discussion.
Excel Spreadsheets. Twenty Excel Spreadsheets are provided for students to solve des-
ignated problems at the end of chapters.
Technical Chapters. Four technical chapters are provided for additional technical mate-
rial on linear programming, transportation method, simulation and waiting lines.
Operations Management Video Series
The operations management video series, free to text adopters, includes professionally de-
veloped videos to help students fully understand the content and terminology within
Operations and Supply Chain Management. These videos will be both relevant and up-to-
date in order to be effectively utilized. Each video will come with a series of questions to
assess the students’ knowledge of the material.
TECHNOLOGY
McGraw-Hill Connect® Operations Management
McGraw-Hill Connect® Operations Management is an online assignment and assessment
solution that connects students with the tools and resources they’ll need to achieve success
through faster learning, higher retention, and more efficient studying. It provides instructors with
tools to quickly pick content and assignments according to the topics they want to emphasize.
Online Assignments. Connect Operations Management helps students learn more efficiently
by providing practice material and feedback when they are needed. Connect grades homework
automatically and provides feedback on any questions that students may have missed.
LearnSmart. LearnSmart adaptive self-study technology with Connect Operations
Management helps students make the best use of their study time. LearnSmart provides
a seamless combination of practice, assessment, and remediation for every concept in the
textbook. LearnSmart’s intelligent software adapts to students by supplying questions on a
new concept when students are ready to learn it. With LearnSmart students will spend less
time on topics they understand and instead focus on the topics they need to master.
Simple Assignment Management and Smart Grading. When it comes to studying,
time is precious. Connect Operations Management helps students learn more efficiently by
providing feedback and practice material when they need it, where they need it. When it
comes to teaching, your time also is precious. The grading function enables you to:
∙ Have assignments scored automatically, giving students immediate feedback on their
work and side-by-side comparisons with correct answers.
∙ Access and review each response; manually change grades or leave comments for stu-
dents to review.
Student Reporting. Connect Operations Management keeps instructors informed about
how each student, section, and class is performing, allowing for more productive use of
lecture and office hours. The progress-tracking function enables you to:
∙ View scored work immediately (Add Assignment Results Screen) and track individual
or group performance with assignment and grade reports.
∙ Access an instant view of student or class performance relative to learning objectives.
∙ Collect data and generate reports required by many accreditation organizations, such
as AACSB.
x Preface
Instructor Library. The Connect Operations Management Instructor Library is your
repository for additional resources to improve student engagement in and out of class.
You can select and use any asset that enhances your lecture. The Connect Operations
Management Instructor Library includes:
∙ eBook
∙ PowerPoint presentations
∙ Test Bank
∙ Instructor’s Solutions Manual
∙ Digital Image Library
∙ Excel Spreadsheets
∙ Technical Chapters
Integrated Media-Rich eBook. An integrated media-rich eBook allows students to
access media in context with each chapter. Students can highlight, take notes, and access
shared instructor highlights/notes to learn the course material.
Dynamic Links. Dynamic links between the problems or questions you assign to your
students and the location in the eBook where that problem or question is covered.
Tegrity Campus: Lectures 24/7
Tegrity Campus is a service that makes class time available 24/7 by automatically cap-
turing every lecture in a searchable format for students to review when they study and
complete assignments. With a simple one-click start-and-stop process, you capture all
computer screens and corresponding audio. Students can replay any part of any class with
easy-to-use browser-based viewing on a PC or Mac.
Educators know that the more students can see, hear, and experience class resources,
the better they learn. In fact, studies prove it. With Tegrity Campus, students quickly recall
key moments by using Tegrity Campus’s unique search feature. This search helps stu-
dents efficiently find what they need, when they need it, across an entire semester of class
recordings. Help turn all your students’ study time into learning moments immediately
supported by your lecture. To learn more about Tegrity, watch a two-minute Flash demo at
http://tegritycampus.mhhe.com.
Online Course Management
No matter what online course management system you use (WebCT, BlackBoard, or eCollege),
we have a course content ePack available for your course. Our new ePacks are specifically
designed to make it easy for students to navigate and access content online. For help, our online
Digital Learning Consultants are ready to assist you with your online course needs. They pro-
vide training and will answer any questions you have throughout the life of your adoption.
McGraw-Hill Higher Education and Blackboard have teamed up. What does this mean for you?
1. Single sign-on. Now you and your students can access McGraw-Hill’s Connect and
Create right from within your Blackboard course-all with one single sign-on.
2. Deep integration of content and tools. You get a single sign-on with Connect and Create,
and you also get integration of McGraw-Hill content and content engines right into Black-
board. Whether you’re choosing a book for your course or building Connect assignments,
all the tools you need are right where you want them-inside of Blackboard.
3. One gradebook. Keeping several gradebooks and manually synchronizing grades into
Blackboard is no longer necessary. When a student completes an integrated Connect
Preface xi
assignment, the grade for that assignment automatically (and instantly) feeds your
Blackboard grade center.
4. A solution for everyone. Whether your institution is already using Blackboard or you
just want to try Blackboard on your own, we have a solution for you. McGraw-Hill and
Blackboard can now offer you easy access to industry-leading technology and content,
whether your campus hosts it, or we do. Be sure to ask your local McGraw-Hill repre-
sentative for details.
ASSURANCE OF LEARNING READY
Many educational institutions today are focused on the notion of assurance of learning, an
important element of some accreditation standards. Operations Management in the Supply
Chain, 7e is designed specifically to support your assurance of learning in initiatives with
a simple yet powerful solution.
Instructors can use Connect to easily query for learning outcomes/objectives that di-
rectly relate to the learning objectives of the course. You can then use the reporting fea-
tures of Connect to aggregate student results in similar fashion, making the collection and
presentation of assurance of learning data simple and easy.
AACSB STATEMENT
McGraw-Hill Global Education is a proud corporate member of AACSB International.
Understanding the importance and value of AACSB accreditation, the authors of Opera-
tions Management in the Supply Chain, 7e have sought to recognize the curricula guide-
lines detailed in the AACSB standards for business accreditation. By connecting questions
in the test bank and end-of-chapter material to the general knowledge and skill guidelines
found in the AACSB standards.
It is important to note that the statements contained in Operations Management in the
Supply Chain, 7e are provided only as a guide for the users of this textbook. The AACSB
leaves content coverage and assessment within the purview of individual schools, the mis-
sion of the school, and the faculty. While Operations Management in the Supply Chain, 7e
and the teaching package make no claim of any specific AACSB qualification or evalua-
tion, we have within Operations Management in the Supply Chain, 7e labeled selected
questions according to the general knowledge and skills areas.
MCGRAW-HILL CUSTOMER CARE CONTACT INFORMATION
At McGraw-Hill, we understand that getting the most from new technology can be chal-
lenging. That’s why our services don’t stop after you purchase our products. You can
e-mail our Product Specialists 24 hours a day to get product-training online. Or you can
search our knowledge bank of Frequently Asked Questions on our support website. For
Customer Support, call 800-331-5094, e-mail hmsupport@mcgraw-hill.com, or visit www.
mhhe.com/support. One of our Technical Support Analysts will be able to assist you in a
timely fashion.
xii Preface
The authors would also like to thank the staff at McGraw-Hill Education who had a direct
hand in the editing and production of the text.
We would like to thank our colleagues at the University of Minnesota who listened to our
ideas and provided suggestions for book improvement. Additional thanks go to Doug and
Letty Chard, who diligently and carefully prepared the index. We would also like to thank
Tom Buchner of the University of Minnesota who carefully prepared the test bank ques-
tions. Our thanks to Ed Pappanastos of Troy University for constructing the Connect solu-
tions to problems. Finally, we thank our families for their patience and perseverance during
the many months of writing and editing. Without their support and encouragement this
textbook would not have been possible.
Roger G. Schroeder
Susan Meyer Goldstein
Tobias Stapleton
University of Massachusetts—Dartmouth
Richard C. Yokeley
Forsyth Technical Community College
Ralph James Rich
Marian University
Rajkumar Kempaiah
College of Mount Saint Vincent
Thomas Buchner
University of Minnesota
Chris D. Bellamy
Eastern University
Pradip K. Shukla
Chapman University
Marvin E. Gonzalez
College of Charleston
Gerald T. Pineault
Lasell College
Jeffrey William Fahrenwald
Rockford University
William M. Penn
Belhaven University
Jeryl L. Nelson
Wayne State College
Clarke W. Higgins
Chapman University
Jay Zortman
Eastern University
Deborah L. Piscitiello
University of Jamestown
Charles Vincent Nemer
Metropolitan State University
Kenneth E. Murphy
Chapman University
Kathy Schaefer
Southwest Minnesota State
University
Nancy Levenburg
Grand Valley State University
Tyler M. Moore
Marian University
Steven Williams
Marian University
Preface xiii
ACKNOWLEDGMENTS
The authors would like to acknowledge the many individuals who have assisted with this
book. Special thanks go to the reviewers for this edition:
Required=
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xvi
Brief Table of
Contents
About the Authors vi
Preface vii
PART ONE
Introduction 1
1 The Operations Function
2
2 Operations and Supply Chain
Strategy
18
3 Product Design 36
PART TWO
Process Design 51
4 Process Selection 52
5 Service Process Design 73
6 Process-Flow Analysis 92
7 Lean Thinking and Lean
Systems 113
PART THREE
Quality 137
8 Managing Quality 138
9 Quality Control and
Improvement 159
PART FOUR
Capacity and Scheduling 185
10 Forecasting 186
Supplement: Advanced
Methods 211
11 Capacity Planning 216
12 Scheduling Operations 246
13 Project Planning and Scheduling 263
PART FIVE
Inventory 285
14 Independent Demand Inventory 286
Supplement: Advanced Models 314
15 Materials Requirements Planning
and ERP 317
PART SIX
Supply Chain Decisions 341
16 Supply Chain Management 342
17 Sourcing 367
18 Global Logistics 386
PART SEVEN
Case Studies 409
APPENDIXES 485
INDEX 487
ACRONYMNS 501
Technical Chapters available in the Instructor’s
Resource Library in Connect
Waiting Lines
Simulation
Transportation Method
Linear Programming
xvii
Contents
About the Authors vi
Preface vii
PART ONE
INTRODUCTION 1
Chapter 1
The Operations Function 2
1.1 Why Study Operations Management? 3
1.2 Definition of Operations Management
and Supply Chains 4
1.3 Decisions at Pizza U.S.A. 7
1.4 Operations Decisions in the Supply
Chain—A Framework 9
1.5 Cross-Functional Decision Making 10
1.6 Operations as a Process 11
1.7 Challenges Facing Operations
and Supply Chain Managers 13
Services 14
Customer-Directed Operations 14
Integration of Decisions Internally and
Externally 14
Environmental Sustainability 14
Globalization of Operations
and the Supply Chain 15
1.8 Key Points and Terms 15
Student Internet Exercises 16
Discussion Questions 17
Chapter 2
Operations and Supply Chain
Strategy 18
2.1 Operations Strategy Model 20
Corporate and Business Strategy 21
Operations Mission 22
Operations Objectives 22
Strategic Decisions 22
Distinctive Competence 24
2.2 Competing with Operations
Objectives 25
2.3 Cross-Functional Strategic Decisions 26
2.4 Distinctive Competence 28
2.5 Global Operations and
Supply Chains 29
2.6 Supply Chain Strategy 30
2.7 Environment and Sustainable
Operations 32
2.8 Key Points and Terms 33
Student Internet Exercises 34
Discussion Questions 34
Chapter 3
Product Design 36
3.1 Strategies for New-Product
Introduction 37
3.2 New-Product Development Process 38
Concept Development 38
Product Design 39
Pilot Production/Testing 39
3.3 Cross-Functional Product Design 40
3.4 Supply Chain Collaboration 42
3.5 Quality Function Deployment 43
Customer Attributes 44
Engineering Characteristics 45
3.6 Modular Design 47
3.7 Key Points and Terms 48
Student Internet Exercises 49
Discussion Questions 49
PART TWO
PROCESS DESIGN 51
Chapter 4
Process Selection 52
4.1 Product-Flow Characteristics 53
4.2 Approaches to Order Fulfillment 58
4.3 Process Selection Decisions 61
4.4 Product-Process Strategy 62
4.5 Focused Operations 64
4.6 Mass Customization 65
4.7 3D Printing and Additive
Manufacturing 67
4.8 Environmental Concerns 68
4.9 Cross-Functional Decision Making 69
4.10 Key Points and Terms 70
Student Internet Exercises 71
Discussion Questions 72
Chapter 5
Service Process Design 73
5.1 Defining Service 74
5.2 Service-Product Bundle 75
5.3 Service Delivery System Matrix 77
5.4 Customer Contact 80
5.5 Service Recovery and Guarantees 82
5.6 Technology and Globalization
of Services 84
5.7 Service Profitability and Employees 87
5.8 Key Points and Terms 89
Student Internet Exercises 90
Discussion Questions 90
Chapter 6
Process-Flow Analysis 92
6.1 Process Thinking 93
6.2 The Process View of Business 94
6.3 Process Flowcharting 95
6.4 Process-Flow Analysis as Asking
Questions 100
6.5 Measuring Process Flows 101
6.6 Measuring Process Flows at Pizza
U.S.A. 103
6.7 Process Redesign 104
6.8 Key Points and Terms 107
Student Internet Exercises 108
Solved Problems 108
Discussion Questions 110
Problems 110
Chapter 7
Lean Thinking and Lean Systems 113
7.1 Evolution of Lean 114
7.2 Lean Tenets 115
Create Value 115
Value Stream 116
Ensure Flow 117
Customer Pull 118
Strive for Perfection 119
Lean Thinking Techniques 119
7.3 Stabilizing the Master
Schedule 120
7.4 Controlling Flow with the Kanban
System 121
7.5 Reducing Setup Time and Lot Sizes 124
7.6 Changing Layout and Maintaining
Equipment 125
7.7 Cross-Training, Rewarding, and Engaging
Workers 126
7.8 Delivering Quality 127
7.9 Changing Relationships with Suppliers 127
7.10 Implementation of Lean 129
7.11 Key Points and Terms 132
Student Internet Exercises 133
Solved Problems 133
Discussion Questions 134
Problems 135
PART THREE
QUALITY 137
Chapter 8
Managing Quality 138
8.1 Quality as Customer Requirements 139
8.2 Product Quality 140
8.3 Service Quality 142
8.4 Quality Planning, Control, and
Improvement 142
8.5 Mistake-Proofing 145
8.6 Ensuring Quality in the Supply Chain 146
8.7 Quality, Cost of Quality, and Financial
Performance 147
8.8 Quality Pioneers 150
W. Edwards Deming 150
Joseph Juran 150
8.9 ISO 9000 Standards 152
8.10 Malcolm Baldrige Award 154
8.11 Why Some Quality Improvement
Efforts Fail 156
8.12 Key Points and Terms 157
Student Internet Exercises 158
Discussion Questions 158
Chapter 9
Quality Control and Improvement 159
9.1 Design of Quality Control Systems 160
9.2 Process Quality Control 163
9.3 Attribute Control Chart 165
9.4 Variables Control Chart 166
9.5 Using Control Charts 167
xviii Contents
9.6 Process Capability 168
9.7 Continuous Improvement 170
9.8 Six Sigma 174
9.9 Lean and Six Sigma 176
9.10 Key Points and Terms 177
Student Internet Exercises 178
Solved Problems 178
Discussion Questions 181
Problems 181
PART FOUR
CAPACITY AND SCHEDULING 185
Chapter 10
Forecasting 186
10.1 Forecasting for Decision Making 188
10.2 Qualitative Forecasting Methods 189
10.3 Time-Series Forecasting 191
10.4 Moving Average 192
10.5 Exponential Smoothing 194
10.6 Forecast Accuracy 197
10.7 Advanced Time-Series
Forecasting 199
10.8 Causal Forecasting Methods 200
10.9 Selecting a Forecasting Method 202
10.10 Collaborative Planning, Forecasting, and
Replenishment 203
10.11 Key Points and Terms 205
Student Internet Exercises 206
Solved Problems 206
Discussion Questions 208
Problems 208
Supplement: Advanced Methods 211
Chapter 11
Capacity Planning 216
11.1 Capacity Defined 217
11.2 Facilities Decisions 219
Amount of Capacity 220
Size of Facilities 221
Timing of Facility Decisions 222
Facility Location 222
Types of Facilities 223
11.3 Sales and Operations Planning
Definition 224
11.4 Cross-Functional Nature
of S&OP 226
11.5 Planning Options 227
11.6 Basic Aggregate Planning
Strategies 229
11.7 Aggregate Planning Costs 230
11.8 Aggregate Planning Example 231
11.9 Key Points and Terms 236
Student Internet Exercises 237
Solved Problems 237
Discussion Questions 242
Problems 242
Chapter 12
Scheduling Operations 246
12.1 Batch Scheduling 247
12.2 Gantt Charts 248
12.3 Finite Capacity Scheduling 251
12.4 Theory of Constraints 253
12.5 Priority Dispatching Rules 254
12.6 Planning and Control Systems 256
12.7 Key Points and Terms 258
Student Internet Exercises 259
Solved Problems 259
Discussion Questions 261
Problems 261
Chapter 13
Project Planning and Scheduling 263
13.1 Objectives and Trade-Offs 264
13.2 Planning and Control in Projects 265
13.3 Scheduling Methods 268
13.4 Constant-Time Networks 269
13.5 CPM Method 274
13.6 Use of Project Management
Concepts 277
13.7 Key Points and Terms 278
Student Internet Exercises 279
Solved Problems 279
Discussion Questions 282
Problems 283
PART FIVE
INVENTORY 285
Chapter 14
Independent Demand Inventory 286
14.1 Definition of Inventory 287
14.2 Purpose of Inventories 289
14.3 Costs of Inventory 290
Contents xix
14.4 Independent versus Dependent
Demand 291
14.5 Economic Order Quantity 292
14.6 Continuous Review System 296
14.7 Periodic Review System 301
14.8 Using P and Q Systems in Practice 304
14.9 Vendor Managed Inventory 306
14.10 ABC Classification of Inventory 306
14.11 Key Points and Terms 308
Student Internet Exercises 309
Solved Problems 309
Discussion Questions 311
Problems 312
Supplement: Advanced Models 314
Chapter 15
Materials Requirements Planning
and ERP 317
15.1 The MRP System 318
15.2 MRP versus Order-Point Systems 320
15.3 Parts Explosion: How an MRP
System Works 321
15.4 MRP System Elements 326
Master Scheduling 326
Bill of Materials (BOM) 327
Inventory Records 327
Capacity Planning 328
Purchasing 328
Shop-Floor Control 329
15.5 Operating an MRP System 329
15.6 The Successful MRP System 330
15.7 Enterprise Resource Planning
Systems 331
15.8 Key Points and Terms 334
Student Internet Exercises 335
Solved Problem 335
Discussion Questions 337
Problems 338
PART SIX
SUPPLY CHAIN DECISIONS 341
Chapter 16
Supply Chain Management 342
16.1 Supply Chain and Supply Chain
Management 343
16.2 Measuring Supply Chain
Performance 347
16.3 Supply Chain Dynamics—The Bullwhip
Effect 349
16.4 Improving Supply Chain Performance 352
16.5 Supply Chain Structural
Improvements 352
16.6 Supply Chain System Improvements 354
16.7 Technology and Supply Chain
Management 356
16.8 Supply Chain Risk and Resilience 358
Analysis of Supply Chain Risk 359
16.9 Sustainability of the Supply Chain 361
16.10 Key Points and Terms 364
Student Internet Exercises 365
Discussion Questions 366
Chapter 17
Sourcing 367
17.1 Importance of Sourcing 368
17.2 Sourcing Goals 369
17.3 Insource or Outsource? 369
Advantages of Outsourcing 370
Disadvantages of Outsourcing 370
Total Cost Analysis 372
17.4 Offshoring 372
The Costs of Offshoring 373
Reshoring 374
17.5 Supply Base Optimization 375
Spend Analysis 375
Total Number of Suppliers 376
Single or Multiple Suppliers 376
17.6 The Purchasing Cycle 377
Internal User-Buyer Interface 378
Sourcing and Make-Buy Decision 378
Find Suppliers 378
Supplier Selection 378
Supplier Relationship
Management 379
17.7 Challenges Facing Purchasing 380
17.8 Key Points and Terms 381
Student Internet Exercises 382
Solved Problems 382
Discussion Questions 384
Problems 384
Chapter 18
Global Logistics 386
18.1 Role of Logistics in Supply Chain
Management 387
xx Contents
18.2 Transportation 389
Transportation Economics 389
Modes of Transportation 390
Selecting the Transportation Mode 392
18.3 Distribution Centers and
Warehousing 394
18.4 Logistics Networks 396
Location 397
Number of Warehouses (Distribution
Centers) 399
18.5 Third-Party Logistics Providers 401
18.6 Logistics Strategy 403
18.7 Key Points and Terms 405
Student Internet Exercises 405
Solved Problems 406
Discussion Questions 407
Problems 407
PART SEVEN
CASE STUDIES 409
Introduction
Operations Strategy at BYD of China,
Electrifying the World’s Automotive
Market 410
Early Supplier Integration in the Design of
the Skid-Steer Loader 415
Process Design
Eastern Gear, Inc.: Job Shop 417
Sage Hill Inn Above Onion Creek: Focusing
on Service Process and Quality 420
U.S. Stroller: Lean 424
The Westerville Physician Practice:
Value-Stream Mapping 430
Quality
Journey to Perfect: Mayo Clinic and the Path
to Quality 433
Toledo Custom Manufacturing: Quality
Control 439
The Evolution of Lean Six Sigma
at 3M, Inc. 441
Capacity and Scheduling
Best Homes, Inc.: Forecasting 447
Polaris Industries Inc.: Global Plant
Location 449
Lawn King, Inc.: Sales and
Operations Planning 454
Inventory
Consolidated Electric: Inventory
Control 458
Southern Toro Distributor,
Inc. 463
ToysPlus, Inc.: MRP 470
Supply Chain
Altimus Brands: Managing
Procurement Risk 474
Murphy Warehouse Company:
Sustainable Logistics 477
Shelterbox: A Decade of
Disaster Relief 481
APPENDIXES
A Areas Under the Standard Normal
Probability Distribution 485
B Random Number Table 486
INDEX 487
ACRONYMNS 501
Online Technical Chapters
Technical Chapters available in the Instructor’s
Resource Library in Connect
Waiting Lines
Simulation
Transportation Method
Linear Programming
Contents xxi
Introduction
P
a
r
t i
1. The Operations Function
2. Operations and Supply Chain Strategy
3. Product Design
The introductory part of this text provides an overview of the operations function,
operations and supply chain strategy, and product design. After reading this part,
students should have an appreciation for the importance to the firm of decisions
made in the operations function and its associated supply chain. Also, the need for
strategy to guide all decision making is emphasized. New-product design is treated
as a cross-functional decision responsibility that precedes the production and
delivery of goods or services.
2
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
LO1.1 Define operations management.
LO1.2 Describe the five main decisions made by operations and supply chain managers.
LO1.3 Explain the nature of cross-functional decision making with operations.
LO1.4 Define typical inputs and outputs of an operations transformation system.
LO1.5 Identify contemporary challenges facing operations and supply chain managers.
1
c h a p t e r
Operations management, as a field, deals with the production of goods and services. Every
day we come in contact with an abundant array of goods or services, all of which are pro-
duced under the leadership of operations managers. Nonprofit and government services are
also managed by operations managers. Without effective management of operations, a
modern industrialized society cannot exist. The operations function is the engine that cre-
ates goods and services for the enterprise and underpins the global economy.
Operations managers have important positions in every organization. One example is the
plant manager who is in charge of a factory. Other managers who work in the factory—
including production and inventory control managers, quality managers, and line
supervisors—are also operations managers. Collectively, this group of managers is respon-
sible for producing the supply of goods in a manufacturing business. We should also include
in the group of operations managers all manufacturing managers at the corporate or divi-
sional level. These managers might include a corporate vice president of operations (or
manufacturing) and a group of corporate staff operations managers concerned with quality,
production and inventory control, facilities, and equipment.
Operations managers have important responsibilities in service industries as well. In the
private sector, operations managers take leadership roles in hotels, restaurants, airlines,
The Operations
Function
Chapter 1 The Operations Function 3
banks, and retail stores. In each of these organizations,
operations managers are responsible for producing and
delivering the supply of services. In government
offices, there are operations managers in the post office,
police department, and housing department, to name
only a few. Anyone who is responsible for producing or
delivering the service is an operations manager.
At first glance, it may appear that service operations
have little in common with manufacturing operations.
However, the unifying feature of these operations is that
both can be viewed as transformation processes inside
organizations that are themselves embedded within
supply chains. In manufacturing, inputs of raw materials,
energy, labor, and capital are transformed into finished
goods. In service operations, the same types of inputs are
transformed into services. Managing the transformation
process in an efficient and effective manner is the task of
the operations manager in any type of organization.
Most Western economies have shifted dramatically
from the production of goods to the production of
services. It may come as a surprise that today more than
80 percent of the U.S. workforce is employed in service
industries.1 Even though the preponderance of employ-
ment is in the service sector, manufacturing remains
important to provide the goods needed for export and
internal consumption. Because of the importance of
both service and manufacturing operations, they are
treated on an equal basis in this text.
In the past when the field was related primarily
to manufacturing, operations management was called
production management. Later, the name was expanded
to “production and operations management,” or,
more simply, “operations management,” to include the service industries as well. The term
“operations management” as used in this text refers to both manufacturing and ser-
vice industries.
Today, individuals who work in operations and associated supply chains can belong to a
number of professional societies. These societies provide opportunities to become certi-
fied, network with other professionals, and learn about and share best practices. See the
Operations Leader box titled “Professional Societies Affiliated with Operations and Sup-
ply Chain Management.” The Operations Leader boxes throughout this book highlight best
practices and useful professional knowledge in a variety of industries.
1.1 WHY STUDY OPERATIONS MANAGEMENT?
All businesses want to hire bright people who can make the best decisions for the business
as a whole, not the best marketing, finance, or operations decisions. They want employees
who can see the big picture of how these functional areas interact. You will severely limit
your career if you take a narrow functional perspective.
Operations managers make important decisions in both
manufacturing and service organizations.
© McGraw-Hill Education/Jill Braaten
1 U.S. Census Bureau, Statistical Abstract of the United States, Washington, DC, 2016 ed.
4 Part One Introduction
Every decision is cross-functional in nature.2 You will be working with operations and need
to understand operations no matter what career path you choose. Operations is a major func-
tion in every organization, and regardless of the function in which you work, you will interact
with the operations function that produces goods or services (or both). The organization in
which someone works only with people from his or her own function does not exist. That is
why we take a cross-functional perspective in this text so that the content is useful to all majors.
As you study operations management, you will find that many of the ideas, techniques,
and principles can be applied across the business, not just in operations. For example, all
work is accomplished through a process (or sequence of steps). The principles of process
thinking found in this text can be applied to all functions. After graduating, many students
find that the ideas learned in operations management are among the most useful, regardless
of the industry or career they enter.
Operations management is an exciting and challenging field of study. The material is
both qualitative and quantitative, and both are essential to good management practices. You
are embarking on a journey that is interesting and useful no matter what career you choose!
1.2 DEFINITION OF OPERATIONS MANAGEMENT
AND SUPPLY CHAINS
All organizations (for-profit and nonprofit) thrive by producing and delivering a good or a
service deemed to be of value to customers. Value is the tangible and intangible benefits
that customers derive from consuming a good or service at a price they are willing to pay.
LO1.1 Define opera-
tions management.
INSTITUTE FOR SUPPLY MANAGEMENT
The largest and one of the most respected
supply management associations in the
world, whose mission is to lead the supply
management and sourcing profession
through its standards of excellence,
research, promotional activities, and education (see www.
ism.ws for more information).
COUNCIL OF SUPPLY CHAIN
MANAGEMENT PROFESSIONALS
The preeminent worldwide professional
association for supply chain management
professionals, whose vision is to lead the
evolving supply chain management profes-
sion by developing, advancing, and dis-
seminating supply chain knowledge and research (see
http://cscmp.org for more information).
Operations Leader Professional Societies Affiliated with Operations and
Supply Chain Management
ASSOCIATION FOR OPERATIONS
MANAGEMENT
The global leader and premier
source of the body of knowledge in
operations management, including
production, inventory, the supply
chain, materials management, sourcing and logistics
(see www.apics.org for more information).
AMERICAN SOCIETY FOR QUALITY
The world’s leading organization devoted
to advancing learning, quality improvement,
and knowledge exchange to improve busi-
ness results and create better workplaces
and communities worldwide (see www.asq.
org for more information).
2 The “hand shake” symbol in the margin identifies a point of cross-functional emphasis and is designed
to illustrate that the various functions must work together for an organization to be successful and thrive.
Chapter 1 The Operations Function 5
For example, value in a pair of shoes may be shoes that are good looking and comfortable
and will last a long time at a price you can afford. What is of value to one customer (or set
of customers) may not be of value to another. Flying in first class may be of value to
business travelers, but for leisure travelers flying in first class may not be of value because
of the price of first-class seats. Value, thus, is always defined in the eyes of the customer
(or set of customers) relative to the price paid. See the Operations Leader box for Dell
Computer Inc. for a company that creates value for its customers.
Organizations that are successful strive to identify the value inherent in the goods or
services being offered to customers. They then deploy this understanding to guide the deci-
sions that affect the production and delivery of those goods and services. These decisions
have an impact on the design, execution, and performance of operations and should be
coordinated with decisions made by managers of the sourcing and the logistics functions.
The sourcing function (also called purchasing or procurement) is responsible for finding
other organizations to serve as sources and then buying the material and service inputs for
the transformation process of the organization. The logistics function, in contrast, is typi-
cally responsible for the actual movement of goods and/or services across organizations.
Collectively, the operations, sourcing, and logistics functions manage the production of the
goods or services that are moved through the production process and delivered to customers.
Most organizations exist as part of a larger supply chain. The supply chain is the net-
work of manufacturing and service operations (often multiple organizations) that supply
one another from raw materials through production to the ultimate customer. The supply
chain consists of the physical flow of materials, money, and information along the entire
chain of sourcing production, and distribution. For example, the food supply chain reaches
2007, through select retail outlets. Orders for products,
once taken, are assembled in one of Dell’s factories
and often shipped to customers or retail stores within
days, with the factories carrying very little finished
goods inventory.
In addition to the importance of the operations func-
tion at Dell, sourcing and logistics activities are critical.
Sourcing managers source the many components
required to manufacture Dell products, and logistics
managers handle the global movement of components
and finished goods to satisfy customer demand. Manag-
ing Dell’s fast and rapidly changing supply chain is a chal-
lenging task that they perform well.
Dell today is pursuing environmentally friendly best
practices: Its global headquarters campus is now powered
by 100 percent green energy; its desk computer systems
have been designed to reduce carbon dioxide emissions;
Dell was the first computer manufacturer to offer free
computer recycling to customers worldwide; and its “Plant
a Tree for Me” and “Plant a Forest for Me” programs have
planted over 600,000 trees.
Source: Adapted from www.dell.com, 2015.
Operations Leader Dell Delivers Products and Value
In 1984 Michael Dell founded Dell Computer Corpora-
tion with $1000 in start-up capital and a business model
to sell custom-configured personal computers directly to
customers while passing along cost sav-
ings to customers by cutting out the mid-
dlemen. The company offers a range of
products beyond personal desktop and
mobile computing products; servers,
storage, and networking products; print-
ing and imaging products; electronics and accessories;
enhanced business and consumer services; and busi-
ness solutions. Nearly half of Dell’s revenue comes from
outside of the United States.
In 2013 Dell was taken private in a stock buyout by
Michael Dell and investors. In 2015 Dell bought EDS ser-
vices to expand its offerings to services, and the cloud.
A key to Dell’s strategy is its customer-driven
approach to innovation. This approach signals a com-
mitment to delivering new products and services that
are valued by customers and that address customer
needs. This approach explains how Dell pioneered the
direct-selling system to allow customer orders to be
placed over the Internet or over the phone and, since
6 Part One Introduction
from the farm to the food processor to the wholesaler and then the retailer. The supply
chain links together the work and output of many different organizations.
In this book we discuss operations management in the supply chain. This means we deal
with operations in the larger context of its supply chain, including external suppliers and
customers. Before discussing the larger supply chain implications, we define operations
management as follows:
Operations management focuses on decisions for the production and delivery of the firm’s
products and services.
There are three aspects of operations management that require elaboration:
1. Decisions. The above definition refers to decision making as an important element of
operations management. Since all managers make decisions, it is natural to focus on
decision making as a central theme in operations. Within the broader context of supply
chain, this decision focus provides a basis for identifying major decision types. In this
text, we specify the five major decision responsibilities of operations and supply chain
management as process, quality, capacity, inventory, and supply chain. These deci-
sions provide the framework for organizing the text and describing what operations and
supply chain managers do. We will discuss these decisions in greater detail in subse-
quent chapters.
2. Function. Operations is a major function in any organization, along with marketing
and finance. In a manufacturing company, the operations function typically is called
the manufacturing or production department. In service organizations, the opera-
tions function may be called the operations department or some name peculiar to
the particular industry (e.g., the policy service department in insurance companies).
In general, the generic term “operations” refers to the function that produces and
delivers goods or services. While separating operations out in this manner is useful
for analyzing decision making and assigning responsibilities, we must also integrate
the business by considering the cross-functional nature of decision making in
the firm.
3. Process. Operations managers plan and control the transformation process and its in-
terfaces in organizations as well as across the supply chain. This process view pro-
vides common ground for defining service and manufacturing operations as
transformation processes and is a powerful basis for the design and analysis of opera-
tions in an organization and across the supply chain. Using the process view, we con-
sider operations managers as managers of the conversion process in the firm. But the
process view also provides important insights for the management of productive pro-
cesses in functional areas outside the operations function. For example, a sales office
may be viewed as a production process with inputs, transformation, and outputs. The
same is true for an accounts payable office and for a loan office in a bank. In terms of
the process view, operations management concepts have applicability beyond the
functional area of operations. Toyota, for example, uses lean thinking to improve pro-
cesses throughout the firm, including processes in human resources, accounting, fi-
nance, information systems, and even the legal department. Process improvement is
not restricted to operations.
Since the field of operations and supply chain management can be defined by decisions,
function, and processes, we will expand on these three elements in detail in this chapter.
But first we provide an example of the decisions that would be made by operations and
supply chain management in a typical company that makes and markets pizzas.
Chapter 1 The Operations Function 7
1.3 DECISIONS AT PIZZA U.S.A.
Pizza U.S.A., Inc., produces and markets pizzas on a national basis. The firm consists of 85
company-owned and franchised outlets (each called a store) in the United States. The oper-
ations function in this company exists at two levels: the corporate level and the level of the
individual store.
The major operations and supply chain decisions made by Pizza U.S.A. can be described
as follows:
Process
Corporate staff makes some of the process decisions, since uniformity across different
stores is desirable. They have developed a standard facility design that is sized to fit a
particular location. Each store incorporates a limited menu with equipment that is
designed to produce high volumes of pizza. As pizzas are made, customers can watch
the process through a glass window; this provides entertainment for both children and
adults as they wait for their orders to be filled. Because this is a service facility, special
care is taken to make the layout attractive and convenient for the customers.
Within the design parameters established by the corporate operations staff, the store
managers seek to improve the process continually over time. This is done both by addi-
tional investment in the process and by the use of better methods and procedures, which
often are developed by the employees themselves. For example, a store might re-arrange
its layout to speed up the process of producing pizzas.
Quality
Certain standards for quality that all stores must follow have been set by the corporate
staff. The standards include procedures to maintain service quality and ensure the quality
and food safety of the pizzas served. While perceptions of service quality may differ by
customer, the quality of the pizzas can be specified more exactly by using criteria such as
temperature at serving time and the amount of raw materials used in relation to standards,
among others. Service-quality measures include courtesy, cleanliness, speed of service,
and a friendly atmosphere. Service quality is monitored by store manager observation,
comment cards, and occasional random surveys. Each Pizza U.S.A. store manager must
carefully monitor quality internally and with suppliers
to make sure that it meets company standards. All
employees are responsible for the quality of their work
to ensure that service quality and food quality are meet-
ing the standards of the company.
Capacity
Decisions about capacity determine the maximum
level of output of pizzas. The capacity available at any
point in time is determined by the availability of
equipment and labor inputs for the pizza-making pro-
cess at that time. First, when the initial location and
process decisions are made, the corporate staff deter-
mines the physical capacity of each facility. Individual
store managers then plan for annual, monthly, and
daily fluctuations in capacity within the available
physical facility. During peak periods, they may
employ part-time help, and advertising is used in an
LO1.2 Describe the five
main decisions made by
operations and supply
chain managers.
Pizza U.S.A. satisfies its customers by carefully managing the
four key decision areas in operations.
© Steve Mason/Getty Images
8 Part One Introduction
attempt to raise demand during slack periods. In the short run, individual personnel are
scheduled in shifts to meet demand during store hours.
Inventory
Each store manager buys the ingredients required to make the recipes provided by corpo-
rate staff. The store managers decide how much flour, tomato paste, sausage, and other
ingredients to order and when to place orders. Store operators must carefully integrate
sourcing and inventory decisions to control the flow of materials in relation to capacity.
For example, they do not want to purchase ingredients for more pizzas than they have the
capacity to bake. They also do not want to run out of food during peak periods or waste
food when demand is low.
Supply Chain
The supply chain decisions consist of sourcing and logistics. Sourcing is done by the corpo-
rate office. They select the specific suppliers for all inputs, negotiate prices, write contracts,
and issue blanket purchase orders that stores use to order individual ingredients and items as
central operations. This individual will participate in the
development of strategic implementation plans and
related objectives. Candidates must have strong commu-
nication skills and acknowledge the important relation-
ship with customer members in supporting the credit
union’s vision and mission.
CONTINUOUS IMPROVEMENT
PLANT LEAD
ConAgra Foods seeks a partner to roll out a system
establishing a zero-loss manufacturing culture. Coordi-
nating with the Plant Manager, this Plant Lead executes
plans for sustainability, develops and maintains training
and tracking standards, and coaches sites on improve-
ment methodologies. This position serves as a key devel-
opment role for a future Plant Manager.
MATERIALS SOURCING MANAGER
Herbalife, a direct-sales nutrition company, is hiring a
senior-level sourcing manager for global spending of
$200 million on raw materials. Responsibilities include
reducing raw materials costs yearly, analyzing market
intelligence for trends in commodity markets, and making
strategic recommendations to senior management for
each category of raw materials. This job also requires
maintaining appropriate inventory levels and developing
strategic supplier relationships.
Source: Abstracted from www.monster.com, April 2012.
Operations Leader Careers in Operations and Supply Chain
from Monster.com
SUPPLY CHAIN ANALYST
PayPal, owned by online shopping site eBay, is hiring a
supply chain management professional responsible for
end-to-end support for PayPal’s new Here product. The
job requires international travel to
manufacturing and distribution
sites. Responsibilities include prod-
uct and distribution management, on time and on bud-
get; reviewing inventory reports with supply partners;
arranging freight shipments globally; and coordinating
and collaborating with internal groups within PayPal and
eBay. The job description also requests “maniacal atten-
tion to detail.”
BUSINESS METRICS/ANALYTICS
SUPPLY CHAIN ANALYST
Cardinal Health is seeking an analyst to develop, quan-
tify, and evaluate the transformation of internal and exter-
nal information into business intelligence. Qualified can-
didates will demonstrate knowledge of concepts and
principles of business metrics and analytical techniques/
tools. The position requires listening to internal/external
customers’ needs and proactively providing them a qual-
ity experience through effective communication.
VICE PRESIDENT OF OPERATIONS
Envista Credit Union is seeking an executive whose
responsibilities include organizing, planning, and direct-
ing all operations functions associated with branches and
Chapter 1 The Operations Function 9
they need them. The orders are then fulfilled by the suppliers, and a logistics provider ensures
the orders are delivered on time. Logistics is handled by a third-party provider who secures
transportation and uses its distribution centers to make deliveries to Pizza U.S.A. stores.
Because Pizza U.S.A. is only one example of an operation, students often ask: What do
operations managers do in more general terms? The Monster.com Operations Leader box
provides examples of five typical operations management and supply chain positions and
describes the associated decision-making responsibilities. The descriptions have been
greatly simplified for purposes of illustration.
As the Operations Leader box indicates, there is a great variety of management positions
in operations and the supply chain. These range from entry-level supervisory positions to
middle- and top-management positions with considerable responsibility. These positions
also show the breadth of operations and apply to both manufacturing and service operations.
There are many opportunities for international employment in operations management
since operations are located around the world. Many operations in other countries are seek-
ing to implement world-class best practices, and so what is learned in this course can be
applied globally.
1.4 OPERATIONS DECISIONS IN THE SUPPLY CHAIN—A FRAMEWORK
The five decision groupings showcased in the Pizza U.S.A. example provide a framework for
understanding the various decisions made by operations and supply chain managers. Although
many different frameworks are possible, the primary one used here is a conceptual scheme for
grouping decisions according to decision responsibilities. The five key decision areas—pro-
cess, quality, capacity, inventory, and supply chain—encompass what operations and supply
chain managers do. This novel and useful decision framework is shown in Figure 1.1 and
summarized in Table 1.1. In the table, examples are given of key decisions in each area.
Careful attention to the five decision areas in the framework is the key to the successful
management of operations and the associated supply chain. Indeed, well-managed opera-
tions and its supply chain can be defined in terms of this decision framework. If decisions
in each of the five groupings support the strategy of the firm, provide value, and are well
integrated with the other functions of the organization, the operations function and its asso-
ciated supply chain can be considered well managed.
Each major section of this text is devoted to one of the five decision categories.3 The
framework thus provides an integrating mechanism for the text that covers both the deci-
sions faced by operations and supply chain managers as well as the cross-functional issues
that must be considered.
FIGURE 1.1
Decision-making
framework for
operations in the
supply chain.
Process
Quality
Capacity
Inventory
Supply
Chain
Decisions
Human
Resources Finance
Marketing
Accounting
Information
Systems
Suppliers Customers
3 Students have called these five categories QPICS, pronounced “Q-PICS.”
10 Part One Introduction
Analytics is the analysis of data to make better decisions. Analytics uses many tech-
niques for the analysis including those from operations research, statistics, data sciences,
and computer science. The analysis can use either big data from massive databases or small
data depending on the application. Analytics can be descriptive, predictive, or prescriptive
in nature. A descriptive analysis typically summarizes the present situation from data. The
data can be used to go one step further and predict what will happen in the future. Prescrip-
tive analytics typically uses mathematical models to find an optimal or best decision. Ana-
lytics are used in operations and supply chains for a variety of decisions, including quality
control, forecasting, capacity, scheduling, inventory, logistics, and sourcing.
Throughout the text, best practices are presented. Additionally, discussion and examples
of firms in which the best practice is not the best for their particular situation are included.
These contingencies, situations, or conditions that require different solutions offer a more
nuanced view of operations decision making. For example, successful implementation of a
new method such as lean or Six Sigma is contingent on top management support. Simi-
larly, the “best” forecasting tools and concepts depend on the availability of data. If there
was a single best practice that works for all firms, then operations would not be the chal-
lenging function to manage that it is. Therefore, by offering insight into specific conditions
in which best practices may not be best, the text addresses the various contingencies or
prerequisites or situaitons that need to be considered.
1.5 CROSS-FUNCTIONAL DECISION MAKING
The operations function is a critical element in every business. No business can survive
without good decisions being made by operations managers. The operations function is
one of the three primary functions in an organization, along with marketing and finance. In
addition, an organization has supporting functions that include human resources, informa-
tion systems, and accounting. Some organizations also have separate sourcing and logistics
LO1.3 Explain
the nature of
cross-functional
decision making with
operations.
Decisions Examples of Decisions
1. Process • What type of process should be selected?
• How should the service delivery system be designed?
• How should material and customer flows be managed?
• What principles of lean systems should be deployed?
• How should environmental and global goals be met?
2. Quality • What should the quality standards be?
• How can quality be controlled and improved?
• What statistical approaches should be used (e.g., control charts and
Six Sigma)?
• How should the suppliers and customers be involved in quality?
3. Capacity • What is the facility strategy for size, location, and timing?
• How should Sales and Operations Planning be implemented?
• How should variable demand be handled with capacity adjustments?
• What priority rule should be used for scheduling?
4. Inventory • How much inventory should be held?
• What should the order size and reorder frequency be?
• Who should hold the inventory?
• How can the inventories of suppliers and customers be coordinated?
5. Supply Chain • What suppliers should be used for products and services?
• How should sourcing be conducted and evaluated?
• What form of transportation should be used?
• How should warehouses be used to allow economic flow of materials?
TABLE 1.1
Operations and
Supply Chain
Decisions—A
Framework
Chapter 1 The Operations Function 11
functions that support operations. In others, the operations, sourc-
ing and logistics functions are joined together to become the supply
chain function.
Functional areas are concerned with a particular focus of respon-
sibility or decision making in an organization. The marketing func-
tion is typically responsible for creating demand and generating
sales revenue; the operations function is responsible for the produc-
tion and distribution of goods or services (generating supply); and
finance is responsible for the acquisition and allocation of capital.
Within for-profit businesses, functional areas tend to be closely
associated with organizational departments because businesses typ-
ically are organized on a functional basis. Supporting functions are
essential to provide staff support to the three primary functions.
Every function must be concerned not only with its own
decision responsibilities but also with integrating decisions with other functions. The five
areas of operations and supply chain decisions, for example, cannot be made separately;
they must be carefully integrated with one another and, equally important, with decisions
made in marketing, finance, and other parts of the organization. In the Pizza U.S.A. exam-
ple, if marketing decides to change the price of pizza, this is likely to affect sales and
change the capacity needs of operations as well as the amount of ingredients (materials)
used. Also, if finance cannot raise the necessary capital, operations may have to redesign
the process to require less capital or manage pizza-related inventories more efficiently.
This in turn may affect the response time to serve customers, costs, and so on.
Decision making is therefore highly interactive and systemic in nature. Unfortunately,
functional silos have developed in many organizations and impede cross-functional deci-
sion making. As a result, the overall organization suffers due to an emphasis on functional
prerogatives.
But some companies are different. Texas Instruments, for example, has been a leader in
fostering cross-functional integration. They do this by forming cross-functional manage-
ment teams for new-product introductions and for day-to-day improvement. Each member
of the team is trained in common methodologies, and the team is given responsibility for
achieving its own goals. Some of the key cross-functional decision-making relationships
are shown in Table 1.2.
1.6 OPERATIONS AS A PROCESS
Operations can be defined as a transformation system (or process) that converts inputs
into outputs. Inputs to the system include energy, materials, labor, capital, and information
(see Figure 1.2). Process technology is then used to convert inputs into outputs. The pro-
cess technology is the methods, procedures, and equipment used to transform materials or
inputs into products or services.
Viewing operations as a process is very useful in unifying seemingly different opera-
tions from different industries. For example, the transformation process in manufacturing
is one of material conversion from raw materials into finished products. When an automo-
bile is produced, steel, plastics, aluminum, cloth, and many other materials are transformed
into parts that are then assembled into the finished automobile. Labor is required to operate
and maintain the equipment, and energy and information are also required to produce the
finished automobile.
In service industries a transformation process is also used to transform inputs into ser-
vice outputs. For example, airlines use capital inputs of aircraft and equipment and human
LO1.4 Define typical
inputs and outputs of
an operations
transformation
system.
Managerial decision making is cross-functional
in nature.
© Corbis
12 Part One Introduction
TABLE 1.2
Examples of Cross-
Functional Decision
Making
Key Decision Area Interface with Operations Decisions
Marketing
Market segment and needs Quality design and quality management
Market size (volume) Type of process selected (assembly line, batch, or
project) and capacity required
Distribution channels Inventory levels and logistics
Pricing Quality, capacity, and inventory
New-product introduction Cross-functional teams
Finance and Accounting
Availability of capital Inventory levels, degree of automation, process type
selected, and capacity
Efficiency of conversion process Process type selection, process flows, value-added
determination and sourcing
Net present value and cash flow Automation, inventory, and capacity
Process costing or job costing Type of process selected
Measurement of operations Costing systems used
Human Resources
Skill level of employees Process type selected and automation
Number of employees and part-time or
full-time employment
Capacity and scheduling decisions
Training of employees Quality improvement and skills
Job design Process and technology choice
Teamwork Cross-functional decisions in operations
Information Systems
Determination of user needs Systems should support all users in operations
Design of information systems Systems should help streamline operations and support
all analytics and decisions in operations
Software development Software is needed for capacity, quality, inventory,
scheduling and supply chain decisions
Hardware acquisition Hardware is needed to support automation decisions in
operations and to run software
FIGURE 1.2
An operation as a
productive system.
OPERATIONS MANAGEMENT
OUTPUTSINPUTS
EXTERNAL BUSINESS
ENVIRONMENT
NATURAL ENVIRONMENT
Transformation
(conversion)
process
Energy
Materials
Labor
Capital
Information
Goods or services
Feedback information for
control of process inputs
and process technology
Chapter 1 The Operations Function 13
inputs of pilots, flight attendants, and support personnel to produce safe, reliable, fast, and
efficient transportation. Transformations of many different types occur in all industries, as
indicated in Table 1.3. By studying these different types of transformation processes, you
can learn a great deal about how to analyze and manage any operation.
Operations as a process provides a basis for seeing an entire business as a system of
interconnected processes. This makes it possible to analyze an organization and improve it
from a process point of view. All work, whether in finance, marketing, accounting, or other
functions, is accomplished by processes. For example, financial analysis of a stock, closing
the books at the end of the year, or conducting market research are each conducted by car-
rying out an appropriate process. Thus, process principles and tools can be applied in every
function in a business.
All of these processes and systems interact with their internal and external environ-
ments. We have indicated the nature of internal interaction through cross-functional decision
making. Interaction with the external environment occurs through the economic, physical,
social, and political environment of operations. Examples include economic changes such as
rising labor costs, social changes such as customer preference for “green” products, and polit-
ical changes such as regulations. Each of these can mean that the operations function and
associated supply chain will have to change the way it was producing products and services.
Operations is surrounded by both internal and external environments and constantly
interacts with them. The interactive nature of these relationships makes it necessary to
constantly monitor the environment and make decisions related to corresponding changes
in operations and the supply chain when needed. In the fast-changing world of today’s
global business, constant change has become essential as a means of survival. Viewing
operations as a process or a constantly updating transformation system helps us understand
how operations and the supply chain cannot be insulated from changes in the environment
but rather must adapt to them.
1.7 CHALLENGES FACING OPERATIONS
AND SUPPLY CHAIN MANAGERS
Several challenges are important for operations and supply chain managers today and will
be addressed repeatedly throughout this text. These challenges make operations and supply
chain management an exciting and interesting place for aspiring managers and those who
want the challenge of leadership in a fast-moving career.
LO1.5 Identify
contemporary
challenges facing
operations and supply
chain managers.
Operation Inputs Outputs
Bank Tellers, staff, computer equipment,
facilities, and energy
Financial services (loans, deposits,
safekeeping, etc.)
Restaurant Cooks, waiters, food, equipment,
facilities, and energy
Meals, entertainment, and satisfied
customers
Hospital Doctors, nurses, staff, equipment,
facilities, and energy
Health services and healthy
patients
University Faculty, staff, equipment, facilities,
energy, and knowledge
Educated students, research, and
public service
Manufacturing plant Equipment, facilities, labor, energy, and
raw materials
Finished goods
Airline Planes, facilities, pilots, flight atten-
dants, maintenance people, labor,
and energy
Transportation from one location
to another
TABLE 1.3
Examples of
Productive
Systems
14 Part One Introduction
Operations concepts and ideas have been applied in service operations for years. Yet, service
operations lag behind manufacturing in applying the latest ideas in supply chain management,
lean operations, and quality improvement. This represents a challenge and tremendous oppor-
tunity to apply what is learned in this course. Also, service-specific ideas such as service
recovery, web-enabled service and globalization of service still represent implementation
challenges. Nevertheless, some leading service businesses do excel in operations including
Walmart, Nordstrom, Starbucks, Amazon.com, FedEx, and Delta Airlines, to name only a
few. They excel by applying many of the operations concepts that are presented in this text.
Every operation should be externally directed to meet customer requirements based on the
“voice of the customer.” This concept is often taught in marketing courses and is being
integrated into operations and supply chain courses as well. A key point is that operations
efficiency need not be sacrificed in the pursuit of meeting customer needs. Rather, the
customer can be a powerful driver for reducing waste and improving the efficiency of all
processes as firms reduce or eliminate activities that customers do not value. This is an
ongoing challenge for operations and supply chain managers to put the customer first, and
we provide tools and concepts for doing so.
One of the most difficult challenges facing all managers is cross-functional integration
within the organization. Some organizations are managing functions as separate depart-
ments with little integration across them. The best operations are now seeking increased
integration through the use of cross-functional teams, information systems, management
coordination, rotation of employees and other methods of integration. Most of the imple-
mentation problems of new systems or new approaches can be traced to lack of cross-func-
tional internal cooperation. The same thing can be said about interorganizational change in
supply chains. Even when companies partner with their suppliers or customers the partner-
ships are often not successful. Adequate information systems may also be lacking for supply
chain integration.
The focus on sustainability of the natural environment has been heightened in recent years
with concerns over global warming, water contamination, air pollution, and so on. Organiza-
tions are increasingly being asked to produce and deliver products or services while minimiz-
ing the negative impact on the global ecosystem and not endangering the ability to meet the
needs of future generations. See the Operations Leader box titled “Sustainability in Interface
Inc.’s Operations Transformation Process” for an example of one firm’s success in facing
these issues. Operations and
supply chain partners have
made tremendous strides in
reducing pollution of the envi-
ronment from air to ground to
water, but there is still a long
way to go. Operations and their
supply chains are finding they
can reduce pollution, conserve
resources, recycle products and
be socially responsible to
provide a sustainable world for
future generations. Sustainabil-
ity is a challenge that progres-
sive operations and supply chain
organizations are accepting.
Services
Customer-
Directed
Operations
Integration of
Decisions
Internally and
Externally
Environmental
Sustainability
Coke is produced and sold globally. Here, workers unload
bottles of Coca Cola from a truck in Caracas, Venezuela.
© Ronaldo Schemidt/AFP/Getty Images
Chapter 1 The Operations Function 15
Finally, the globalization of operations and supply chains is a pervasive theme in business
today. One can hardly avoid information on the accelerating nature of global business.
Strategies for operations and its supply chain partners should be formulated with global
effects in mind and not only consider narrow national interests. Even many small busi-
nesses compete globally, sourcing or selling goods and services in markets with global
competitors. Facility location must be considered in view of its global implications. Tech-
nology can be transferred rapidly across national borders. All decisions in operations and
its associated supply chains are affected by the global nature of business.
1.8 KEY POINTS AND TERMS
This text provides a broad overview of the challenging and dynamic field of operations
management and the supply chain. It stresses decision making in operations, its associated
supply chain, and the relationship of these decisions to other functions. The five major
decision categories—process, quality, capacity, inventory and supply chain are the organiz-
ing framework for the text.
Globalization
of Operations
and the Supply
Chain
post-consumer waste (used car-
pet) as raw material input to their
production system. It is not a
perfect system, as it still requires
some newly extracted raw mate-
rials, but they believe they are
moving in the right direction for
achieving sustainability.
With production on four conti-
nents and offices in more than
100 countries, Interface Inc. is the
global leader in the design, pro-
duction, and sales of modular car-
pet squares. Since undertaking
the goal of sustainability, Inter-
face Inc. reports more than 133
million pounds of post- consumer
waste has been diverted from
landfills to serve as raw materials
for new carpet squares. They
have achieved a series of major
milestones at the European man-
ufacturing facility in The Nether-
lands. As of 2015, the plant is operating with 100 percent
renewable energy, using virtually zero water in manufactur-
ing processes and has attained zero waste to landfill.
Source: Adapted from Dave Gustashaw and Robert W. Hall,
“From Lean to Green: Interface, Inc.”. Target 24, no. 5
(2008), pp. 6–14 and interfaceglobal.com 2015.
Operations Leader Sustainability in Interface Inc.’s Operations
Transformation Process
Interest in sustainability contin-
ues to grow, and the operations
function of most organizations is
deeply involved in such efforts.
The philosophy of sustainability
is “meeting the needs of the
present without compromising
the ability of future generations
to meet their own needs.” Over
the past 15 years, carpet manu-
facturer Interface Inc. has shifted
its operations toward this phi-
losophy and three bottom-line
impacts: social, environmental,
and financial. Or, in their words:
People, Planet, and Profit.
A typical operations transfor-
mation process requires a con-
tinuous supply of new raw mate-
rial input. “In most instances,
extraction of raw material
[from the natural environment]
exceeds its natural rate of regen-
eration.” Following production, customers use and then
dispose of products. Interface Inc. set out to change this
typical supply chain with its environmental costs at both
ends. They found that the most benign materials to use in
manufacturing new products are their own used products.
Creating a closed-loop supply chain, they use their own
© Arcaid Images/Alamy Stock Photo
16 Part One Introduction
Key points emphasized in the chapter are these:
∙ Operations and its associated supply chain produces and delivers goods or services
deemed to be of value to customers in a global economy. The operations function is es-
sential for both for-profit and nonprofit organizations.
∙ Operations management focuses on decisions for the production and delivery of the
firm’s products and services. These decisions are intended to maximize the value inher-
ent in goods or services delivered to customers throughout the entire supply chain.
∙ The supply chain is the network of manufacturing and service operations that supply
each other from raw materials through manufacturing to the ultimate customer. The
supply chain consists of the physical flow of materials, money, and information along
the entire chain of sourcing production, and distribution. The supply chain connects
many different organizations.
∙ There are five key groupings of decisions in operations: process, quality, capacity,
inventory, and supply chain. These decisions need to utilize analytics when appropriate
and account for contingencies, or special situations, because a best practice may not be
best in all circumstances.
∙ Operations decisions are often cross-functional in nature. Decisions may impact or be
impacted by activities in other functions such as marketing and finance. Often, cross-
functional teams are formed to undertake complex decisions.
∙ We identify several challenges facing operations and supply chain managers that are
emerging and will be important in the future. These challenges are services, customer-
directed operations, integration of decisions internally and externally, environmental
sustainability, and globalization of operations and the supply chain.
Key Terms Value 4
Sourcing function 5
Logistics function 5
Supply chain 5
Operations management 6
Decision making 6
Process 6
Transformation
system 11
Internal and external
environments 13
Voice of the customer 14
Sustainability 14
Globalization 15
Quality 6
Capacity 6
Inventory 6
Process view 6
Analytics 10
Cross-functional
decision making 11
STUDENT
INTERNET
EXERCISES
1. Search the Internet for “Wikipedia Operations Management.”
Read about the Wiki definition of Operations Management and prepare a short synopsis
of the History of Operations Management.
2. Search the Internet for “How everyday things are made.”
Find a site (e.g., manufacturing.stanford.edu) that shows everything from motorcycles to
jelly beans to denim. Create a presentation that explains the five operations and supply chain
decisions relevant to the sourcing, production and delivery of a product of your choosing.
3. Monster.com
www.monster.com
Check the monster.com website for positions and career opportunities in operations man-
agement. Come to class prepared to discuss one or two jobs in operations that you found
interesting (not necessarily an entry-level job).
Discussion Questions
1. Why study operations management in the supply chain?
2. What is the difference between the terms “production
management” and “operations management”?
3. What is the difference between operations management
and supply chain management?
4. What are the key decisions made by sourcing and logis-
tics managers?
5. How does the work of an operations manager differ
from the work of a marketing manager or a finance
manager? How are these functions similar?
6. How is the operations management function related to
activities in human resources, information systems, and
accounting?
7. Describe the nature of operations management in the
following organizations. In doing this, first identify the
outputs of the organization and then use the five deci-
sion types to identify important operations decisions
and responsibilities.
a. A college library
b. A hotel
c. A small manufacturing firm
8. For the organizations listed in question 7, describe the
inputs, transformation process, and outputs of the
production system.
9. Describe the decision-making view and the view of
operations as a process. Why are both views useful in
studying the field of operations management?
10. Write a short paper on some of the challenges
facing operations management in the future. Use
newspapers, business magazines, or the Internet as
your sources.
11. Review job postings from various sources for
management positions that are available for operations
management graduates. Summarize the responsibilities
of these positions.
12. Describe how the view of operations as a process can
be applied to the following types of work:
a. Acquisition of another company.
b. Closing the books at the end of the year.
c. Marketing research for a new product.
d. Design of an information system.
e. Hiring a new employee.
Chapter 1 The Operations Function 17
18
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
LO2.1 Define operations strategy.
LO2.2
Describe the elements of operations strategy and alignment with business and other
functional strategies.
LO2.3 Differentiate the ways to compete with operations objectives.
LO2.4 Compare product imitator and innovator strategies.
LO2.5 Provide examples of a distinctive competence for operations.
LO2.6 Explain the nature of global operations and supply chains.
LO2.7 Describe two types of supply chain strategies.
LO2.8 Illustrate how operations can become more environmentally sustainable.
2
c h a p t e r
There is an increasing awareness that operations and the supply chain contribute to the
global competitive position of a business and are not merely making a firm’s products
or services. This can be done by contributing distinctive capability (or competence) to
the business and continually improving the products, services, and processes. The
Operations Leader box on Insignia Athletics discusses the way it competes through a
strategy of flexible manufacturing and just-in-time delivery for both customized and
standard products.
Operations should be fully connected to the business strategy. Operations strategies and
decisions should fulfill the needs of the business and add competitive advantage to the firm.
LO2.1 Define opera-
tions strategy.
Operations and Supply
Chain Strategy
Chapter 2 Operations and Supply Chain Strategy 19
Operations Leader Insignia Athletics: American-Made for America’s Pastime
inventory to sell off when styles
change. Material costs, mostly
leather, make up 55 percent of
manufacturing costs. The com-
pany developed an automated
cutting system to get higher
yields from irregularly shaped
raw materials and the system can
be very quickly updated for
new styles.
While U.S. labor costs are
high, Insignia competes with effi-
cient manufacturing, material sav-
ings, speed to market, quick
response to retailers, and the
ability to customize for the con-
sumer. Firms use their operations
strategy to compete in a variety
of ways.
Source: “Worcester Manufacturer
Dons a Rally Cap,”
www.wbjournal.com, 2012,
www.insigniaathletics.com, 2016.
Insignia Athletics in Worcester,
Massachusetts, is manufactur-
ing baseball gloves in the
United States, where wages are
much higher than those paid by
other companies for imported
gloves. Insignia balances the cost
of labor with other product charac-
teristics that customers value, like
fast delivery, unique designs, prod-
uct quality, and customer prefer-
ences. Their $150–300 gloves are
sold through retailers and online.
Gloves can be customized with
your choice of colors and your
embroidered name, and delivered
in ten days.
Operations strategy helps this
firm compete. Insignia uses the
advantages of a flexible just-
in-time manufacturing process to
quickly make, ship, and sell what
customers want, without old
The operations function is a key value creator for the firm. Value can be created only by
operations and supply chains that are more productive than competitors’ in relation to the
company’s chosen markets. All functions of the firm must be well coordinated for value to
be created and competitive advantage to occur. The cross-functional coordination of deci-
sion making is facilitated by an operations strategy that is developed by a team of managers
from across the entire business.
The following definition of operations strategy is a starting point for our discussion:
Operations strategy is a consistent pattern of decisions for operations and the associated
supply chain that are linked to the business strategy and other functional strategies, leading
to a competitive advantage for the firm.
This definition will be expanded throughout this chapter as a basis for guiding all deci-
sions that occur in operations and its supply chain with decisions in other functions.
We will use McDonald’s as an example in the next several sections to illustrate the ele-
ments of an operations strategy. In 1955, Ray Kroc opened his first restaurant in Des Plaines,
Illinois, patterned after the McDonald brother’s hamburger stand in California. The
McDonald’s service system was designed on the idea of a very limited menu and fast produc-
tion of standardized food and service with convenience and a low price. Never before had
customers been served food so fast in a clean and courteous environment. Using a standard
design for equipment, facilities, and employee training, the McDonald’s system was replicated
in many locations and rapidly expanded throughout the United States and then the world.
The McDonald’s system is a standardized service system designed to meet stringent spec-
ifications. Every detail of the system is designed to provide fast and efficient food and service.
© Purestock/SuperStock
20 Part One Introduction
McDonald’s has continuously adapted its service system and supply chain over the
years. For example, the menu has been expanded to offer many more food and beverage
items, but always within the capability of the existing restaurants. They have updated their
information systems in operations, and responded to environmental challenges by replac-
ing, for example, the foam boxes previously used for sandwiches with biodegradable paper
wrappers. In response to healthy food trends, they added salads, apple slices, and grilled
chicken. Nevertheless, McDonald’s still has its critics and sometimes is blamed for the
obesity of Americans and for having an adverse environmental impact.
McDonald’s is a global service firm. The operations strategy for global expansion has
been to replicate the service system design and supply chain in each country with minimum
modifications to the menu or processes. However, a few local international options are pro-
vided. For example, McDonald’s serves beer in Germany, McRice in Indonesia, soup in Por-
tugal, and salmon burgers in Norway. They have also extended their supply chain forward by
developing a franchise system that maintains strong control over the product and service.
Today, McDonald’s is the global leader in food service with more than 35,000 restau-
rants in 120 countries serving an average of 68 million customers each day. Now we will
describe the elements of operations strategy in detail. We will use McDonald’s to illustrate
how the elements of operations strategy support overall business strategy.
2.1 OPERATIONS STRATEGY MODEL
Operations strategy is a functional strategy along with a firm’s other functional strategies
such as those of marketing, engineering, information systems, and human resources. Since
operations strategy is a functional strategy, it should be guided by the business and corpo-
rate strategies shown in Figure 2.1. The four elements inside the dashed box—mission,
objectives, strategic decisions, and distinctive competence—are the heart of operations
strategy. The other elements in the figure are inputs or outputs from the process of develop-
ing operations strategy. The outcome of using the operations strategy is a consistent pattern
of operations decisions that are well connected with the other functions in the business.
LO2.2 Describe
the ele ments of
operations strategy
and alignment with
business and other
functional strategies.
McDonald’s is a
leading global service
firm.
© McGraw-Hill Education/
Christopher Kerrigan
Chapter 2 Operations and Supply Chain Strategy 21
Corporate strategy and business strategy are at the top of Figure 2.1. The corporate strat-
egy defines the business that the company is pursuing. For example, Walt Disney Corpora-
tion considers itself in the business of “making people happy.” Disney Corporation includes
not only theme parks but the production of cartoons, movie production, merchandizing,
and a variety of entertainment-related businesses around the world.
Business strategy follows from the corporate strategy and defines how each particular
business will compete. Most large corporations have several different businesses, each
competing in different market segments. Michael Porter (1980) describes three generic
business strategies: differentiation, low cost, and focus. Differentiation is associated with a
unique and frequently innovative product or service, while low cost is pursued in commod-
ity markets where the products or services are imitative. Focus refers to the geographical or
product portfolio being narrow or broad in nature. Focus can be combined with either a
differentiation or a low-cost strategy.
Corporate and
Business
Strategy
FIGURE 2.1
Operations strategy
process.
Operations strategy Functional strategies in
marketing, finance,
engineering,
human resources, and
information systems
Strategic decisions
(process, quality system,
capacity, inventory, and
supply chain)
Mission
Distinctive
competence
Objectives
(cost, quality, flexibility,
and delivery)
Business strategy
Corporate
strategy
Internal
analysis
External
analysis
Results
Consistent pattern
of decisions
22 Part One Introduction
Every operation should have a mission that
is connected to the business strategy and is
coordinated with the other functional strate-
gies. For example, if the business strategy is
differentiation through innovative products,
the operations mission should emphasize
new-product introduction and flexibility to
adapt products to changing market needs.
Other business strategies lead to other oper-
ations missions, such as low cost or fast de-
livery. The operations mission is thus
derived from the particular business strat-
egy selected by the business unit.
At McDonald’s, the operations mission is
to provide food and service quickly to cus-
tomers with consistent quality and low cost
in a clean and friendly environment. See the
Medtronic Operations Leader box for
another example of a mission-driven firm.
Operations objectives, sometimes called
competitive priorities, are the second ele-
ment of operations strategy. The four com-
mon objectives of operations are cost,
quality, delivery, and flexibility. In certain situations, other objectives may be added, such
as innovation, safety, and sustainable operations. The objectives should be derived from
the operations mission, and they constitute a restatement of the mission in quantitative and
measurable terms. The objectives should be long-range-oriented (5 to 10 years) to be stra-
tegic in nature and should be treated as goals.
Definitions of the four common operations objectives follow:
∙ Cost is a measure of the resources used by operations, typically the unit cost of pro-
duction or the cost of goods or services sold.
∙ Quality is the conformance of the product or service to the customers’ requirements.
∙ Delivery is providing the product or service quickly and on time.
∙ Flexibility is the ability to rapidly change operations.
Table 2.1 shows some common measures of objectives that can be used to quantify
long-range operations performance. The objectives for five years into the future are com-
pared to the current year and also to a current world-class competitor. The comparison to
a world-class competitor is for benchmarking purposes and may indicate that operations
is behind or ahead of the competition. However, the objectives should be suited to the
particular business, which will not necessarily exceed the competition in every category.
At McDonald’s, each restaurant has specific objectives with respect to cost, quality, and
service times. These objectives are pursued using extensive standards and are frequently
measured for compliance. McDonald’s tracks the performance of each restaurant and com-
pares the results with those of competitors.
Strategic decisions constitute the third element of operations strategy. These decisions
determine how the operations objectives will be achieved. A consistent pattern of strategic
decisions should be made for each of the major operations decision categories (process,
quality, capacity, inventory, and supply chain). These decisions must be well integrated
Operations
Mission
Operations
Objectives
Strategic
Decisions
THE MAGIC KINGDOM. Disney Corporation is in
the business of “making people happy.”
© Phelan M. Ebenhack/AP Images
Chapter 2 Operations and Supply Chain Strategy 23
TABLE 2.1
Typical Operations
Objectives
Current
Year
Objective:
5 Years
in the Future
Current:
World-Class
Competitor
Cost
Manufacturing cost as a percentage of sales
Inventory turnover
55%
4.1
52%
5.2
50%
5.0
Quality
Customer satisfaction (percentage satisfied
with products)
Percentage of scrap and rework
Warranty cost as a percentage of sales
85%
3%
1%
99%
1%
0.5%
95%
1%
1%
Delivery
Percentage of orders filled from stock
Lead time to fill stock
90%
3 wk
95%
1 wk
95%
3 wk
Flexibility
Number of months to introduce new products
Number of months to change capacity by ±20%
10 mo
3 mo
6 mo
3 mo
8 mo
3 mo
with other functional decisions. This coordination and consistency is one of the most dif-
ficult things to achieve in business.
Table 2.2 indicates some important strategic decisions for operations. Note that these
decisions may require trade-offs or choices. For example, in the capacity area there is a
or stock options—to immediate results that increase
shareholder value will indeed motivate the top people in
the organization, at least in the short term. This is well
established and documented. Unfortunately, the top peo-
ple represent only a small fraction of the people doing
the work of the organization. . . .
The purpose of a company boils down to one thing:
serving the customers. If it is superior (in serving its cus-
tomers) to everyone else in the field, and can sustain this
advantage over the long term, that company will create
ultimate shareholder value. . . .
In the end, motivating employees with a mission and a
clear sense of purpose is the only way I know of to deliver
innovative products, superior service, and unsurpassed
quality to customers over an extended period of time.
Over time, an innovative idea for a product or a service will
be copied by your competitors. Creating an organization
of highly motivated people is extremely hard to duplicate.
Source: William George, “Address Given to the Academy of
Management,” Academy of Management Executive 15, no.
4 (November 2001), pp. 39–47, and medtronic.com, 2016.
Operations Leader How Mission-Driven Companies Create Long-Term
Shareholder Value: Medtronic’s Former CEO Bill George
. . . I have developed a deep conviction that the widely
accepted philosophy, that the primary mission of a for-profit
corporation is to maximize shareholder value, is flawed at
its core. While that philosophy may result in short-term
increases in shareholder value, it is simply not sustainable
over the long term. Over time, shareholder value will stag-
nate and eventually decline for companies that drive their
strategy simply from financial considerations. . . .
The best path to long-term growth in shareholder
value comes from having a well-articulated mission
that employ-
ees are willing
to commit to,
a consistently
practiced set of values, and a clear business strategy that
is adaptable to changing business conditions. Compa-
nies that pursue their mission in a consistent and unre-
lenting manner in the end will create shareholder value
far beyond what anyone believes is possible. . . .
Tying financial incentives of the management team—
be they bonuses, incentive compensation, stock grants,
24 Part One Introduction
choice between one large facility and several smaller ones. While the large facility may
require less total investment due to economies of scale, the smaller facilities can be located
in their markets and provide better customer service. Thus, the strategic decision depends
on what objectives are being pursued in operations, the availability of capital, marketing
objectives, and so forth.
McDonald’s illustrates how a consistent pattern of strategic decisions is made in the five
operations decisions areas:
Process: Specialized equipment and work flows ensure meals are delivered to cus-
tomers quickly. For example, the special French fry scoop puts the right amount of
fries in each serving with little effort. Also, servers use information technology to
instantly communicate orders to food preparers.
Quality: More than 2,000 quality, food safety, and inspections monitor food as it
moves from farms to suppliers to restaurants. McDonald’s requires that 72 safety
and quality protocols be conducted at each restaurant every day. Managers are
trained at “Hamburger U” in the McDonald’s system to ensure standards for
service, speed, food quality, cleanliness, and courtesy are met.
Capacity: Restaurant capacity is carefully designed to control customer waiting
times. Employees are scheduled to meet the fluctuating demand during the day.
Inventory: Just-in-time replenishment ensures food and packaging are available
when needed. Food and packaging are highly standardized across restaurants.
Supply Chain: Each restaurant is connected to its supply chain for fast replenish-
ment. The supply chain is designed for frequent deliveries and to avoid stockouts.
All operations should have a distinctive competence (or operations capability) that differ-
entiates it from the competitors. The distinctive competence is something that operations
does better than anyone else. It may be based on unique resources (human or capital) that
are difficult to imitate. Distinctive competence can also be based on proprietary or pat-
ented technology or any innovation in operations that cannot be copied easily.
The distinctive competence should match the mission of operations. For example, it is a
mismatch to have a distinctive competence of superior inventory management systems
when the operations mission is to excel at new-product introduction. Likewise, the distinc-
tive competence must be coordinated with marketing, finance, and the other functions so
that it is supported across the entire business as a basis for competitive advantage.
Distinctive
Competence
TABLE 2.2
Examples of
Important Strategic
Decisions in
Operations
Strategic Decision Decision Type Strategic Choice
Process Span of process
Automation
Make or buy
Handmade or machine-made
Process flow
Job specialization
Project, batch, line, or continuous
High or low specialization
Quality Approach
Training
Suppliers
Prevention or inspection
Technical or managerial training
Selected on quality or cost
Capacity Facility size
Location
Investment
One large or several small facilities
Near markets, low cost, or foreign
Permanent or temporary
Inventory Amount
Distribution
Control systems
High or low levels of inventory
Centralized or decentralized warehouse
Control in greater or less detail
Supply Chain Sourcing
Logistics
Insource or outsource products
National or global distribution
Chapter 2 Operations and Supply Chain Strategy 25
Distinctive competence may be used to
define a particular business strategy in an
ongoing business. The business strategy does
not always emanate from the market; it may
be built instead on matching operations’ dis-
tinctive competence (current or projected)
with a current or potential new market. Both
a viable market segment and a unique capa-
bility to deliver the product or service offered
must be present for the firm to compete.
Walmart has a mission to be the low-cost
retailer. To achieve this mission it has developed a distinctive competence in cross-docking
aimed at lowering the costs of shipping. Using cross-docking, goods from suppliers’ trucks
are transferred across the loading dock to waiting Walmart trucks and delivered to the stores
without entering the warehouse. Walmart also has a sophisticated inventory control system
and more purchasing power than its competitors and therefore can minimize inventories and
related costs. These distinctive competencies help Walmart compete on the basis of low cost.
McDonald’s early distinctive competence was its unique service and supply chain that it
designed. Since other firms have copied this system over time, the distinctive competence
has shifted to continuous improvement of the transformation system along with the brand.
McDonald’s system and its brand are now its distinctive competence.
2.2 COMPETING WITH OPERATIONS OBJECTIVES
We will now use the four operations objectives discussed above to describe different ways
to compete through operations. Most firms choose one or a few objectives to focus on, so
that the strategic decisions made in operations can be aligned with and support these
focused objectives.
Suppose we start with the idea of competing through a quality objective. Delivering
quality means satisfying customer requirements. This assumes that marketing has identi-
fied a particular target market, and that operations understands these customers’ specific
requirements. Operations processes must be capable of meeting those requirements. If
competing through quality is the objective, strategic decisions related to product or service
design, operations, and the supply chain must support customers’ expectations for quality.
For example, expectations for customer service in a moderately priced hotel differ from
those for a high-end luxury hotel. Workers must be trained to provide the expected level of
service, and supply chain decisions—for instance, which softness of sheets to purchase for
the hotel—must satisfy customer requirements.
Now, suppose we decide to pursue a low-cost objective. Perhaps the best way to achieve
low cost is to focus on conforming to customer requirements (quality) in product/service
design and operations processes by eliminating rework, scrap, inspection, and other non-
value-added activities. By preventing errors through continuous improvement, costs can be
lowered. A low-cost objective may require more than just an emphasis on conformance qual-
ity. Investment in automation and information systems may also be needed to reduce costs.
If we select a delivery objective, strategic decisions should support fast or on-time deliv-
ery, depending on the expectations of customers. Industrial (business) customers often want
on-time delivery because they schedule loading docks at warehouses or retail stores and do
not want several trucks delivering at the same time. Fast delivery may be desirable for con-
sumers ordering products online (they will order from the company that can deliver the
product soonest). For services, fast delivery could take the form of the shortest wait for a
fast food meal during the lunch rush. In manufacturing, when quality improvement efforts
LO2.3 Differentiate
the ways to com-
pete with operations
objectives.
Walmart has distinctive
competencies to
support its low-cost
strategy.
© Mcgraw-Hill Education/
John Flournoy
26 Part One Introduction
reduce non-value-added steps, the time to produce and deliver the product is indirectly
reduced. Time can also be directly reduced by improving process changeover times, simpli-
fying complex operations, and redesigning the product or service for fast production.
Finally, we could choose to emphasize a flexibility objective. If we reduce delivery
time, flexibility will automatically improve. For example, if it originally took 16 weeks to
make a product and we reduce production time to 2 weeks, then it is possible to change the
schedule within a 2-week time frame rather than 16 weeks, making operations more flexi-
ble to changes in customer requirements. Other types of flexibility can be directly improved
by adding capacity, buying more flexible equipment, training workers to perform a wider
variety of tasks, or redesigning the product or service for high variety.
We can see that operations objectives are connected. If we stress a quality objective, we
also naturally get some cost reduction, time improvement, and more flexibility. Quality is
often a good p