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1 USING OPERATIONS TO CREATE VALUE
Characters perform at Cinderella’s Castle in Magic Kingdom,
Orlando, Florida, USA.
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Disney
Disney Corporation is an internationally diversified
entertainment and media enterprise comprising of five
business segments of media networks (e.g., ABC, ESPN
networks), parks and resorts (e.g., Disneyland and
Disneyworld), studio entertainment (e.g., Pixar and Marvel
studios), consumer products (e.g., toys, apparel, and books),
and interactive media (e.g., Disney.com). It is one of the 30
companies that has been a part of the Dow Jones Industrial
Average since 1991. With annual revenues of $45 billion in
2013, Disney is particularly well known for its theme parks
that had a 17 percent increase in operating income to $2.2
billion in the last fiscal year alone. Its largest park, Walt
Disney World Resort opened in Orlando, Florida, in 1971 and
includes the Magic Kingdom, Epcot Center, Disney Studios,
and Animal Kingdom.
Disney constantly evaluates and improves its processes to
enhance customer experience. One of its recent innovations is
a $1 billion comprehensive reservation and ride-planning
system that can allow guests to book rides months in advance
through a website or a smartphone app. Dubbed as
MyMagic+, it works through a radio-frequency identification
(RFID) chip embedded inside electronic wristbands or
bracelets that guests wear once they check into a Disney
theme park. Called MagicBands, they link electronically to
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centralized databases and can be used as admission tickets,
credit or debit cards, or hotel room keys. Just by tapping them
against electronic sensors, these MagicBands also become a
form of payment for food, entertainment,
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and merchandise. Data from these wristbands can help
1
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Disney determine when to add more staff to which rides,
decide how many employees in costumes should roam
around at which locations in the park, determine restaurant
menus and which souvenirs should be stocked based on
customer preferences, and even send e-mail or text message
alerts to guests when space opens up in an expedited queue at
that guest’s favorite ride such as Space Mountain or Pirates of
the Caribbean. Apart from facilitating crowd control and data
collection, this wearable technology helps Disney seamlessly
personalize each guest’s experience and change how they
play and spend at the oft-advertised “Most Magical Place on
Earth.”
Despite some privacy concerns surrounding the use of RFID
chips that can track a guest’s identity and location within the
theme parks, the new MyMagic+ system has multiple
advantages. First, when visitors have well-planned schedules
and forward visibility on what they are going to do on a given
day on an hourly basis, they are less likely to jump ship to
other theme parks in the area such as the Sea World or the
popular Wizarding World of Harry Potter by Universal
Studios. Second, when the logistics of moving from one
attraction to another are simplified, guests have additional
opportunities to spend more time and money in Disney
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restaurants and shops. Finally, by using this new RFIDenabled technology, Disney can effectively increase its
capacity when it is needed the most. For instance, this new
system allowed Disney to handle 3,000 additional visitors to
the Magic Kingdom in Orlando during the Christmas rush.
With other costs more or less fixed, the incremental revenues
from additional guests flow directly to the bottom line.
Increased profitability through technological and operational
innovations help Disney provide more value to its guests as
well as maintain its leadership position in the entertainment
industry on multiple dimensions. It is also one among many
other reasons why despite the price of entrance tickets
crossing an average of $100 per day inclusive of taxes, an
increase of 45 percent since 2005, there is no end in sight to
the large crowds flooding Disney’s theme parks.
Sources: Christopher Palmeri, “Disney Bets $1 Billion on Technology to
Track Theme Park Visitors,” Bloomberg Business Week (March 7, 2014); Justin
Bachman, “Disney’s Magic Kingdom Nears $100 Tickets, and the Crowds Keep
Coming,” Bloomberg Business Week (February 25, 2014);
http://thewaltdisneycompany.com/about-disney/company-overview;
http://en.wikipedia.org/wiki/Disney (August 18, 2014).
LEARNING GOALS
After reading this chapter, you should be able to:
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Describe the role of operations in an organization and
its historical evolution over time.
Describe the process view of operations in terms of
inputs, processes, outputs, information flows, suppliers,
and customers.
Describe the supply chain view of operations in terms of
linkages between core and support processes.
Define an operations strategy and its linkage to
corporate strategy and market analysis.
Identify nine competitive priorities used in operations
strategy, and explain how a consistent pattern of decisions
can develop organizational capabilities.
Identify the latest trends in operations management,
and understand how given these trends, firms can address
the challenges facing operations and supply chain
managers in a firm.
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3
Operations management refers to the systematic design,
direction, and control of processes that transform inputs into
services and products for internal, as well as external
customers. As exemplified by Disney, it can be a source of
competitive advantage for firms in both service as well as
manufacturing sectors.
This book deals with managing those fundamental activities
and processes that organizations use to produce goods and
services that people use every day. A process is any activity or
group of activities that takes one or more inputs, transforms
them, and provides one or more outputs for its customers. For
organizational purposes, processes tend to be clustered
together into operations. An operation is a group of resources
performing all or part of one or more processes. Processes can
be linked together to form a supply chain, which is the
interrelated series of processes within a firm and across
different firms that produce a service or product to the
satisfaction of customers.1 A firm can have multiple supply
chains, which vary by the product or service provided. Supply
chain management is the synchronization of a firm’s
processes with those of its suppliers and customers to match
the flow of materials, services, and information with customer
demand. As we will learn throughout this book, all firms have
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processes and supply chains. Sound operational planning and
design of these processes, along with internal and external
coordination within its supply chain, can create wealth and
value for a firm’s diverse stakeholders.
operations management
The systematic design, direction, and control of processes that
transform inputs into services and products for internal, as
well as external, customers.
process
Any activity or group of activities that takes one or more
inputs, transforms them, and provides one or more outputs
for its customers.
operation
A group of resources performing all or part of one or more
processes.
supply chain
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An interrelated series of processes within and across firms
that produces a service or product to the satisfaction of
customers.
supply chain management
The synchronization of a firm’s processes with those of its
suppliers and customers to match the flow of materials,
services, and information with customer demand.
Role of Operations in an Organization
Broadly speaking, operations and supply chain management
underlie all departments and functions in a business.
Whether you aspire to manage a department or a particular
process within it, or you just want to understand how the
process you are a part of fits into the overall fabric of the
business, you need to understand the principles of operations
and supply chain management.
Operations serve as an excellent career path to upper
management positions in many organizations. The reason is
that operations managers are responsible for key decisions
that affect the success of the organization. In manufacturing
firms, the head of operations usually holds the title chief
operations officer (COO) or vice president of manufacturing
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(or of production or operations). The corresponding title in a
service organization might be COO or vice president (or
director) of operations. Reporting to the head of operations
are the managers of departments such as customer service,
production and inventory control, and quality assurance.
Figure 1.1 shows operations as one of the key functions
within an organization. The circular relationships in Figure
1.1 highlight the importance of the coordination among the
three mainline functions of any business, namely, (1)
operations, (2) marketing, and (3) finance. Each function is
unique and has its own knowledge and skill areas, primary
responsibilities, processes, and decision domains. From an
external perspective, finance generates resources, capital, and
funds from investors and sales of its goods and services in the
marketplace. Based on business strategy, the finance and
operations functions then decide how to invest these
resources and convert them into physical assets and material
inputs. Operations subsequently transforms these material
and service inputs into product and service outputs. These
outputs must match the characteristics that can be sold in the
selected markets by marketing. Marketing is responsible for
producing sales revenue of the outputs, which become returns
to investors and capital for supporting operations. Functions
such as accounting, information systems, human resources,
and engineering make the firm complete by providing
essential information, services, and other managerial support.
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These relationships provide direction for the business as a
whole and are aligned to the same strategic intent. It is
important to understand the entire circle, and not just the
individual functional areas. How well these functions work
together determines the effectiveness of the organization.
Functions should be integrated and should pursue a common
strategy. Success depends on how well they are able to do so.
No part of this circle can be dismissed or minimized without
loss of effectiveness, and regardless of how departments and
functions are individually managed; they are always linked
together through processes. Thus, a firm competes not only by
offering new services and products, creative marketing, and
skillful finance but also through its unique competencies in
operations and sound management of core processes.
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FIGURE 1.1 Integration between Different Functional
Areas of a Business
1
The terms supply chain and value chain are sometimes used
interchangeably.
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Historical Evolution and Perspectives
The history of modern operations and supply chain
management is rich and over two hundred years old, even
though its practice has been around in one form or another
for centuries. James Watt invented the steam engine in 1785.
The subsequent establishment of railroads facilitated efficient
movement of goods throughout Europe, and eventually even
in distant colonies such as India. With the invention of the
cotton gin in 1794, Eli Whitney introduced the concept of
interchangeable parts. It revolutionized the art of machinebased manufacturing, and coupled with the invention of the
steam engine, lead to the great industrial revolution in
England and the rest of Europe. The textile industry was one
of the earliest industries to be mechanized. The industrial
revolution gradually spread to the United States and the rest
of the world in the nineteenth century and was accompanied
by such great innovations as the internal combustion engine,
steam-powered ships, metallurgy of iron making, large-scale
production of chemicals, and invention of machine tools,
among others. The foundations of modern manufacturing and
technological breakthroughs were also inspired by the
creation of a mechanical computer by Charles Babbage in the
early part of the nineteenth century. He also pioneered the
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concept of division of labor, which laid the foundation for
scientific management of operations and supply chain
management that was further improved upon by Frederick
Taylor in 1911.
The Ford Motor Company, founded in 1903, produced about one
million Model T’s in 1921 alone.
Three other landmark events from the twentieth century
define the history of operations and supply chain
management. First is the invention of the assembly line for
the Model T car by Henry Ford in 1909. The era of mass
production was born, where complex products like
automobiles could be manufactured in large numbers at
affordable prices through repetitive manufacturing. Second,
Alfred Sloan in the 1930s introduced the idea of strategic
planning for achieving product proliferation and variety, with
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the newly founded General Motors Corporation offering “a car
for every purse and purpose.” Finally, with the publication of
the Toyota Production System book in Japanese in 1978,
Taiichi Ohno laid the groundwork for removing wasteful
activities from an organization, a concept that we explore
further in this book while learning about lean systems.
The recent history of operations and supply chains over the
past three decades has been steeped in technological
advances. The 1980s were characterized by wide availability
of computer-aided design (CAD), computer-aided
manufacturing (CAM), and automation. Information
technology applications started playing an increasingly
important role in the 1990s and started connecting the firm
with its extended enterprise through Enterprise Resource
Planning Systems and outsourced technology hosting for
supply chain solutions. Service organizations like Federal
Express, United Parcel Service (UPS), and Walmart also
became sophisticated users of information technology in
operations, logistics, and management of supply chains. The
new millennium has seen an acceleration of this trend, along
with an increased focus on sustainability and the natural
environment. We cover all these ideas and topical areas in
greater detail throughout this book.
A Process View
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You might wonder why we begin by looking at processes
rather than at departments or even the firm. The reason is
that a process view of the firm provides a much more relevant
picture of the way firms actually work. Departments typically
have their own set of objectives, a set of resources with
capabilities to achieve those objectives, and managers and
employees responsible for performance. Some processes, such
as billing, may be so specific that they are contained wholly
within a single department, such as accounting.
The concept of a process, however, can be much broader. A
process can have its own set of objectives, involve a work flow
that cuts across departmental boundaries, and require
resources from several departments. You will see examples
throughout this text of companies that discovered how to use
their processes to gain a competitive advantage. You will
notice that the key to success in many organizations is a keen
understanding of how their processes work, since an
organization is only as effective as its processes. Therefore,
operations management is relevant and important for all
students, regardless of major, because all departments have
processes that must be managed effectively to gain a
competitive advantage.
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5
How Processes Work
Figure 1.2 shows how processes work in an organization. Any
process has inputs and outputs. Inputs can include a
combination of human resources (workers and managers),
capital (equipment and facilities), purchased materials and
services, land, and energy. The numbered circles in Figure 1.2
represent operations through which services, products, or
customers pass and where processes are performed. The
arrows represent flows and can cross because one job or
customer can have different requirements (and thus a
different flow pattern) than the next job or customer.
Processes provide outputs to customers. These outputs may
often be services (that can take the form of information) or
tangible products. Every process and every person in an
organization has customers. Some are external customers,
who may be end users or intermediaries (e.g., manufacturers,
financial institutions, or retailers) buying the firm’s finished
services or products. Others are internal customers, who may
be employees in the firm whose process inputs are actually
the outputs of earlier processes managed within the firm.
Either way, processes must be managed with the customer in
mind.
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external customers
A customer who is either an end user or an intermediary
(e.g., manufacturers, financial institutions, or retailers)
buying the firm’s finished services or products.
internal customers
One or more employees or processes that rely on inputs from
other employees or processes to perform their work.
In a similar fashion, every process and every person in an
organization relies on suppliers. External suppliers may be
other businesses or individuals who provide the resources,
services, products, and materials for the firm’s short-term and
long-term needs. Processes also have internal suppliers, who
may be employees or processes that supply important
information or materials.
external suppliers
The businesses or individuals who provide the resources,
services, products, and materials for the firm’s short-term
and long-term needs.
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internal suppliers
The employees or processes that supply important
information or materials to a firm’s processes.
Inputs and outputs vary depending on the service or product
provided. For example, inputs at a jewelry store include
merchandise, the store building, registers, the jeweler, and
customers; outputs to external customers are services and
sold merchandise. Inputs to a factory manufacturing blue
jeans include denim, machines, the plant, workers, managers,
and services provided by outside consultants; outputs are
clothing and supporting services. The fundamental role of
inputs, processes, and customer outputs holds true for
processes at all organizations.
Figure 1.2 can represent a whole firm, a department, a small
group, or even a single individual. Each one has inputs and
uses processes at various operations to provide outputs. The
dashed lines represent two special types of input:
participation by customers and information on performance
from both internal and external sources. Participation by
customers occurs not only when they receive outputs but also
when they take an active part in the processes, such as when
students participate in a class discussion. Information on
performance includes internal reports on customer service or
inventory levels and external information from market
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research, government reports, or telephone calls from
suppliers. Managers need all types of information to manage
processes most effectively.
FIGURE 1.2 Processes and Operations
Nested Processes
Processes can be broken down into subprocesses, which in
turn can be broken down further into still more subprocesses.
We refer to this concept of a process within a process as a
nested process. It may be helpful to separate one part of a
process from another for several reasons. One person or one
department may be unable to perform all parts of the process,
or different parts of the process may require different skills.
Some parts of the process may be designed for routine work
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while other parts may be geared for customized work. The
concept of nested processes is illustrated in greater detail in
Chapter 2, “Process Strategy and Analysis,” where we
reinforce the need to understand and improve activities
within a business and each process’s inputs and outputs.
nested process
The concept of a process within a process.
Service and Manufacturing Processes
Two major types of processes are (1) service and (2)
manufacturing. Service processes pervade the business world
and have a prominent place in our discussion of operations
management. Manufacturing processes are also important;
without them the products we enjoy as part of our daily lives
would not exist. In addition, manufacturing gives rise to
service opportunities.
Differences
Why do we distinguish between service and manufacturing
processes? The answer lies at the heart of the design of
competitive processes. While Figure 1.3 shows several
distinctions between service and manufacturing processes
along a continuum, the two key differences that we discuss in
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detail are (1) the nature of their output and (2) the degree of
customer contact. In general, manufacturing processes also
have longer response times, are more capital intensive, and
their quality can be measured more easily than those of
service processes.
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Manufacturing processes convert materials into goods that
have a physical form we call products. For example, an
assembly line produces a 370 Z sports car, and a tailor
produces an outfit for the rack of an upscale clothing store.
The transformation processes change the materials on one or
more of the following dimensions:
1. Physical properties
2. Shape
3. Size (e.g., length, breadth, and height of a rectangular
block of wood)
4. Surface finish
5. Joining parts and materials
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FIGURE 1.3 Continuum of Characteristics of
Manufacturing and Service Processes
The outputs from manufacturing processes can be produced,
stored, and transported in anticipation of future demand.
If a process does not change the properties of materials on at
least one of these five dimensions, it is considered a service
(or nonmanufacturing) process. Service processes tend to
produce intangible, perishable outputs. For example, the
output from the auto loan process of a bank would be a car
loan, and an output of the order fulfillment process of the U.S.
Postal Service is the delivery of your letter. The outputs of
service processes typically cannot be held in a finished goods
inventory to insulate the process from erratic customer
demands.
A second key difference between service processes and
manufacturing processes is degree of customer contact.
Service processes tend to have a higher degree of customer
contact. Customers may take an active role in the process
itself, as in the case of shopping in a supermarket, or they may
be in close contact with the service provider to communicate
specific needs, as in the case of a medical clinic.
Manufacturing processes tend to have less customer contact.
For example, washing machines are ultimately produced to
meet retail forecasts. The process requires little information
from the ultimate consumers (you and me), except indirectly
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through market surveys and market focus groups. Even
though the distinction between service and manufacturing
processes on the basis of customer contact is not perfect, the
important point is that managers must recognize the degree of
customer contact required when designing processes.
Similarities
At the level of the firm, service providers do not just offer
services and manufacturers do not just offer products.
Patrons of a restaurant expect good service and good food. A
customer purchasing a new computer expects a good product
as well as a good warranty, maintenance, replacement, and
financial services.
Further, even though service processes do not keep finished
goods inventories, they do inventory their inputs. For
example, hospitals keep inventories of medical supplies and
materials needed for day-to-day operations. Some
manufacturing processes, on the other hand, do not inventory
their outputs because they are too costly. Such would be the
case with low-volume customized products (e.g., tailored
suits) or products with short shelf lives (e.g., daily
newspapers).
When you look at what is being done at the process level, it is
much easier to see whether the process is providing a service
or manufacturing a product. However, this clarity is lost when
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the whole company is classified as either a manufacturer or a
service provider because it often performs both types of
processes. For example, the process of cooking a hamburger
at a McDonald’s is a manufacturing process because it
changes the material’s physical properties (dimension 1), as is
the process of assembling the hamburger with the bun
(dimension 5). However, most of the other processes visible or
invisible to McDonald’s customers are service processes. You
can debate whether to call the whole McDonald’s organization
a service provider or a manufacturer, whereas classifications
at the process level are much less ambiguous.
A Supply Chain View
Most services or products are produced through a series of
interrelated business activities. Each activity in a process
should add value to the preceding activities; waste and
unnecessary cost should be eliminated. Our process view of a
firm is helpful for understanding how services or products are
produced and why cross-functional coordination is important,
but it does not shed any light on the strategic benefits of the
processes. The missing strategic insight is that processes must
add value for customers throughout the supply chain. The
concept of supply chains reinforces the link between
processes and performance, which includes a firm’s internal
processes as well as those of its external customers and
suppliers. It also focuses attention on the two main types of
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processes in the supply chain, namely (1) core processes and
(2) support processes. Figure 1.4 shows the links between the
core and support processes in a firm and a firm’s external
customers and suppliers within its supply chain.
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7
FIGURE 1.4 Supply Chain Linkages Showing Work and
Information Flows
MyOMLab Animation
Core Processes
A core process is a set of activities that delivers value to
external customers. Managers of these processes and their
employees interact with external customers and build
relationships with them, develop new services and products,
interact with external suppliers, and produce the service or
product for the external customer. Examples include a hotel’s
reservation handling, a new car design for an auto
manufacturer, or Web-based purchasing for an online retailer
like amazon.com. Of course, each of the core processes has
nested processes within it.
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In this text we focus on four core processes:
1. Supplier Relationship Process. Employees in the supplier
relationship process select the suppliers of services,
materials, and information and facilitate the timely and
efficient flow of these items into the firm. Working
effectively with suppliers can add significant value to the
services or products of the firm. For example, negotiating
fair prices, scheduling on-time deliveries, and gaining
ideas and insights from critical suppliers are just a few of
the ways to create value.
2. New Service/Product Development Process. Employees in
the new service/product development process design and
develop new services or products. The services or products
may be developed to external customer specifications or
conceived from inputs received from the market in
general.
3. Order Fulfillment Process. The order fulfillment process
includes the activities required to produce and deliver the
service or product to the external customer.
4. Customer Relationship Process, sometimes referred to as
customer relationship management. Employees involved
in the customer relationship process identify, attract, and
build relationships with external customers and facilitate
the placement of orders by customers. Traditional
functions, such as marketing and sales, may be a part of
this process.
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core process
A set of activities that delivers value to external customers.
supplier relationship process
A process that selects the suppliers of services, materials, and
information and facilitates the timely and efficient flow of
these items into the firm.
new service/product development process
A process that designs and develops new services or products
from inputs received from external customer specifications
or from the market in general through the customer
relationship process.
order fulfillment process
A process that includes the activities required to produce and
deliver the service or product to the external customer.
customer relationship process
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A process that identifies, attracts, and builds relationships
with external customers and facilitates the placement of
orders by customers, sometimes referred to as customer
relationship management.
support process
A process that provides vital resources and inputs to the core
processes and therefore is essential to the management of the
business.
Support Processes
A support process provides vital resources and inputs to the
core processes and is essential to the management of the
business. Processes as such are not just in operations but are
found in accounting, finance, human resources, management
information systems, and marketing. The human resources
function in an organization provides many support processes
such as recruiting and hiring workers who are needed at
different levels of the organization, training the workers for
skills and knowledge needed to properly execute their
assigned responsibilities, and establishing incentive and
compensation plans that reward employees for their
performance. The legal department puts in place support
processes that ensure that the firm is in compliance with the
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rules and regulations under which the business operates. The
accounting function supports processes that track how the
firm’s financial resources are being created and allocated
over time, while the information systems function is
responsible for the movement and processing of data and
information needed to make business decisions.
Organizational structure throughout the many diverse
industries varies, but for the most part, all organizations
perform similar business processes. Table 1.1 lists a sample of
them that are outside the operations area.
All of these support processes must be managed to create as
much value for the firm and its customers and are therefore
vital to the execution of core processes highlighted in Figure
1.4. Managers of these processes must understand that they
cut across the organization, regardless of whether the firm is
organized along functional, product, regional, or process lines.
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7
8
TABLE 1.1 ILLUSTRATIVE BUSINESS
PROCESSES OUTSIDE OF OPERATIONS
Activity-based
costing
Employee benefits Help desks
Asset management Employee
compensation
IT networks
Billing budget
Employee
development
Payroll
Complaint
handling
Employee
recruiting
Records
management
Credit
management
Employee training Research and
development
Customer
satisfaction
Engineering
Data warehousing Environment
Sales
Security
management
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Data mining
External
communications
Waste
management
Disaster recovery
Finance
Warranty
Supply Chain Processes
Supply chain processes are business processes that have
external customers or suppliers. Table 1.2 illustrates some
common supply chain processes.
supply chain processes
Business processes that have external customers or suppliers.
TABLE 1.2 SUPPLY CHAIN PROCESS
EXAMPLES
Process
Description
Outsourcing
Exploring available
suppliers for the best
options to perform
processes in terms of price,
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Process
Description
quality, delivery time,
environmental issues
Warehousing
Receiving shipments from
suppliers, verifying
quality, placing in
inventory, and reporting
receipt for inventory
records
Sourcing
Selecting, certifying, and
evaluating suppliers and
managing supplier
contracts
Customer Service
Providing information to
answer questions or
resolve problems using
automated information
services as well as voice-tovoice contact with
customers
Logistics
Selecting transportation
mode (train, ship, truck,
airplane, or pipeline)
scheduling both inbound
and outbound shipments,
and providing
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Process
Description
intermediate inventory
storage
Cross-docking
Packing of products of
incoming shipments so
they can be easily sorted
more economically at
intermediate warehouses
for outgoing shipments to
their final destination
These supply chain processes should be documented and
analyzed for improvement, examined for quality
improvement and control, and assessed in terms of capacity
and bottlenecks. Supply chain processes will be only as good
as the processes within the organization that have only
internal suppliers and customers. Each process in the chain,
from suppliers to customers, must be designed and managed
to add value to the work performed.
Operations Strategy
Operations strategy specifies the means by which operations
implements corporate strategy and helps to build a customerdriven firm. It links long-term and short-term operations
decisions to corporate strategy and develops the capabilities
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the firm needs to be competitive. It is at the heart of managing
processes and supply chains. A firm’s internal processes are
only building blocks: They need to be organized to ultimately
be effective in a competitive environment. Operations
strategy is the linchpin that brings these processes together to
form supply chains that extend beyond the walls of the firm,
encompassing suppliers as well as customers. Since customers
constantly desire change, the firm’s operations strategy must
be driven by the needs of its customers.
operations strategy
The means by which operations implements the firm’s
corporate strategy and helps to build a customer-driven firm.
Developing a customer-driven operations strategy is a process
that begins with corporate strategy, which, as shown in Figure
1.5, coordinates the firm’s overall goals with its core
processes. It determines the markets the firm will serve and
the responses the firm will make to changes in the
environment. It provides the resources to develop the firm’s
core competencies and core processes, and it identifies the
strategy the firm will employ in international markets. Based
on corporate strategy, a market analysis categorizes the firm’s
customers, identifies their needs, and assesses competitors’
strengths. This information is used to develop competitive
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priorities. These priorities help managers develop the services
or products and the
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processes needed to be competitive in the marketplace.
8
9
Competitive priorities are important to the design of existing
as well as new services or products, the processes that will
deliver them, and the operations strategy that will develop the
firm’s capabilities to fulfill them. Developing a firm’s
operations strategy is a continuous process because the firm’s
capabilities to meet the competitive priorities must be
periodically checked, and any gaps in performance must be
addressed in the operations strategy.
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FIGURE 1.5 Connection Between Corporate Strategy
and Key Operations Management Decisions
MyOMLab Animation
Corporate Strategy
Corporate strategy provides an overall direction that serves as
the framework for carrying out all the organization’s
functions. It specifies the business or businesses the company
will pursue, isolates new opportunities and threats in the
environment, and identifies growth objectives.
Developing a corporate strategy involves four considerations:
(1) environmental scanning: monitoring and adjusting to
changes in the business environment, (2) identifying and
developing the firm’s core competencies, (3) developing the
firm’s core processes, and (4) developing the firm’s global
strategies.
Environmental Scanning
The external business environment in which a firm competes
changes continually and an organization needs to adapt to
those changes. Adaptation begins with environmental
scanning, the process by which managers monitor trends in
the environment (e.g., the industry, the marketplace, and
society) for potential opportunities or threats. A crucial reason
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for environmental scanning is to stay ahead of the
competition. Competitors may be gaining an edge by
broadening service or product lines, improving quality, or
lowering costs. New entrants into the market or competitors
that offer substitutes for a firm’s service or product may
threaten continued profitability. Other important
environmental concerns include economic trends,
technological changes, political conditions, social changes (i.e.,
attitudes toward work), and the availability of vital resources.
For example, car manufacturers recognize that dwindling oil
reserves will eventually require alternative fuels for their
cars. Consequently, they have designed prototype cars that
use hydrogen or electric power as supplements to gasoline as
a fuel.
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10
Developing Core Competencies
Good managerial skill alone cannot overcome environmental
changes. Firms succeed by taking advantage of what they do
particularly well—that is, the organization’s unique strengths.
Core competencies are the unique resources and strengths
that an organization’s management considers when
formulating strategy. They reflect the collective learning of
the organization, especially in how to coordinate processes
and integrate technologies. These competencies include the
following:
1. Workforce. A well-trained and flexible workforce allows
organizations to respond to market needs in a timely
fashion. This competency is particularly important in
service organizations, where customers come in direct
contact with employees.
2. Facilities. Having well-located facilities (offices, stores, and
plants) is a primary advantage because of the long lead
time needed to build new ones. In addition, flexible
facilities that can handle a variety of services or products
at different levels of volume provide a competitive
advantage.
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3. Market and Financial Know-How. An organization that
can easily attract capital from stock sales, market and
distribute its services or products, or differentiate them
from similar services or products on the market has a
competitive edge.
4. Systems and Technology. Organizations with expertise in
information systems have an edge in industries that are
data intensive, such as banking. Particularly advantageous
is expertise in Internet technologies and applications, such
as business-to-consumer and business-to-business systems.
Having the patents on a new technology is also a big
advantage.
core competencies
The unique resources and strengths that an organization’s
management considers when formulating strategy.
lead time
The elapsed time between the receipt of a customer order and
filling it.
Developing Core Processes
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A firm’s core competencies should drive its core processes:
customer relationship, new service or product development,
order fulfillment, and supplier relationship. Many companies
have all four processes, while others focus on a subset of them
to better match their core competencies, since they find it
difficult to be good at all four processes and still be
competitive. For instance, in the credit card business within
the banking industry, some companies primarily specialize in
finding customers and maintaining relationships with them.
American Airlines’s credit card program reaches out and
achieves a special affinity to customers through its marketing
database. On the other hand, specialized credit card
companies, such as Capital One, focus on service innovation
by creating new features and pricing programs. Finally, many
companies are taking over the order fulfillment process by
managing the processing of credit card transactions and call
centers. The important point is that every firm must evaluate
its core competencies and choose to focus on those processes
that provide it the greatest competitive strength.
Developing Global Strategies
Identifying opportunities and threats today requires a global
perspective. A global strategy may include buying foreign
services or parts, combating threats from foreign competitors,
or planning ways to enter markets beyond traditional
national boundaries. Although warding off threats from
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global competitors is necessary, firms should also actively
seek to penetrate foreign markets. Two effective global
strategies are (1) strategic alliances and (2) locating abroad.
One way for a firm to open foreign markets is to create a
strategic alliance. A strategic alliance is an agreement with
another firm that may take one of three forms. One form of
strategic alliance is the collaborative effort, which often arises
when one firm has core competencies that another needs but
is unwilling (or unable) to duplicate. Such arrangements
commonly arise out of buyer–supplier relationships. Another
form of strategic alliance is the joint venture, in which two
firms agree to produce a service or product jointly. This
approach is often used by firms to gain access to foreign
markets. Finally, technology licensing is a form of strategic
alliance in which one company licenses its service or
production methods to another. Licenses may be used to gain
access to foreign markets.
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Capital One Financial Corp. is a U.S.-based bank holding company
specializing in credit cards, home loans, auto loans, banking, and
savings products.
Another way to enter global markets is to locate operations in
a foreign country. However, managers must recognize that
what works well in their home country might not work well
elsewhere. The economic and political environment or
customers’ needs may be
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significantly different. For example, the family-owned chain
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Jollibee Foods Corporation became the dominant fast-food
chain in the Philippines by catering to a local preference for
sweet and spicy flavors, which it incorporates into its fried
chicken, spaghetti, and burgers. Jollibee’s strength is its
creative marketing programs and an understanding of local
tastes; it claims that its burger is similar to the one a Filipino
would cook at home. McDonald’s responded by introducing its
own Filipino-style spicy burger, but competition is stiff. This
example shows that to be successful, corporate strategies must
recognize customs, preferences, and economic conditions in
other countries.
Locating abroad is a key decision in the design of supply
chains because it affects the flow of materials, information,
and employees in support of the firm’s core processes.
Chapter 12, “Supply Chain Design,” and Chapter 13, “Supply
Chain Logistic Networks,” offer more in-depth discussion of
these other implications.
Market Analysis
One key to successfully formulating a customer-driven
operations strategy for both service and manufacturing firms
is to understand what the customer wants and how to provide
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it. A market analysis first divides the firm’s customers into
market segments and then identifies the needs of each
segment. In this section, we examine the process of market
analysis, and we define and discuss the concepts of market
segmentation and needs assessment.
Market Segmentation
Market segmentation is the process of identifying groups of
customers with enough in common to warrant the design and
provision of services or products that the group wants and
needs. To identify market segments, the analyst must
determine the characteristics that clearly differentiate each
segment. The company can then develop a sound marketing
program and an effective operating strategy to support it. For
instance, The Gap, Inc., a major provider of casual clothes,
targets teenagers and young adults while the parents or
guardians of infants to 12-year-olds are the primary targets
for its GapKids stores. At one time, managers thought of
customers as a homogeneous mass market but now realize
that two customers may use the same product for different
reasons. Identifying the key factors in each market segment is
the starting point in devising a customer-driven operations
strategy.
Needs Assessment
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The second step in market analysis is to make a needs
assessment, which identifies the needs of each segment and
assesses how well competitors are addressing those needs.
Each market segment’s needs can be related to the service or
product and its supply chain. Market needs should include
both the tangible and intangible attributes and features of
products and services that a customer desires. Market needs
may be grouped as follows:
■ Service or Product Needs. Attributes of the service or
product, such as price, quality, and degree of
customization.
■ Delivery System Needs. Attributes of the processes and the
supporting systems, and resources needed to deliver the
service or product, such as availability, convenience,
courtesy, safety, accuracy, reliability, delivery speed, and
delivery dependability.
■ Volume Needs. Attributes of the demand for the service or
product, such as high or low volume, degree of variability
in volume, and degree of predictability in volume.
■ Other Needs. Other attributes, such as reputation and
number of years in business, after-sale technical support,
ability to invest in international financial markets, and
competent legal services.
Once it makes this assessment, the firm can incorporate the
needs of customers into the design of the service or product
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and the supply chain that must deliver it. We further discuss
these new service and product development-related issues in
Chapter 14, “Supply Chain Integration.”
Competitive Priorities and Capabilities
A customer-driven operations strategy requires a crossfunctional effort by all areas of the firm to understand the
needs of the firm’s external customers and to specify the
operating capabilities the firm requires to outperform its
competitors. Such a strategy also addresses the needs of
internal customers because the overall performance of the
firm depends upon the performance of its core and
supporting processes, which must be coordinated to provide
the overall desirable outcome for the external customer.
Competitive priorities are the critical operational dimensions
a process or supply chain must possess to satisfy internal or
external customers, both now and in the future. Competitive
priorities are planned for processes and the supply chain
created from them. They must be present to maintain or build
market share or to allow other internal processes to be
successful. Not all competitive priorities are critical for a
given process; management selects those that are most
important. Competitive capabilities are the cost, quality,
time, and flexibility dimensions that a process or supply chain
actually
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11
12
possesses and is able to deliver. When the capability falls
short of the priority attached to it, management must find
ways to close the gap or else revise the priority.
competitive priorities
The critical dimensions that a process or supply chain must
possess to satisfy its internal or external customers, both now
and in the future.
competitive capabilities
The cost, quality, time, and flexibility dimensions that a
process or supply chain actually possesses and is able to
deliver.
We focus on nine broad competitive priorities that fall into
the four capability groups of cost, quality, time, and flexibility.
Table 1.3 provides definitions and examples of these
competitive priorities, as well as how firms achieve them at
the process level.
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TABLE 1.3 DEFINITIONS, PROCESS
CONSIDERATIONS, AND EXAMPLES OF
COMPETITIVE PRIORITIES
Cost
Definition
Processes
Example
Considerations
1. Low-cost
operations
Delivering a
service or a
product at
the lowest
possible cost
to the
satisfaction
of external
or internal
customers of
the process
or supply
chain
To reduce
costs, processes
must be
designed and
operated to
make them
efficient using
rigorous
process
analysis that
addresses
workforce,
methods, scrap
or rework,
overhead, and
other factors,
such as
investments in
new
automated
facilities or
technologies to
lower the cost
per unit of the
Costco
achieves low
costs by
designing all
processes for
efficiency,
stacking
products on
pallets in
warehousetype stores,
and
negotiating
aggressively
with their
suppliers.
Costco can
provide low
prices to its
customers
because they
have
designed
operations
for low cost.
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Cost
Definition
Processes
Example
Considerations
service or
product.
Quality
2. Top quality Delivering an
outstanding
service or
product
To deliver top
quality, a
service process
may require a
high level of
customer
contact, and
high levels of
helpfulness,
courtesy, and
availability of
servers. It may
require
superior
product
features, close
tolerances, and
greater
durability from
a
manufacturing
process.
Rolex is
known
globally for
creating
precision
timepieces.
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Cost
Definition
Processes
Example
Considerations
3. Consistent
quality
Producing
services or
products that
meet design
specifications
on a
consistent
basis
Processes must
be designed
and monitored
to reduce
errors, prevent
defects, and
achieve similar
outcomes over
time,
regardless of
the “level” of
quality.
McDonald’s
standardizes
work
methods,
staff training
processes,
and
procurement
of raw
materials to
achieve the
same
consistent
product and
process
quality from
one store to
the next.
Quickly
filling a
customer’s
order
Design
processes to
reduce lead
time (elapsed
time between
the receipt of a
customer order
and filling it)
through
Netflix
engineered
its customer
relationship,
order
fulfillment
and supplier
relationship
processes to
Time
4. Delivery
speed
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Cost
5. On-time
delivery
Definition
Processes
Example
Considerations
keeping
backup
capacity
cushions,
storing
inventory, and
using premier
transportation
options.
create an
integrated
Web-based
system that
allows its
customers to
watch
multiple
episodes of a
TV program
or movies in
rapid
succession.
Meeting
Along with
delivery-time processes that
promises
reduce lead
time, planning
processes
(forecasting,
appointments,
order
promising,
scheduling,
and capacity
planning) are
used to
increase
percent of
customer
orders shipped
United
Parcel
Services
(UPS) uses its
expertise in
logistics and
warehousing
processes to
deliver a
very large
volume of
shipments
on-time
across the
globe.
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Cost
Definition
Processes
Example
Considerations
when
promised (95%
is often a
typical goal).
6.
Quickly
Development introducing a
new service
speed
or a product
Processes aim
to achieve
crossfunctional
integration and
involvement of
critical
external
suppliers in the
service or
product
development
process.
Zara is
known for its
ability to
bring
fashionable
clothing
designs from
the runway
to market
quickly.
Processes with
a
customization
strategy
typically have
low volume,
close customer
contact, and an
Ritz Carlton
customizes
services to
individual
guest
preferences.
Flexibility
7.
Satisfying the
Customization unique needs
of each
customer by
changing
service or
product
designs
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Cost
Definition
Processes
Example
Considerations
ability to
reconfigure
processes to
meet diverse
types of
customer
needs.
8. Variety
Handling a
wide
assortment
of services or
products
efficiently
Processes
supporting
variety must
be capable of
larger volumes
than processes
supporting
customization.
Services or
products are
not necessarily
unique to
specific
customers and
may have
repetitive
demands.
Amazon.com
uses
information
technology
and
streamlined
customer
relationship
and order
fulfillment
processes to
reliably
deliver a vast
variety of
items to its
customers.
9. Volume
flexibility
Accelerating
or
decelerating
the rate of
Processes must
be designed for
excess capacity
and excess
The United
States Post
Office (USPS)
can have
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Cost
Definition
Processes
Example
Considerations
production
of services or
products
quickly to
handle large
fluctuations
in demand
inventory to
handle
demand
fluctuations
that can vary
in cycles from
days to
months. This
priority could
also be met
with a strategy
that adjusts
capacity
without
accumulation
of inventory or
excess
capacity.
severe
demand
peak
fluctuations
at large
postal
facilities
where
processes are
flexibly
designed for
receiving,
sorting, and
dispatching
mail to
numerous
branch
locations.
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At times, management may emphasize a cluster of
competitive priorities together. For example, many companies
focus on the competitive priorities of delivery speed and
development speed for their processes, a strategy called timebased competition. To implement the strategy, managers
carefully define the steps and time needed to deliver a service
or produce a product and then critically analyze each step to
determine whether they can save time without hurting
quality.
time-based competition
A strategy that focuses on the competitive priorities of
delivery speed and development speed.
To link to corporate strategy, management assigns selected
competitive priorities to each process (and the supply chains
created from them) that are consistent with the needs of
external as well as internal customers. Competitive priorities
may change over time. For example, consider a high-volume
standardized product, such as color ink-jet desktop printers.
In the early stages of the ramp-up period when the printers
had just entered the mass market, the manufacturing
processes required consistent quality, delivery speed, and
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volume flexibility. In the later stages of the ramp-up when
demand was high, the competitive priorities became low-cost
operations, consistent quality, and on-time delivery.
Competitive priorities must change and evolve over time
along with changing business conditions and customer
preferences.
The lavish interior lobby decor of the Ritz Carlton resort in Palm
Beach, Florida, USA
Order Winners and Qualifiers
Competitive priorities focus on what operations can do to help
a firm be more competitive and are in response to what the
market wants. Another useful way to examine a firm’s ability
to be successful in the marketplace is to identify the order
winners and order qualifiers. An order winner is a criterion
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that customers use to differentiate the services or products of
one firm from those of another. Order winners can include
price (which is supported by low-cost operations) and other
dimensions of quality, time, and flexibility. However, order
winners also include criteria not directly related to the firm’s
operations, such as after-sale support (Are maintenance
service contracts available? Is there a return policy?);
technical support (What help do I get if something goes
wrong? How knowledgeable are the technicians?); and
reputation (How long has this company been in business?
Have other customers been satisfied with the service or
product?). It may take good performance on a subset of the
order-winner criteria, cutting across operational as well as
nonoperational criteria, to make a sale.
order winner
A criterion customers use to differentiate the services or
products of one firm from those of another.
Order winners are derived from the considerations customers
use when deciding which firm to purchase a service or
product from in a given market segment. Sometimes
customers demand a certain level of demonstrated
performance before even contemplating a service or product.
Minimal level required from a set of criteria for a firm to do
business in a particular market segment is called an order
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qualifier. Fulfilling the order qualifier will not ensure
competitive success; it will only position the firm to compete
in the market. From an operations perspective, understanding
which competitive priorities are order qualifiers and which
ones are order winners is important for the investments made
in the design and management of processes and supply
chains.
order qualifier
Minimal level required from a set of criteria for a firm to do
business in a particular market segment.
FIGURE 1.6 Relationship of Order Winners and Order
Qualifiers to Competitive Priorities
MyOMLab Animation
Figure 1.6 shows how order winners and qualifiers are
related to achieving the competitive priorities of a firm. If a
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minimum threshold level is not met for an order-qualifying
dimension (consistent quality, for example) by a firm, then it
would get disqualified from even being considered further by
its customers. For example, there is a level of quality
consistency that is minimally tolerable by customers in the
auto industry. When the subcompact car Yugo built by
Zastava Corporation could not sustain the minimal level of
quality, consistency, and reliability expected by customers, it
had to exit the U.S. car market in 1991 despite offering very
low prices (order winner) of under $4,000. However, once the
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firm qualifies by attaining consistent quality beyond the
13
14
threshold, it may only gain additional sales at a very low rate
by investing further in improving that order-qualifying
dimension. In contrast, for an order-winning dimension (i.e.,
low price driven by low-cost operations), a firm can
reasonably expect to gain appreciably greater sales and
market share by continuously lowering its prices as long as
the order qualifier (i.e., consistent quality) is being adequately
met. Toyota Corolla and Honda Civic have successfully
followed this route in the marketplace to become leaders in
their target market segment.
Order winners and qualifiers are often used in competitive
bidding. For example, before a buyer considers a bid,
suppliers may be required to document their ability to
provide consistent quality as measured by adherence to the
design specifications for the service or component they are
supplying (order qualifier). Once qualified, the supplier may
eventually be selected by the buyer on the basis of low prices
(order winner) and the reputation of the supplier (order
winner).
Using Competitive Priorities: An Airline
Example
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To get a better understanding of how companies use
competitive priorities, let us look at a major airline. We will
consider two market segments: (1) first-class passengers and
(2) coach passengers. Core services for both market segments
are ticketing and seat selection, baggage handling, and
transportation to the customer’s destination. The peripheral
services are quite different across the two market segments.
First-class passengers require separate airport lounges;
preferred treatment during check-in, boarding, and
deplaning; more comfortable seats; better meals and
beverages; more personal attention (cabin attendants who
refer to customers by name); more frequent service from
attendants; high levels of courtesy; and low volumes of
passengers (adding to the feeling of being special). Coach
passengers are satisfied with standardized services (no
surprises), courteous flight attendants, and low prices. Both
market segments expect the airline to hold to its schedule.
Consequently, we can say that the competitive priorities for
the first-class segment are top quality and on-time delivery,
whereas the competitive priorities for the coach segment are
low-cost operations, consistent quality, and on-time delivery.
The airline knows what its collective capabilities must be as a
firm, but how does that get communicated to each of its core
processes? Let us focus on the four core processes: (1)
customer relationship, (2) new service or product
development, (3) order fulfillment, and (4) supplier
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relationship. Competitive priorities are assigned to each core
process to achieve the service required to provide complete
customer satisfaction. Table 1.4 shows some possible
assignments just to give you an idea of how this works.
Identifying Gaps between Competitive
Priorities and Capabilities
Operations strategy translates service or product plans and
competitive priorities for each market segment into decisions
affecting the supply chains that support those market
segments. Even if it is not formally stated, the current
operations strategy for any firm is really the pattern of
decisions that have been made for its processes and supply
chains. As we have previously seen in Figure 1.5, corporate
strategy provides the umbrella for key operations
management decisions that contribute to the development of
the firm’s ability to compete successfully in the marketplace.
Once managers determine the competitive priorities for a
process, it is necessary to assess the competitive capabilities of
the process. Any gap between a competitive priority and the
capability to achieve that competitive priority must be closed
by an effective operations strategy.
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Flight attendants welcoming passengers aboard a commercial
airline.
Developing capabilities and closing gaps is the thrust of
operations strategy. To demonstrate how this works, suppose
the management of a bank’s credit card division decides to
embark on a marketing campaign to significantly increase its
business, while keeping costs low. A key process in this
division is billing and payments. The division receives credit
transactions from the merchants, pays the merchants,
assembles and sends the bills to the credit card holders, and
processes payments. The new marketing effort is expected to
significantly increase the volume of bills and payments. In
assessing the capabilities, the process must have to serve the
bank’s customers and to meet the
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14
challenges of the new market campaign; management assigns
15
the following competitive priorities for the billing and
payments process:
■ Low-Cost Operations. It is important to maintain low costs
in the processing of the bills because profit margins are
tight.
■ Consistent Quality. The process must consistently produce
bills, make payments to the merchants, and record
payments from the credit card holders accurately.
■ Delivery Speed. Merchants want to be paid for the credit
purchases quickly.
■ Volume Flexibility. The marketing campaign is expected to
generate many more transactions in a shorter period of
time.
TABLE 1.4 COMPETITIVE PRIORITIES
ACROSS DIFFERENT CORE PROCESSES
FOR AN AIRLINE
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CORE PROCESSES
Priority
Supplier
New Service Order
Relationship Development Fulfillment
Low Cost
Operations
Costs of
acquiring
inputs must
be kept to a
minimum to
allow for
competitive
pricing.
Top Quality
Airlines
compete on
price and
must keep
operating
costs in
check.
New services
must be
carefully
designed
because the
future of the
airline
industry
depends on
them.
High quality
meal and
beverage
service
delivered by
experienced
cabin
attendants
ensures that
the service
provided to
first-class
passengers
is kept top
notch.
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CORE PROCESSES
Priority
Supplier
New Service Order
Relationship Development Fulfillment
Consistent
Quality
Quality of the
inputs must
adhere to the
required
specifications.
In addition,
information
provided to
suppliers
must be
accurate.
Once the
quality level
is set, it is
important to
achieve it
every time.
Inputs must
be delivered
to tight
schedules.
The airline
strives to
arrive at
destinations
Delivery
Speed
On time
delivery
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CORE PROCESSES
Priority
Supplier
New Service Order
Relationship Development Fulfillment
on schedule,
otherwise
passengers
might miss
connections
to other
flights.
Development
Speed
It is
important to
get to the
market fast
to preempt
the
competition.
Customization
The process
must be able
to create
unique
services.
Variety
Many
different
inputs must
be acquired,
Maintenance
operations
are required
for a variety
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CORE PROCESSES
Priority
Supplier
New Service Order
Relationship Development Fulfillment
including
maintenance
items, meals
and
beverages.
Volume
Flexibility
of aircraft
models.
The process
must be able
to handle
variations in
supply
quantities
efficiently.
Management assumed that customers would avoid doing
business with a bank that could not produce accurate bills or
payments. Consequently, consistent quality is an order
qualifier for this process.
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15
16
TABLE 1.5 OPERATIONS STRATEGY
ASSESSMENT OF THE BILLING AND
PAYMENT PROCESS
Competitive
Priority
Low-cost
operations
Measure
■ Cost per
billing
statement
■ Weekly
postage
Capability
Gap
■ $0.0813 ■ Target is
■ $17,000
$0.06
■ Target is
$14,000
■
■
Consistent
quality
■ Percent
■ 0.90%
■ 0.74%
errors in
bill
information
■ Percent
errors in
posting
payments
■ Acceptable ■
■ Acceptable ■
■ Acceptable ■
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Competitive
Priority
Delivery
speed
Volume
flexibility
Measure
Capability
■ Lead time
to process
merchant
payments
■ 48
hours
■ Utilization
■ 98%
Gap
■ Too high
■
to support
rapid
■
increase
in
volumes
Is the billing and payment process up to the competitive
challenge? Table 1.5 shows how to match capabilities to
priorities and uncover any gaps in the credit card division’s
operations strategy. The procedure for assessing an
operations strategy begins with identifying good measures for
each priority. The more quantitative the measures are, the
better. Data are gathered for each measure to determine the
current capabilities of the process. Gaps are identified by
comparing each capability to management’s target values for
the measures, and unacceptable gaps are closed by
appropriate actions.
The credit card division shows significant gaps in the
process’s capability for low-cost operations. Management’s
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remedy is to redesign the process in ways that reduce costs
but will not impair the other competitive priorities. Likewise,
for volume flexibility, management realized that a high level
of utilization is not conducive for processing quick surges in
volumes while maintaining delivery speed. The recommended
actions will help build a capability for meeting more volatile
demands.
Addressing the Trends and Challenges
in Operations Management
Several trends are currently having a great impact on
operations management: productivity improvement; global
competition; and ethical, workforce diversity, and
environmental issues. Accelerating change in the form of
information technology, e-commerce, robotics, and the
Internet is dramatically affecting the design of new services
and products as well as a firm’s sales, order fulfillment, and
purchasing processes. In this section, we look at these trends
and their challenges for operations managers.
Productivity Improvement
Productivity is a basic measure of performance for economies,
industries, firms, and processes. Improving productivity is a
major trend in operations management because all firms face
pressures to improve their processes and supply chains so as
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to compete with their domestic and foreign competitors.
Productivity is the value of outputs (services and products)
produced divided by the values of input resources (wages,
cost of equipment, etc.) used:
Productivity =
Output
Input
productivity
The value of outputs (services and products) produced
divided by the values of input resources (wages, costs of
equipment, etc.).
Manufacturing employment peaked at just below 20 million in
mid-1979, and shrunk by nearly 8 million from 1979 to 2011.2
However, the manufacturing productivity in the United States
has climbed steadily, as more manufacturing capacity and
output has been achieved efficiently with a leaner work force.
It is interesting and even surprising to compare productivity
improvements in the service and manufacturing sectors. In
the United States, employment in the service sector has grown
rapidly, outstripping the manufacturing sector. It now
employs about 90 percent of the workforce. But service-sector
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productivity gains have been much lower. If productivity
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17
growth in the service sector stagnates, so does the overall
standard of living regardless of which part of the world you
live in. Other major industrial countries, such as Japan and
Germany, are experiencing the same problem. Yet signs of
improvement are appearing. The surge of investment across
national boundaries can stimulate productivity gains by
exposing firms to greater competition. Increased investment
in information technology by service providers also increases
productivity.
2Paul
Wiseman, “Despite China’s Might, US Factories Maintain
Edge,” The State and The Associated Press (January 31, 2011).
Measuring Productivity
As a manager, how do you measure the productivity of your
processes? Many measures are available. For example, value
of output can be measured by what the customer pays or
simply by the number of units produced or customers served.
The value of inputs can be judged by their cost or simply by
the number of hours worked.
Managers usually pick several reasonable measures and
monitor trends to spot areas needing improvement. For
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example, a manager at an insurance firm might measure
office productivity as the number of insurance policies
processed per employee per week. A manager at a carpet
company might measure the productivity of installers as the
number of square yards of carpet installed per hour. Both
measures reflect labor productivity, which is an index of the
output per person or per hour worked. Similar measures may
be used for machine productivity, where the denominator is
the number of machines. Accounting for several inputs
simultaneously is also possible. Multifactor productivity is an
index of the output provided by more than one of the
resources used in production; it may be the value of the
output divided by the sum of labor, materials, and overhead
costs. Here is an example:
EXAMPLE 1.1 Productivity Calculations
Calculate the productivity for the following operations:
a. Three employees process 600 insurance policies in a week.
They work 8 hours per day, 5 days per week.
b. A team of workers makes 400 units of a product, which is
sold in the market for $10 each. The accounting
department reports that for this job the actual costs are
$400 for labor, $1,000 for materials, and $300 for
overhead.
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MyOMLab
Tutor 1.1 in MyOMLab provides a new example for
calculating productivity.
SOLUTION
a.
Labor productivity
=
=
Policies processed
Employee hours
600policies
= 5policies/hours
(3employees)(40hours/employee)
Multifactor productivity
=
b.
=
Value of output
Labor cost+Materials cost+Overhead cost
(400units)($10/unit)
$400+$1,000+$300
=
$4,000
$1,700
= 2.35
DECISION POINT
We want multifactor productivity to be as high as possible.
These measures must be compared with performance levels
in prior periods and with future goals. If they do not live up to
expectations, the process should be investigated for
improvement opportunities.
The Role of Management
The way processes are managed plays a key role in
productivity improvement. Managers must examine
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productivity from the level of the supply chain because it is
the collective performance of individual processes that makes
the difference. The challenge is to increase the value of output
relative to the cost of input. If processes can generate more
output or output of better quality using the same amount of
input, productivity increases. If they can maintain the same
level of output while reducing the use of resources,
productivity also increases.
Global Competition
Most businesses realize that, to prosper, they must view
customers, suppliers, facility locations, and competitors in
global terms. Firms have found that they can increase their
market penetration by locating their production facilities in
foreign countries because it gives them a local presence that
reduces customer
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aversion to buying imports. Globalization also allows firms to
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18
balance cash flows from other regions of the world when
economic conditions are less robust in the home country.
Sonoco, a $5-billion-a-year industrial and consumer packaging
company in Hartsville, South Carolina, has nearly 20,000
employees in 335 locations worldwide spread across 33
countries. These global operations resulted in international
sales and income growth even as domestic sales were
stumbling during 2007. How did Sonoco do it?3 Locating
operations in countries with favorable tax laws is one reason.
Lower tax rates in Italy and Canada helped in padding the
earnings margin. Another reason was a weak dollar, whereby
a $46 million boost came from turning foreign currencies into
dollars as Sonoco exported such items as snack bag packaging,
and tubes and cores used to hold tape and textiles, to
operations it owned in foreign countries. The exchange rate
difference was more than enough to counter the added
expense of increased raw materials, shipping, and energy
costs in the United States.
Most products today are composites of materials and services
from all over the world. Your Gap polo shirt is sewn in
Honduras from cloth cut in the United States. Sitting in a
Cineplex theater (Canadian), you munch a Nestle’s Crunch bar
(Swiss) while watching a Columbia Pictures movie (Japanese).
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Five developments spurred the need for sound global
strategies: (1) improved transportation and communications
technologies; (2) loosened regulations on financial institutions;
(3) increased demand for imported services and goods; (4)
reduced import quotas and other international trade barriers
due to the formation of regional trading blocks, such as the
European Union (EU) and the North American Free Trade
Agreement (NAFTA); and (5) comparative cost advantages.
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Sonoco is a global supplier of innovative packaging solutions
including packages for Chips Ahoy cookies, M&M’s, Pringles Potato
Crisps, flexible brick packs for coffee, and many other products.
Comparative Cost Advantages
China and India have traditionally been the sources for lowcost, but skilled, labor, even though the cost advantage is
diminishing as these countries become economically stronger.
In the late 1990s, companies manufactured products in China
to grab a foothold in a huge market, or to get cheap labor to
produce low-tech products despite doubts about the quality of
the workforce and poor roads and rail systems. Today,
however, China’s new factories, such as those in the Pudong
industrial zone in Shanghai, produce a wide variety of
products that are sold overseas in the United States and other
regions of the world. U.S. manufacturers have increasingly
abandoned low profit margin sectors like consumer
electronics, shoes, and toys to emerging nations such as China
and Indonesia. Instead, they are focusing on making
expensive goods like computer chips, advanced machinery,
and health care products that are complex and which require
specialized labor.
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Foreign companies have opened tens of thousands of new
facilities in China over the past decade. Many goods the
United States imports from China now come from foreignowned companies with operations there. These companies
include telephone makers, such as Nokia and Motorola, and
nearly all of the big footwear and clothing brands. Many more
major manufacturers are there as well. The implications for
competition are enormous. Companies that do not have
operations in China are finding it difficult to compete on the
basis of low prices with companies that do. Instead, they must
focus on speed and small production runs.
What China is to manufacturing, India is to service. As with
the manufacturing companies, the cost of labor is a key factor.
Indian software companies have grown sophisticated in their
applications and offer a big advantage in cost. The computer
services industry is also affected. Back-office operations are
affected for the same reason. Many firms are using Indian
companies for accounting and bookkeeping, preparing tax
returns, and processing insurance claims. Many tech
companies, such as Intel and Microsoft, are opening
significant research and development (R&D) operations in
India.
3Ben
Werner, “Sonoco Holding Its Own,” The State (February
7, 2008); http://www.sonoco.com, 2008.
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18
19
Disadvantages of Globalization
Of course, operations in other countries can have
disadvantages. A firm may have to relinquish proprietary
technology if it turns over some of its component
manufacturing to offshore suppliers or if suppliers need the
firm’s technology to achieve desired quality and cost goals.
Political risks may also be involved. Each nation can exercise
its sovereignty over the people and property within its
borders. The extreme case is nationalization, in which a
government may take over a firm’s assets without paying
compensation. Exxon and other large multinational oil firms
are scaling back operations in Venezuela due to
nationalization concerns. Further, a firm may actually
alienate customers back home if jobs are lost to offshore
operations.
Employee skills may be lower in foreign countries, requiring
additional training time. South Korean firms moved much of
their sports shoe production to low-wage Indonesia and
China, but they still manufacture hiking shoes and in-line
roller skates in South Korea because of the greater skills
required. In addition, when a firm’s operations are scattered
globally, customer response times can be longer. We discuss
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these issues in more depth in Chapter 12, “Supply Chain
Design,” because they should be considered when making
decisions about outsourcing. Coordinating components from a
wide array of suppliers can be challenging. In addition, as
Managerial Practice 1.1 shows, catastrophic events such as
the Japanese earthquake affect production and operations in
Europe and United States because connected supply chains
can spread disruptions rapidly and quickly across
international borders.
MANAGERIAL PRACTICE 1.1 Japanese
Earthquake and Its Supply Chain Impact
Northeast Touhoku district of Japan was struck by a set of
massive earthquakes on the afternoon of March 11, 2011,
which were soon followed by a huge tsunami that sent waves
higher than 33 feet in the port city of Sendai 80 miles away
and traveling at the speed of a jetliner. At nearly 9.0 on the
Richter scale, it was one of the largest recorded earthquakes
to hit Japan. It shifted the Earth’s axis by 6 inches with an
impact that was felt 250 miles inland in Tokyo, and which
moved Eastern Japan 13 feet toward North America. Apart
from huge loss of life and hazards of nuclear radiation arising
from the crippled Daiichi nuclear reactors in Fukushima, the
damage to the manufacturing plants in Japan exposed the
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hazards of interconnected global supply chains and their
impact on factories located half way around the globe.
The impact of the earthquake was particularly acute on
industries that rely on cutting edge electronic parts sourced
from Japan. Shin-Etsu Chemical Company is the world’s
largest producer of silicon wafers and supplies 20 percent of
the global capacity. Its centralized plant located 40 miles from
the Fukushima nuclear facility was damaged in the
earthquake, causing ripple effects at Intel and Toshiba that
purchase wafers from Shin-Etsu. Similarly, a shortage of
automotive sensors from Hitachi slowed or halted production
of vehicles in Germany, Spain, and France, while Chrysler
reduced overtime at factories in Mexico and Canada to
conserve parts from Japan. Even worse, General Motors
stopped production altogether at a plant in Louisiana and
Ford closed a truck plant in Kentucky due to the quake. The
supply of vehicles such as Toyota’s Prius and Lexus were
limited in the United States because of production disruptions
in its Japanese factories. China was affected too, where ZTE
Corporation faced shortages of batteries and LCD screens for
its cell phones. Similarly, Lenovo in China faced reduced
supplies of components from Japan for assembly of its tablet
computers. These disruptions due to reliance on small
concentrated network of suppliers in Japan and globally
connected production and logistics systems have caused
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worker layoffs an increase in prices of affected products, and
economic losses that have been felt around the world.
Devastation caused by the strong earthquake in Kobe, the sixthlargest city in Japan located approximately 19 miles west of Osaka
on the north shore of Osaka Bay.
Sources: Don Lee and David Pearson, “Disaster in Japan Exposes Supply
Chain Weakness,” The State (April 8, 2011), B6-B7; “Chrysler Reduces
Overtime to Help Japan,” The Associated Press (April 8, 2011) printed in The
State (April 6, 2011), B7; Krishna Dhir, “From the Editor,” Decision Line, vol. 42,
no. 2, 3.
Strong global competition affects industries everywhere. For
example, U.S. manufacturers of steel, appliances, household
durable goods, machinery, and chemicals have seen their
market share decline in both domestic and international
markets. With the value of world trade in commercial services
now at more than $4.3 trillion per year, banking, data
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processing, airlines, and consulting services are beginning to
face many of the same international pressures. Regional
trading blocs, such as EU and NAFTA, further change the
competitive landscape in both services and manufacturing.
Regardless of which area of the world you live in, the
challenge is to produce services or products that can compete
in a global market and to design the processes that can make
it happen.
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permission. Violators will be prosecuted.
19
20
Ethical, Workforce Diversity, and
Environmental Issues
Businesses face more ethical quandaries than ever before,
intensified by an increasing global presence and rapid
technological change. As companies locate new operations
and acquire more suppliers and customers in other countries,
potential ethical dilemmas arise when business is conducted
by different rules. Some countries are more sensitive than
others about conflicts of interest, bribery, discrimination
against minorities and women, minimum-wage levels, and
unsafe workplaces. Managers must decide whether to design
and operate processes that do more than just meet local
standards. In addition, technological change brings debates
about data protection and customer privacy. In an electronic
world, businesses are geographically far from their
customers, so a reputation of trust is paramount.
In the past, many people viewed environmental problems,
such as toxic waste, poisoned drinking water, poor air quality,
and climate change as quality-of-life issues; now, many people
and businesses see them as survival issues. The automobile
industry has seen innovation in electric and hybrid cars in
response to environmental concerns and economic benefits
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arising from using less expensive fuels. Industrial nations face
a particular burden because their combined populations
consume proportionally much larger resources. Just seven
nations, including the United States and Japan, produce
almost half of all greenhouse gases. Now China and India
have added to that total carbon footprint because of their vast
economic and manufacturing expansion over the past decade.
Apart from government initiatives, large multinational
companies have a responsibility as well for creating
environmentally conscious practices, and can do so profitably.
For instance, Timberland has over 110 stores in China because
of strong demand for its boots, shoes, clothes, and outdoor
gear in that country. It highlights its environmental
credentials and corporate social responsibility through
investments such as the reforestation efforts in northern
China’s Horqin Desert. Timberland hopes to double the
number of stores over the next 3 years by environmentally
differentiating itself from the competition. We discuss these
issues in greater detail in Chapter 15, “Supply Chain
Sustainability.”
The challenge is clear: Issues of ethics, workforce diversity,
and the environment are becoming part of every manager’s
job. When designing and operating processes, managers
should consider integrity, respect for the individual, and
customer satisfaction along with more conventional
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performance measures such as productivity, quality, cost, and
profit.
A Chinese consumer looks at Timberland products at a department
store in Shanghai, China, November 11, 2010. Timberland seeks to
benefit from rising incomes in the worlds fastest-growing major
economy, and will also invest in its Hong Kong shops.
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Designing and Operating Processes and
Supply Chains
How can firms meet challenges today and in the future to
adequately recognize these trends and take advantage of
opportunities in a global market place? One way is to
recognize challenges as opportunities to improve existing
processes and supply chains or to create new, innovative
ones. The management of processes and supply chains goes
beyond designing them; it requires the ability to ensure they
achieve their goals. Firms should manage their processes and
supply chains to maximize their competitiveness in the
markets they serve. We share this philosophy of operations
management, as illustrated in Figure 1.7. We use this figure at
the start of each chapter to show how the topic of the chapter
fits into our philosophy of operations management. In
addition, this text also contains several chapter supplements
that are not explicitly shown in Figure 1.7.
Figure 1.7 shows that all effective operations decisions follow
from a sound operations strategy. Consequently, our text has
three major parts: “Part 1: Managing Processes,” Part 2:
“Managing Customer Demand,” and “Part 3: Managing Supply
Chains.” The flow of topics reflects our approach of first
understanding how a firm’s operations can help provide a
solid foundation for competitiveness before tackling the
essential process design decisions that will support its
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strategies. Each part begins with a strategy discussion to
support the decisions in that part. Once it is clear how firms
design and improve processes, we try to understand how they
implement those designs to satisfactorily meet customer
demand. Finally we examine the design and operation of
supply chains that link processes, whether they are internal or
external to the firm. The performance of the supply chains
determines the firm’s outcomes, which include the services or
products the firm produces, the financial results, and
feedback from the firm’s customers. These outcomes, which
are considered in the firm’s strategic plan, are discussed
throughout this text.
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FIGURE 1.7 Managing Processes, Customer Demand,
and Supply Chains
Part 1: Managing Processes
In Part 1, we focus on analyzing processes and how they can
be improved to meet the goals of the operations strategy. We
begin by addressing the strategic aspects of process design
and then present a six-step systematic approach to process
analysis. Each chapter in this part deals with some aspect of
that approach. We discuss the tools that help managers
analyze processes, and we r...
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