An easy way to help your students learn, collaborate, and grow. Operations Management, 6e 85% O P E R AT I O N S M A N A G E M E N T A N I N T E G R AT E D A P P R O A C H 6th EDITION R. DAN REID • NADA R. SANDERS Diagnose Early Facilitate Engagement Measure Outcomes Educators assess the real-time SURĆFLHQF\RIHDFKVWXGHQWWR inform teaching decisions. Students always know what they need to work on. Educators can quickly organize learning activities, manage student collaboration, and customize their course. Students can collaborate and have meaningful discussions on concepts they are learning. With visual reports, it’s easy for both educators and students to gauge problem areas and act on what’s most important. ,QVWUXFWRU%HQHĆWV 6WXGHQW%HQHĆWV • Assign activities and add your own materials • Instantly know what you need to work on • Guide students through what’s important in the LQWHUDFWLYHHWH[WERRNE\HDVLO\DVVLJQLQJVSHFLĆF content • Create a personal study plan • Set up and monitor collaborative learning groups • Assess learner engagement • Gain immediate insights to help inform teaching www.wileypluslearningspace.com • Assess progress along the way • Participate in class discussions • Remember what you have learned because you have made deeper connections to the content Operations Management An Integrated Approach th 6 EDITION R. DAN REID • NADA R. 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Outside of the United States, please contact your local representative. Library of Congress Cataloging-in-Publication Data BRV: 978-1-118-95261-0 EVAL: 978-1-118-95260-3 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 Preface Today, companies are competing in a very different environment than they were only a few years ago. Rapid changes such as global competition, e-business, the Internet, and advances in technology have required businesses to adapt their standard practices. Operations management (OM) is the critical function through which companies can succeed in this competitive landscape. Operations management concepts are not confined to one department. Rather, they are far-reaching, affecting every functional aspect of the organization. Whether studying accounting, finance, human resources, information technology, management, marketing, or purchasing, students need to understand the critical impact operations management has on any business. We each have more than 25 years of teaching experience and understand the challenges inherent in teaching and taking the introductory OM course. The vast majority of students taking this course are not majoring in operations management. Rather, classes are typically composed of students from various business disciplines or students who are undecided about their major and have little knowledge of operations management. The challenge is not only to teach the foundation of the field, but also to help students understand the impact operations management has on the business as a whole and the close relationship of operations management with other business functions. We were motivated to write this book to help students understand operations management and to make it easier for faculty to teach the introductory operations management course. We continue to have three major goals for this book. Goals of the Book 1. Provide a Solid Foundation of Operations Management Our book provides a solid foundation of OM concepts and techniques, but also covers the latest on emerging topics such as e-business, supply chain management, enterprise resource planning (ERP), and information technology. We give equal time to strategic and tactical decisions and provide coverage of both service and manufacturing organizations. We look closely at some of the unique challenges faced by service operations. 2. Provide an Integrated Approach to Operations Management While several excellent textbooks provide appropriate foundation coverage, we believe that few provide sufficient motivation for students. We are aware that a major teaching challenge in OM is that students aren’t motivated to study OM because they don’t understand its relevance to their majors. We think the course textbook can greatly support the professor in this area; therefore, a chief goal of this book is to integrate coverage of why and v vi • Preface how OM is integral to all organizations. Interfunctional coordination and decision making have become the norm in today’s business environment. Throughout each chapter we discuss information flow between business functions and the role of each function in the organization. The text also illustrates the linkages and integration between the various OM topics. Our end-of-chapter feature entitled “Within OM: How It All Fits Together” describes how the chapter topic is related to other OM decisions. It addresses the issue that OM topics are linked and interdependent, not independent of one another. As supply chain management (SCM) has taken on an increasingly important role, the end-of-chapter section titled “The Supply Chain Link” explains the relationships between the specific chapter topic covered and supply chain management. 3. Help Students to Understand the Concepts This course remains challenging for students to take and professors to teach. Students often have no prior exposure to operations concepts and little real business experience. They have a broad spectrum of quantitative sophistication and often find the math in the course extremely challenging. Therefore, a chief goal of the text and supplement package is to help students with these concepts. We begin each chapter with an example from everyday life, often a consumer or personal example, to help students intuitively understand what the chapter will be about. Then we explain each concept clearly and carefully, with enough depth for non-majors. Sustainability in operations is highlighted at the end of each chapter. The new edition is focused on helping students by offering problem-solving hints and tips as part of the solution to most examples and solved problems throughout the entire text. Two unique supplements support student comprehension. A “Quantitative Survival Guide,” available as an optional supplement packaged with the text, provides “help with the math” for all chapters. WileyPLUS Learning Space (available on-line via a password in an optional package with the book) provides plenty of homework practice, feedback for students, an e-book, and much more. In addition, algorithmic homework problems have been designed for each chapter in order to provide unlimited practice opportunity. Organization and Content of the Book We have arranged the topics in the book in progressive order from strategic to tactical. Early in the book we cover operations topics that require a strategic perspective and a cultural change within the organization, such as supply chain management, total quality management, and just-in-time systems. Progressively we move to more tactical issues, such as work management, inventory management, and scheduling concerns. We recognize that most faculty will select the chapters relevant to their needs. To make it easier for students and faculty, each chapter can stand alone. Any specific knowledge needed for a chapter is summarized at the beginning of each chapter, with specific topic and page references for easy review. Balanced Coverage of Quantitative and Qualitative Topics We have tried to find a balance between the quantitative and qualitative treatment and coverage of OM topics. To meet students’ needs, this text presents the application of OM concepts through the extensive use of practical and relevant business examples. We eliminated from the printed book coverage of topics less frequently covered at the introductory level. Preface • However, complete supplementary chapters on spreadsheet modeling, optimization, master production scheduling, rough-cut capacity planning, and waiting line models are available on the book’s Web site (www.wiley.com/college/reid). Integrated Technology Perspective Advances in e-commerce and the Internet are transforming the business environment, and we integrate these concepts in every chapter. We discuss a range of topics from enterprise resource planning (ERP) and electronic data interchange (EDI) to quality issues of buying goods on-line. Changes to this Edition We have made a number of changes to this edition in order to make the text as current, user-friendly, and relevant as possible. In particular we have updated company examples, technology, big data analytics, and added some supply chain management issues. Company Examples: Since our last edition we have observed many changes in organizations that we had used as examples. Some companies have gone out of business while others, such as Amazon.com and Dell Computer Corporation, have changed their strategies. In order to offer the most current text we have made updates in company examples across all chapters. Technology: One of the biggest changes we are witnessing relates to changes in technology. We have updated discussions with regard to the latest technologies that impact operations management. This includes discussions of 3D Printing, new generation robotics and automation, and advancements in radio frequency identification (RFID) in Chapter 3. Big Data Analytics: Big data analytics is having a tremendous impact on digitizing operations. We have incorporated the latest on big data analytics in Chapters 1 and 3. In Chapter 8 we have added an entire section on predictive analytics and forecasting. Supply Chain Management Issues: Since our last edition the proposed new shipping facility in Mexico has been canceled, while the Panama Canal is currently being widened. We discuss the ramifications on materials being shipped from Asia to the United States in Chapter 4. In addition, several chapters have been reorganized to facilitate a better flow. During the past five editions, we have added many new topics. This sixth edition better integrates those topics into the chapters. We continue to emphasize inter-functional coordination and decision making, and have updated a number of features as shown below. Before You Begin. In order to help students when solving quantitative problems, the feature called “Before You Begin,” placed immediately prior to the solution of most in-chapter example problems and end-of-chapter solved problems. Emphasizing our focus on strong pedagogy, this feature provides problem-solving tips and hints that the student should consider before proceeding to solve the problem. Supply Chain Link. To emphasize the increasingly important role of supply chain management, there is a section on supply chain management and expanded coverage of supply chain and services in every chapter. Sustainability Link. In order to address the latest challenges facing business, we have included “The Sustainability Link” feature. This feature discusses how the subject of the chapter directly ties to today’s sustainability concerns and challenges, providing specific business examples that illustrate the issues. vii viii • Preface Problem Solving. While our goal is to provide balanced coverage of quantitative and qualitative topics, the new edition further emphasizes and integrates problem solving to help students experience the course more successfully. We provide algorithmic homework problems for every chapter of the text (via WileyPLUS Learning Space) for unlimited practice opportunities, include problem-solving help in the book (“Before You Begin”) and on-line via WileyPLUS Learning Space, and provide step-by-step solved problems in the book and on-line. We also provide “help with math” as needed via WileyPLUS Learning Space. We believe that these changes to the new edition greatly enhance student learning. Features of the Book c05TotalQualityManagement.indd Page 162 7/10/15 12:07 PM user /208/WB01651/9781118952610/ch05/text_s We have developed our pedagogical features to implement and reinforce the goals discussed previously and address the many challenges in this course. Pedagogy that Provides an Integrated Approach veryone has had experiences of poor quality when dealing with business organizations. These experiences might involve an airline that has lost a passenger’s luggage, a dry cleaner that has left clothes wrinkled or stained, poor course offerings and scheduling at your college, a purchased product that is damaged or broken, or a pizza delivery service that is often late or delivers the wrong order. The experience of poor quality is exacerbated when employees of the company either are not empowered to correct quality inadequacies or do not seem willing to do so. We have all encountered service employees who do not seem to care. The consequences of such an attitude are lost customers and opportunities for competitors to take advantage of the market need. Successful companies understand the powerful impact customer-defined quality can have on business. For this reason, many competitive firms continually increase their quality standards. For example, Ford Motor Company’s focus on qual- E p THE WALT DISNEY COMPANY www.disney.com Links L to Practice Other OM texts have many boxes and a sidebars, which make it difficult for students to understand u what they need to know. Furthermore, the many m examples frequently interrupt the flow of the text and a make a chapter difficult to read and assimilate. We W recognize the importance of including “real-world” examples, e but believe they should be integrated into the t stream of the text instead of interrupting the text. Therefore, T we have developed embedded boxes titled “Links “Li k tto P Practice, ti ” which hi h provide id brief b examples from actual companies in every chapter. Embedded by both content and design into the general text discussion, each provides a concise and relevant example without interrupting the flow of the text. Current textbooks typically do not use business examples to which students can relate. The typical examples provided are from large corporations such as General Motors, IBM, or Xerox. Primarily using these types of examples creates the impression for students that this is a field that is either beyond their reach or irrelevant to their needs. We have found that students understand the concepts better when these concepts are also presented in a context that is smaller in scale. The examples chosen range from large multinational organizations to small local businesses. quality problems. Open discussion is promoted, and criticism is not allowed. Although the functioning of quality circles is friendly and casual, it is serious business. Quality circles are not mere “gab sessions.” Rather, they do important work for the company and have been very successful in many firms. The importance of exceptional quality is demonstrated by The Walt Disney Company in the operation of its theme parks. The focus of the parks is customer satisfaction. This is accomplished through meticulous attention to every detail, with particular focus on the role of employees in service delivery. Employees are viewed as the most important organizational resource, and great © Dennis MacDonald/Alamy LINKSTO PRACTICE Chapter Opening Vignettes and Within OM: How C IIt All Fits Together To help students intuitively undersstand the topic, each chapter begins with a description of a personal problem that can be solved using the concepts discussed in the chapter. Our objective is to attract the d aattention of students by starting with a personal example tto which they can relate. We demonstrate that OM is not just about operating a plant or a business, but that it is ju rrelevant in everything that we do. An end-of-chapter secttion titled “Within OM: How It All Fits Together” describes how the chapter topic is related to other OM decisions. h IIt emphasizes the point that OM decisions are not made independently i of one another, but that they are linked together and are dependent on one another. Preface • ments of the company. A company cannot achieve high quality if its accounting is inaccu rate or the marketing department is not working closely with customers. TQM requires the OM across the Organization and Cross-Funcclose cooperation of different functions in order to be successful. In this section we look at the involvement of these other functions in TQM. tional Icons Unique to this book is an end-of-chapMarketing plays a critical role in the TQM process by providing key inputs that make TQM a success. Recall that the goal of TQM is to satisfy customer needs by producing the ter summary titled “OM across the Organization” that exact product that customers want. Marketing’s role is to understand the changing needs and wants of customers by working closely with them. This requires a solid identification highlights the relationship between OM and key busiof target markets and an understanding of whom the product is intended for. Sometimes, apparently small differences in product features can result in large differences in customer ness functions, such as accounting, finance, human appeal. Marketing needs to accurately pass customer information along to operations, and operations needs to include marketing in any planned product changes. Finance is another major participant in the TQM process because of the great cost conresources, information technology, management, marsequences of poor quality. General definitions of quality need to be translated into specific dollar terms. This serves as a baseline for monitoring the financial impact of quality efforts keting, and purchasing. This section is designed to help and can be a great motivator. Recall the four costs of quality discussed earlier. The first two costs, prevention and appraisal, are preventive costs; they are intended to prevent interstudents understand the close relationship of operations management with other business functions and appreciate the critical i t th iti l iimpactt OM has h on other business functions. In addition, a cross-functional icon is used throughout the text to highlight sections in the text where the relationships between OM and other key business functions are discussed. MKT FIN Cases Each chapter ends with four cases that reinforce the issues and topics discussed in the chapter. The first two cases are within the text, while the other two are on-line cases. The cases can provide the basis for group discussion or can be assigned as individual exercises for students. Many cases conclude with a list of questions for students to answer. In addition, each chapter offers a unique interactive learning exercise titled “Internet Challenge” where students are provided with a short case and given specific Internet assignments. Interactive Cases There are two Web-based cases www.wiley.com/college/reid Interactive Case: Virtual Company for this edition. The first case features an Internet site beginning to end. We need your help in bringing ideas On-line Case: Cruise International, Inc. for a simulated cruise company that has hired a student Assignment: Total Quality Management (TQM) at Cruis- together on how to measure quality in a service organiing International, Inc. For this assignment, you will work zation.” This assignment will enhance your knowledge again with Meghan Willoughby, Chief Purser aboard of the material in Chapter 5 of your textbook while preintern to help solve operations problems. The second the Friendly Seas I. You know the assignment has some- paring you for your future assignments. thing to do with quality, but you aren’t quite sure what. To access the Web site: case features an Internet site for a simulated consultYou meet Meghan aboard the ship. She greets you and • Go to www.wiley.com/college/reid says, “Let me tell you a bit about what you’ll be doing ing company that works in the medical industry that • Click Student Companion Site for us. We’ve been working on quality measures for several years, and now must focus on quality even more as • Click Virtual Company/Cruise International, Inc. has hired a student to help solve operations problems. our industry becomes more competitive. We need to • Click Consulting Assignments make sure that our guests receive quality service from • Click Service Package and Processes at CII In both cases, the students are given assignments that require them to use information provided at the book Web site to develop solutions. These exercises offer students d h hands-on d experience in the h areas of supply chain management, statistical quality control, forecasting, just-in-time, aggregate planning, inventory management, scheduling, and project management, and help tie all the topics in the book together in a service environment. Pedagogy to Help Students Master the Course Learning Objectives At the beginning of each chapter, students are provided with a short statement of what they need to either know or review from previous chapters, referring students to specific topic information. This enables students to review previous material necessary to understand the topic being covered. Before You Go On Sections strategically placed within every chapter summarize key material the student should know before continuing. Often the material in chapters can be overwhelming. We felt that breaking up the chapter with a brief summary of key material is highly beneficial in aiding learning and comprehension. Learning Objectives After studying this chapter you should be able to: 1 Explain the meaning of total quality management (TQM). 2 Identify costs of quality BEFORE YOU GO ON Today’s concept of quality, called total quality management (TQM), focuses on building quality into the process, as opposed to simply inspecting for poor quality after production. TQM is customer driven and encompasses the entire company. Before you go on, you should know the four categories of quality costs. These are prevention and appraisal costs, which are costs that are incurred to prevent poor quality, and internal and external failure costs, which are costs that the company hopes to prevent. You should understand the evolution of TQM and the notable individuals who have shaped our knowledge of quality. Last, you should know the seven concepts of the TQM philosophy: customer focus, continuous improvement, employee empowerment, use of quality tools, product design, process management, and managing supplier quality. Key Terms and Definitions Key terms and concepts are highlighted in boldface when they are first explained in the text, are defined in the margin next to their discussion in the text, and are listed at the end of the chapter with page references. ix x • Preface Before You Begin Most example problems within the chapters, and end-of-chapter solved problems, have a feature called “Before You Begin.” The feature provides students with problem-solving tips and hints they need to consider before solving the problem. The purpose is to help students with their problem-solving ability. Solved Problems (See student companion site for Excel template.) Solution: PROBLEM 1 An office security system at Delco, Inc. has two component parts, both of which must work for the system to function. Part 1 has a reliability of 80 percent, and part 2 has a reliability of 98 percent. Compute the reliability of the system. Before You Begin: Before you begin solving reliability problems, it is best to first draw a diagram of the compot R b th t th t f t i d Part 1 Part 2 R1 = 0.80 R2 = 0.98 The reliability of the system is Rs = R1 X R2 S Solved Problems Numerous solved problems are p provided, complete with step-by-step explanations to eensure students understand the process and why the p problem is solved in a particular way. Where appropriaate, we provide a series of steps for problem solving and ooffer problem-solving tips. Teaching and Learning Resources Our supporting material has been designed to make learning OM easier for students and teaching OM easier for faculty. Book Companion Site www.wiley.com/college/reid An extensive Web site has been developed in support of Operations Management. The site is available at www.wiley.com/college/reid, and offers a range of information for instructors and students. For Instructors • Instructor’s Manual: Includes a suggested course outline, teaching tips and strategies, war stories, answers to all end-of-chapter material, brief description of the additional resources referenced in the Interactive Learning box, additional in-class exercises, and tips on integrating the theory of constraints. • Solutions Manual: A complete set of detailed solutions is provided for all problems. • Virtual Company Cases Instructor’s Materials: Include accompanying Instructor’s Manual with answers to exercises and Excel solutions. · Test Bank: A comprehensive Test Bank comprised of approximately 1700 questions that consist of multiple choice, true-false, essay questions, and open-ended problems for each chapter. The Test Bank is also available in a computerized version that allows instructors to customize their exams. • PowerPoint Lecture Slides: PowerPoint Slides are available for use in class. Fullcolor slides highlight key figures from the text as well as many additional lecture outlines, concepts, and diagrams. Together, these provide a versatile opportunity to add high-quality visual support to lectures. • Operations Management Video Series: The video package, including Wiley’s own Student OM Videos, offers video selections that tie directly to the theme of operations management and bring to life many of the examples used in the text. Videos can be viewed within WileyPLUS Learning Space. Preface • For Students • Supplemental Chapters: The supplement chapters include Supplement A: Spreadsheet Modeling: An Introduction; Supplement B: Introduction to Optimization; Supplement C: Waiting Line Models; Supplement D: Master Scheduling and Rough-Cut Capacity Planning. • Excel Spreadsheets: Templates are provided so that students can model and solve problems presented in the textbook. A spreadsheet icon appears next to those examples and problems in the textbook that have an accompanying Excel template available on the student Web site. Step-by-step directions are provided. Directions prompt students as they work through each spreadsheet. Expected outcomes and questions are also given. WileyPlus Learning Space What is WileyPLUS Learning Space? It is a place where students can learn, collaborate, and grow. Through a personalized experience, students create their own study guide while they interact with course content and work on learning activities. WileyPLUS Learning Space combines adaptive learning functionality with a dynamic new e-textbook for your course—giving you tools to quickly organize learning activities, manage student collaboration, and customize your course so that you have full control over content as well as the amount of interactivity between students. You can: • Assign activities and add your own materials • Guide students through what is important in the e-textbook by easily assigning specific content • Set up and monitor collaborative learning groups • Assess student engagement • Benefit from a sophisticated set of reporting and diagnostic tools that give greater insight into class activity Learn more at www.wileypluslearningspace.com. If you have questions, please contact your Wiley representative. Acknowledgments Operations Management, Sixth Edition, benefits from insights provided by a dedicated group of operations management educators from around the globe who carefully read and critiqued draft chapters of this and previous editions. We are pleased to express our appreciation to the following colleagues for their contributions: Charles Foley, Columbus State Community College; Nicholas C. Georgantzas, Fordham University Business Schools; Gregory A. Graman, Michigan Technological University; Roger Dean lles, The University of Memphis; Tony R. Johns, Clarion University of Pennsylvania; Anita LeePost, University of Kentucky; Douglas Schneiderheinze, Lewis and Clark Community College. Yossi Aviv, Washington University in St. Louis; Kevin Caskey, SUNY New Paltz; Scott T. Crino, United States Military Academy; Phillip C. Fry, Boise State University; Thomas F. Gattiker, Boise State University; Christian Grandzol, Bloomsburg University; Samuel Hazen, Tarleton State University; James He, Fairfield University; John Jensen, University of Southern Maine; Mark Kesh, University of Texas at El Paso; Anita Lee-Post, University of Kentucky; xi xii • Preface Winston T. Lin, SUNY Buffalo; Jaideep Motwani, Grand Valley State University; Fariborz Y. Partovi, Drexel University; Tamara Reid, Seattle University; Dmitriy Shaltayev, Christopher Newport University; Marilyn Smith, Winthrop University; Robert J. Vokurka, Texas A&M University–Corpus Christi; Pamaela J. Zelbst, Sam Houston State University. Dennis Agboh, Morgan State University; Karen Eboch, Bowling Green State University; Greg Graman, Michigan Technological University; GG Hegde, University of Pittsburgh; Seung-Lae Kim, Drexel University; John Kros, East Carolina University; Anita Lee-Post, University of Kentucky; David Little, High Point University; Robert Vokurka, Texas A&M University; John Wang, Montclair State University. Ajay Aggarwal, Millsaps College; Nezih Altay, University of Richmond; Suad Alway, Chicago State University; Robert Amundsen, New York Institute of Technology; Gordon Bagot, California State University, Los Angeles; Cliff Barber, California Polytechnic State University, San Luis Obispo; Hooshang Beheshti, Radford University; Prashanth Bharadwaj, Indiana University of Pennsylvania; Joe Biggs, California Polytechnic State University; Debra Bishop, Drake University; Vincent Calluzzo, Iona College; James Campbell, University of Missouri–St. Louis; Kevin Caskey, SUNY New Paltz; Sohail Chaudhry, Villanova University; Chin-Sheng Chen, Florida International University; Kathy Dhanda, University of Portland; Barb Downey, University of Missouri–Columbia; Joe Felan, University of Arkansas at Little Rock; Wade Ferguson, Western Kentucky University; Teresa Friel, Butler University; Daniel Heiser, DePaul University; Lewis Hofmann, The College of New Jersey; Lisa Houts, California State University, Fullerton; Tony Inman, Louisiana Tech University; Richard Insinga, SUNY Oneonta; Tim Ireland, Oklahoma State University; Mehdi Kaighobadi, Florida Atlantic University; Hale Kaynak, The University of Texas–Pan American; William Coty Keller, St. Josephs College; Robert Kenmore, Keller Graduate School of Management; Jennifer Kohn, Montclair State University; Dennis Krumwiede, Idaho State University; Kevin Lewis, University of Wyoming; Ardeshir Lohrasbi, University of Illinois at Springfield; Chris McDermott, Rensselaer Polytechnic Institute; John Miller, Mercer University; Ajay Mishra, SUNY Binghamton; Ken Murphy, Florida International University; Abraham Nahm, University of Wisconsin–Eau Claire; Len Nass, New Jersey City University; Joao Neves, The College of New Jersey; Susan Norman, Northern Arizona University; Muhammad Obeidat, Southern Polytechnic State University; Barbara Osyk, The University of Akron; Taeho Park, San Jose State University; Eddy Patuwo, Kent State University; Carl Poch, Northern Illinois University; Leonard Presby, William Paterson University; Will Price, University of the Pacific; Randy Rosenberger, Juniata College; George Schneller, Baruch College–CUNY; LW Schell, Nicholls State University; Kaushik Sengupta, Hofstra University; William Sherrard, San Diego State University; Samia Siha, Kennesaw State University; Susan Slotnick, Cleveland State University; Ramesh Soni, Indiana University of Pennsylvania; Ted Stafford, University of Alabama in Huntsville; Peter Sutanto, Prairie View A&M University; Fataneh Taghaboni-Dutta, University of Michigan–Flint; Nabil Tamimi, University of Scranton; John Visich, Bryant College; Tom Wilder, California State University, Chico; Peter Zhang, Georgia State University; Faye X. Zhu, Rowan University. David Alexander, Angelo State University; Stephen L. Allen, Truman State University; Jerry Allison, University of Central Oklahoma; Suad Alwan, Chicago State University; Tony Arreola-Risa, Texas A&M University; Gordon F. Bagot, California State University–Los Angeles; Brent Bandy, University of Wisconsin–Oshkosh; Joseph R. Biggs, California Polytechnic State University at San Luis Obispo; Jean-Marie Bourjolly, Concordia University; Ken Boyer, DePaul University; Karen L. Brown, Southwest Missouri State University; Linda D. Brown, Middle Tennessee State University; James F. Campbell, University of Missouri–St. Louis; Cem Canel, University of North Carolina at Wilmington; Chin-Sheng Chen, Florida International University; Preface • Louis Chin, Bentley College; Sidhartha R. Das, George Mason University; Greg Dobson, University of Rochester; Ceasar Douglas, Grand Valley State University; Shad Dowlatshahi, University of Missouri–Kansas City; L. Paul Dreyfus, Athens State University; Lisa Ferguson, Hofstra University; Mark Gershon, Temple University; William Giauque, Brigham Young University; Greg Graman, Wright State University; Jatinder N.D. Gupta, Ball State University; Peter Haug, Western Washington University; Daniel Heiser, DePaul University; Ted Helmer, F. Theodore Helmer and Associates, Inc.; Lew Hofmann, The College of New Jersey; Lisa Houts, California State University–Fresno; Tim C. Ireland, Oklahoma State University; Peter T. Ittig, University of Massachusetts–Boston; Jayanth Jayaram, University of Oregon; Robert E. Johnson, University of Connecticut; Mehdi Kaighobadi, Florida Atlantic University; Yunus Kathawala, Eastern Illinois University; Basheer Khumawala, University of Houston; Thomas A. Kratzer, Malone College; Ashok Kumar, Grand Valley State University; Cynthia Lawless, Baylor University; Raymond P. Lutz, University of Texas at Dallas; Satish Mehra, University of Memphis; Brad C. Meyer, Drake University; Abdel-Aziz M. Mohamed, California State University–Northridge; Charles L. Munson, Washington State University; Kenneth E. Murphy, Florida International University; Jay Nathan, St. Johns University; Harvey N. Nye, University of Central Oklahoma; Susan E. Pariseau, Merrimack College; Carl J. Poch, Northern Illinois University; Claudia H. Pragman, Minnesota State University; Willard Price, University of the Pacific; Feraidoon Raafat, San Diego State University; William D. Raffield, University of St. Thomas; Ranga Ramasesh, Texas Christian University; Paul H. Randolph, Texas Tech University; Robert M. Saltzman, San Francisco State University; George O. Schneller IV, Baruch College– CUNY; A. Kimbrough Sherman, Loyola College in Maryland; William R. Sherrard, San Diego State University; Chwen Sheu, Kansas State University; Sue Perrott Siferd, Arizona State University; Samia M. Siha, Kennesaw State University; Natalie Simpson, SUNY Buffalo; Barbara Smith; Niagara College; Victor E. Sower, Sam Houston State University; Linda L. Stanley, Our Lady of the Lake University; Donna H. Stewart, University of Wisconsin–Stout; Manouchehr Tabatabaei, University of Tampa; Nabil Tamimi, University of Scranton; Larry Taube, University of North Carolina– Greensboro; Giri K. Tayi, SUNY Albany; Charles J. Teplitz, University of San Diego; Timothy L. Urban, The University of Tulsa; Michael L. Vineyard, Memphis State University; John Visich, University of Houston; Robert Vokurka, Texas A&M University; George Walker, Sam Houston State University; John Wang, Montclair State University; Theresa Wells, University of Wisconsin–Eau Claire; T.J. Wharton, Oakland University; Barbara Withers, University of San Diego; Steven A. Yourstone, University of New Mexico. Special Thanks We would also like to personally thank and acknowledge the work of our supplements authors, who worked diligently to create a variety of support materials for both instructors and students. We would also like to express our appreciation to Mark Sullivan, AIA, NCARB, of Mark Sullivan Architects, and Susan O’Hara, RN, MPH, of O’Hara HealthCare Consultants, who generously contributed a simulation showing the before and after designs of an ambulatory surgery unit. A working example of the Extend simulation they used to optimize the design of the renovated facility is available on the Web site. We would like to offer special acknowledgment to the publishing team at Wiley for their creativity, talent, and hard work. Their great personalities and team spirit have made working on the book a pleasure. Special thanks go to Lisé Johnson, Executive Editor; Jennifer xiii xiv • Preface Manias, Sponsoring Editor; and Suzie Pfister, Senior Production Editor, for all their efforts. We could not have done it without you. Other Wiley staff who contributed to the text and media include: Allison Morris, Product Design Manager; Tom Nery, Senior Designer; Billy Ray, Senior Photo Editor; and Amanda Dallas, Market Solutions Assistant. About the Authors R. Dan Reid is Associate Professor Emeritus of Operations Management at the Whittemore School of Business and Economics at the University of New Hampshire. He holds a Ph.D. in Operations Management from The Ohio State University, an M.B.A. from Angelo State University, and a B.A. in Business Management from the University of Maryland. During the past twenty years, he has taught at The Ohio State University, Ohio University, Bowling Green State University, Otterbein College, and the University of New Hampshire. Dr. Reid’s research publications have appeared in numerous journals such as the Production and Inventory Management Journal, Mid-American Journal of Business, Cornell Hotel and Restaurant Administration Quarterly, Hospitality Research and Education Journal, Target, and the OM Review. His research interests include manufacturing planning and control systems, quality in services, purchasing, and supply chain management. He has worked for, or consulted with, organizations in the telecommunications, consumer electronics, defense, hospitality, and capital equipment industries. Dr. Reid has served as Program Chair and President of the Northeast Region of the Decision Sciences Institute (NEDSI) and as Associate Program Chair and Proceedings Editor of the First International DSI Conference, and held numerous positions within DSI. He has been the Program Chair and Chair of the Operations Management Division of the Academy of Management. Dr. Reid has also served as President of the Granite State Chapter of the American Production and Inventory Control Society. He has been a board member of the Operations Management Association and the Manchester Manufacturing Management Center. Dr. Reid is a past Editor of the OM Review. Dr. Reid has designed and taught courses for undergraduates, graduates, and executives on topics such as resource management, manufacturing management, introduction to operations management, purchasing management, and manufacturing planning and control systems. In 2002 Dr. Reid received a University of New Hampshire Excellence in Teaching Award. Nada R. Sanders is Distinguished Professor of Supply Chain Management at the D’Amore-McKim School of Business at Northeastern University. She holds a Ph.D. in Operations Management from The Ohio State University, an M.B.A. from The Ohio State University, and a B.S. degree in Mechanical Engineering from Franklin University. She has taught for more than twenty-five years at a variety of academic institutions including The Ohio State University, Wright State University, Texas Christian University, and Lehigh University, in addition to lecturing to various industry groups. She has designed and taught classes for undergraduates, graduates, and executives on topics such as operations management, operations strategy, forecasting, and supply chain management. She has received a number of teaching awards and is a Fellow of the Decision Sciences Institute. Dr. Sanders has extensive research experience and has published in numerous journals such as Decisions Sciences, Journal of Operations Management, Sloan Management Review, Omega, Interfaces, Journal of Behavioral Decision Making, Journal of Applied Business Research, and Production & Inventory Management Journal. She has authored chapters in books and encyclopedias such as the Forecasting Principles Handbook (Kluwer Academic Publishers), Encyclopedia of Production and Manufacturing Management (Kluwer Academic Publishers), and the Encyclopedia of Electrical and Electronics Engineering (John Wiley & Sons). Dr. Sanders has served as Vice President of Decision Sciences Institute (DSI), President of the Midwest Decision Sciences Institute, and has held numerous other positions within the Institute. In addition to DSI, Dr. Sanders is active in the Production Operations Management Society (POMS), APICS, INFORMS, Council of Supply Chain Management Professions (CSCMP), and the International Institute of Forecasters (IIF). She has served on review boards and/or as a reviewer for numerous journals including Decision Sciences, Journal of Business Logistics, Production Operations Management, International Journal of Production Research, Omega, and others. In addition, Dr. Sanders has worked and/or consulted for companies in the telecommunications, pharmaceutical, steel, automotive, warehousing, retail, and publishing industries, and is frequently called upon to serve as an expert witness. xv Contents Preface v CHAPTER 2 About the Authors xv Operations Strategy and Competitiveness 28 CHAPTER 1 Introduction to Operations Management 1 What is Operations Management? 2 Differences between Manufacturing and Service Organizations 5 Operations Management Decisions 6 Historical Development 10 Why OM? 10 Historical Milestones 10 The Industrial Revolution 10 Scientific Management 12 The Human Relations Movement 12 Management Science 13 The Computer Age 13 Just-in-Time 14 Total Quality Management 14 Business Process Reengineering 14 Flexibility 14 Time-Based Competition 15 Supply Chain Management 15 Global Marketplace 16 Sustainability and Green Operations 17 Electronic Commerce 17 Outsourcing and Flattening of the World 17 Big Data Analytics 18 Today’s OM Environment 18 Operations Management in Practice 19 Within OM: How It All Fits Together 20 OM Across the Organization 20 THE SUPPLY CHAIN LINK 22 THE SUSTAINABILITY LINK 22 Chapter Highlights 23 Key Terms 23 Discussion Questions 24 CASE: Hightone Electronics, Inc. 24 CASE: Creature Care Animal Clinic (A) 25 INTERACTIVE CASE: Virtual Company 26 INTERNET CHALLENGE: Demonstrating Your Knowledge of OM 26 Selected Bibliography 26 The Role of Operations Strategy 29 The Importance of Operations Strategy 30 Developing a Business Strategy 30 Mission 30 Environmental Scanning 31 Core Competencies 32 Putting It Together 33 Developing an Operations Strategy 34 Competitive Priorities 35 The Need for Trade-Offs 38 Order Winners and Qualifiers 38 Translating Competitive Priorities into Production Requirements 39 Strategic Role of Technology 40 Types of Technologies 40 Technology as a Tool for Competitive Advantage 41 Productivity 41 Measuring Productivity 41 Interpreting Productivity Measures 44 Productivity and Competitiveness 44 Productivity and the Service Sector 45 Operations Strategy Within OM: How it All Fits Together 45 Operations Strategy Across the Organization 46 THE SUPPLY CHAIN LINK 46 THE SUSTAINABILITY LINK 47 Chapter Highlights 47 Key Terms 47 Formula Review 48 Solved Problems 48 Discussion Questions 49 Problems 49 CASE: Prime Bank of Massachusetts 50 CASE: Boseman Oil and Petroleum (BOP) 51 INTERACTIVE CASE: Virtual Company 52 INTERNET CHALLENGE: Understanding Strategic Differences 52 Selected Bibliography 53 Contents • xvii CHAPTER 3 CHAPTER 4 Product Design and Process Selection 54 Supply Chain Management 98 Product Design 55 Design of Services versus Goods 55 The Product Design Process 56 Idea Development 56 Product Screening 58 Preliminary Design and Testing 59 Final Design 60 Factors Impacting Product Design 60 Design for Manufacture 60 Product Life Cycle 61 Concurrent Engineering 62 Remanufacturing 64 Process Selection 64 Types of Processes 64 Designing Processes 67 Process Performance Metrics 69 Linking Product Design and Process Selection 72 Product Design Decisions 72 Competitive Priorities 74 Facility Layout 74 Product and Service Strategy 76 Degree of Vertical Integration 76 Technology Decisions 77 Information Technology 77 Automation 78 E-manufacturing 80 Designing Services 82 How Are Services Different from Manufacturing? 82 How Are Services Classified? 83 The Service Package 84 Differing Service Designs 84 Product Design and Process Selection Within OM: How It All Fits Together 86 Product Design and Process Selection Across the Organization 87 Basic Supply Chains 99 Components of a Supply Chain for a Manufacturer 100 A Supply Chain for a Service Organization 102 The Bullwhip Effect 104 Issues Affecting Supply Chain Management 106 E-commerce and Supply Chains 106 Consumer Expectations and Competition Resulting from E-commerce 108 Globalization 110 Infrastructure Issues 111 Government Regulation and E-commerce 113 Green Supply Chain Management 113 The Role of Purchasing 116 Traditional Purchasing and E-purchasing 116 Sourcing Decisions 120 Insourcing versus Outsourcing Decisions 121 Developing Supplier Relationships 123 How Many Suppliers? 124 Developing Partnerships 125 Supplier Management Ethics 129 The Role of Warehouses 130 Crossdocking 132 Radio Frequency Identification Technology (RFID) 134 Third-Party Service Providers 135 Implementing Supply Chain Management 135 Strategies for Leveraging Supply Chain Management 136 Supply Chain Performance Metrics 137 Supply Chain Management Within OM: How It All Fits Together 139 SCM Across the Organization 140 THE SUPPLY CHAIN LINK 88 THE SUSTAINABILITY LINK 88 Chapter Highlights 88 Key Terms 89 Formula Review 89 Solved Problems 90 Discussion Questions 91 Problems 92 CASE: Biddy’s Bakery (BB) 94 CASE: Creature Care Animal Clinic (B) 95 INTERACTIVE CASE: Virtual Company 96 INTERNET CHALLENGE: Country Comfort Furniture 96 Selected Bibliography 96 THE SUPPLY CHAIN LINK 140 THE SUSTAINABILITY LINK 140 Chapter Highlights 141 Key Terms 142 Formula Review 142 Solved Problems 142 Discussion Questions 144 Problems 144 CASE: Electronic Personal Heart Rate Monitors Supply Chain Management Game 145 CASE: Supply Chain Management At Durham International Manufacturing Company (DIMCO) 148 INTERACTIVE CASE: Virtual Company 148 INTERNET CHALLENGE: Global Shopping 149 Selected Bibliography 149 xviii • Contents CHAPTER 5 Total Quality Management 151 Defining Quality 152 Differences between Manufacturing and Service Organizations 153 Cost of Quality 154 The Evolution of Total Quality Management (TQM) 156 Quality Gurus 156 The Philosophy of TQM 160 Customer Focus 160 Continuous Improvement 160 Employee Empowerment 162 Use of Quality Tools 163 Product Design 166 Process Management 170 Managing Supplier Quality 171 Quality Awards and Standards 171 The Malcolm Baldrige National Quality Award (MBNQA) 171 The Deming Prize 172 ISO 9000 Standards 173 ISO Standards for Sustainability Reporting 174 Why TQM Efforts Fail 174 Total Quality Management (TQM) Within OM: How It All Fits Together 175 Total Quality Management (TQM) Across the Organization 175 THE SUPPLY CHAIN LINK 176 THE SUSTAINABILITY LINK 176 Chapter Highlights 177 Key Terms 177 Formula Review 178 Solved Problems 178 Discussion Questions 179 Problems 179 CASE: Gold Coast Advertising (GCA) 180 CASE: Delta Plastics, Inc. (A) 181 INTERACTIVE CASE: Virtual Company 182 INTERNET CHALLENGE: Snyder Bakeries 183 Selected Bibliography 183 Descriptive Statistics 187 The Mean 188 The Range and Standard Deviation 188 Distribution of Data 188 Statistical Process Control Methods 189 Developing Control Charts 189 Types of Control Charts 190 Control Charts for Variables 191 Mean (x-Bar) Charts 191 Range (R) Charts 194 Using Mean and Range Charts Together 196 Control Charts for Attributes 197 p-Charts 198 c-Charts 201 Process Capability 203 Measuring Process Capability 203 Six Sigma Quality 208 Acceptance Sampling 210 Sampling Plans 210 Operating Characteristic (OC) Curves 211 Developing OC Curves 213 Average Outgoing Quality 214 Implications for Managers 216 How Much and How Often to Inspect 216 Where to Inspect 217 Which Tools to Use 217 Statistical Quality Control in Services 217 Statistical Quality Control (SQC) Within OM: How It All Fits Together 219 Statistical Quality Control (SQC) Across the Organization 219 THE SUPPLY CHAIN LINK 220 THE SUSTAINABILITY LINK 220 Chapter Highlights 221 Key Terms 221 Formula Review 222 Solved Problems 222 Discussion Questions 227 Problems 227 CASE: Scharadin Hotels 230 CASE: Delta Plastics, Inc. (B) 231 INTERACTIVE CASE: Virtual Company 232 INTERNET CHALLENGE: Safe-Air 232 Selected Bibliography 233 CHAPTER 7 CHAPTER 6 Statistical Quality Control 185 What Is Statistical Quality Control? 186 Sources of Variation: Common and Assignable Causes 187 Just-in-Time and Lean Systems 234 The Philosophy of JIT 235 Eliminate Waste 235 A Broad View of Operations 236 Simplicity 236 Contents • Continuous Improvement 236 Visibility 237 Flexibility 237 Elements of JIT 237 Just-in-Time Manufacturing 237 Total Quality Management (TQM) 239 Respect for People 240 Just-in-Time Manufacturing 241 The Pull System 241 Kanban Production 241 Variations of Kanban Production 243 Small Lot Sizes and Quick Setups 245 Uniform Plant Loading 246 Flexible Resources 246 Facility Layout 247 Total Quality Management 249 Product versus Process 249 Quality at the Source 250 Preventive Maintenance 250 Work Environment 251 Respect for People 251 The Role of Production Employees 251 Lifetime Employment 252 The Role of Management 253 Supplier Relationships 254 Benefits of JIT 255 Implementing JIT 256 JIT in Services 258 Improved Quality 258 Uniform Facility Loading 258 Use of Multifunction Workers 258 Reductions in Cycle Time 258 Minimizing Setup Times and Parallel Processing 258 Workplace Organization 259 JIT and Lean Systems Within OM: How It All Fits Together 259 JIT and Lean Systems Across the Organization 259 THE SUPPLY CHAIN LINK 260 THE SUSTAINABILITY LINK 260 Chapter Highlights 261 Key Terms 261 Formula Review 262 Solved Problems 262 Discussion Questions 262 Problems 263 CASE: Katz Carpeting 263 CASE: Dixon Audio Systems 265 INTERACTIVE CASE: Virtual Company 265 INTERNET CHALLENGE: Truck-Fleet, Inc. 266 Selected Bibliography 266 xix CHAPTER 8 Forecasting 267 Principles of Forecasting 268 Steps in the Forecasting Process 268 Types of Forecasting Methods 269 Qualitative Methods 271 Quantitative Methods 272 Time Series Models 272 Forecasting Level or Horizontal Pattern 275 Forecasting Trend 283 Forecasting Seasonality 286 Causal Models 289 Linear Regression 289 Multiple Regression 293 Measuring Forecast Accuracy 293 Forecast Accuracy Measures 293 Tracking Signal 295 Selecting the Right Forecasting Model 296 Forecasting Software 297 Predictive Analytics and Forecasting 298 Combining Forecasting 299 Collaborative Planning, Forecasting, and Replenishment (CPFR) 299 Forecasting Within OM: How It All Fits Together 300 Forecasting Across the Organization 301 THE SUPPLY CHAIN LINK 301 THE SUSTAINABILITY LINK 302 Chapter Highlights 302 Key Terms 303 Formula Review 303 Solved Problems 304 Discussion Questions 308 Problems 308 CASE: Bram-Wear 312 CASE: The Emergency Room (Er) At Northwest General (A) 313 INTERACTIVE CASE: Virtual Company 314 INTERNET CHALLENGE: On-line Data Access 315 Selected Bibliography 315 CHAPTER 9 Capacity Planning and Facility Location 316 Capacity Planning 317 Why Is Capacity Planning Important? 317 Measuring Capacity 318 Capacity Considerations 320 xx • Contents Making Capacity Planning Decisions 323 Identify Capacity Requirements 324 Develop Capacity Alternatives 325 Evaluate Capacity Alternatives 325 Decision Trees 325 Location Analysis 328 What Is Facility Location? 328 Factors Affecting Location Decisions 329 Globalization 331 Making Location Decisions 332 Procedure for Making Location Decisions 332 Procedures for Evaluating Location Alternatives 333 Capacity Planning and Facility Location Within OM: How It All Fits Together 343 Capacity Planning and Facility Location Across the Organization 343 THE SUPPLY CHAIN LINK 344 THE SUSTAINABILITY LINK 344 Chapter Highlights 344 Key Terms 345 Formula Review 345 Solved Problems 345 Discussion Questions 348 Problems 348 CASE: Data Tech, Inc. 351 CASE: The Emergency Room (ER) At Northwest General (B) 352 INTERACTIVE CASE: Virtual Company 353 INTERNET CHALLENGE: EDS Office Supplies, Inc. 354 Selected Bibliography 354 CHAPTER 10 Facility Layout 355 What Is Layout Planning? 356 Types of Layouts 356 Process Layouts 356 Product Layouts 358 Hybrid Layouts 359 Fixed-Position Layouts 359 Designing Process Layouts 360 Step 1: Gather Information 360 Step 2: Develop a Block Plan 363 Step 3: Develop a Detailed Layout 366 Special Cases of Process Layout 366 Warehouse Layouts 366 Office Layouts 369 Designing Product Layouts 370 Step 1: Identify Tasks and Their Immediate Predecessors 370 Step 2: Determine Output Rate 372 Step 3: Determine Cycle Time 372 Step 4: Compute the Theoretical Minimum Number of Stations 374 Step 5: Assign Tasks to Workstations (Balance the Line) 374 Step 6: Compute Efficiency, Idle Time, and Balance Delay 375 Other Considerations 376 Group Technology (Cell) Layouts 377 Facility Layout Within OM: How It All Fits Together 378 Facility Layout Across the Organization 378 THE SUPPLY CHAIN LINK 379 THE SUSTAINABILITY LINK 379 Chapter Highlights 380 Key Terms 380 Formula Review 380 Solved Problems 381 Discussion Questions 383 Problems 384 CASE: Sawhill Athletic Club (A) 388 CASE: Sawhill Athletic Club (B) 389 INTERACTIVE CASE: Virtual Company 390 INTERNET CHALLENGE: DJ and Associates, Inc. 391 Selected Bibliography 391 CHAPTER 11 Work System Design 392 Work System Design 393 Job Design 393 Job Design 393 Machines or People? 395 Level of Labor Specialization 395 Eliminating Employee Boredom 396 Team Approaches to Job Design 397 The Alternative Workplace 398 The Work Environment 400 Methods Analysis 400 Work Measurement 402 Developing Standards 404 Developing a Standard Work Sampling 411 Learning Curve Theory 414 Compensation 415 Group Incentive Plans 417 Incentive Plan Trends 417 Work System Design Within OM: How It All Fits Together 418 Work System Design Across the Organization 418 THE SUPPLY CHAIN LINK 419 THE SUSTAINABILITY LINK 419 Chapter Highlights 420 Contents • Key Terms 421 Formula Review 421 Solved Problems 421 Discussion Questions 424 Problems 425 CASE: The Navigator III 428 CASE: Northeast State University 428 INTERACTIVE CASE: Virtual Company 429 INTERNET CHALLENGE: E-commerce Job Design 430 Selected Bibliography 430 CHAPTER 12 Inventory Management 432 Basic Inventory Principles 433 How Manufacturers Use Inventory 433 Inventory in Service Organizations 435 Inventory Management Objectives 436 Customer Service 436 Cost-Efficient Operations 437 Minimum Inventory Investment 438 Relevant Inventory Costs 440 ABC Inventory Classification 442 Inventory Record Accuracy 445 Determining Order Quantities 446 Non-mathematical Techniques for Determining Order Quantity 447 Mathematical Models for Determining Order Quantity 448 The Single-Period Inventory Model 459 Why Companies Don’t Always Use the Optimal Order Quantity 461 How a Company Justifies Smaller Order Quantities 462 Determining Safety Stock Levels 463 The Periodic Review System 466 Comparing Continuous Review Systems and Periodic Review Systems 468 Inventory Management within OM: How It All Fits Together 468 Inventory Management across the Organization 469 THE SUPPLY CHAIN LINK 469 THE SUSTAINABILITY LINK 470 Chapter Highlights 470 Key Terms 471 Formula Review 471 Solved Problems 472 Discussion Questions 476 Problems 476 CASE: Fabqual Ltd. 480 CASE: Kayaks!Incorporated 480 INTERACTIVE CASE: Virtual Company 481 INTERNET CHALLENGE: Community Fund-Raiser (A) 482 Selected Bibliography 482 xxi CHAPTER 13 Aggregate Planning 483 Business Planning 484 Aggregate Planning Options 486 Demand-Based Options 487 Capacity-Based Options 488 Evaluating the Current Situation 489 Aggregate Plan Strategies 490 Level Aggregate Plan 490 Chase Aggregate Plan 491 Hybrid Aggregate Plan 492 Developing the Aggregate Plan 492 Aggregate Plans for Companies with Tangible Products 494 Aggregate Plans for Companies with Nontangible Products 497 Aggregate Planning Within OM: How It All Fits Together 502 Aggregate Planning Across the Organization 502 THE SUPPLY CHAIN LINK 503 THE SUSTAINABILITY LINK 503 Chapter Highlights 503 Key Terms 504 Solved Problems 504 Discussion Questions 510 Problems 511 CASE: Newmarket International Manufacturing Company (A) 513 CASE: JPC, Inc.: Kitchen Countertops Manufacturer 514 INTERACTIVE CASE: Virtual Company 515 INTERNET CHALLENGE: Cruising 515 Selected Bibliography 516 CHAPTER 14 Resource Planning 517 Enterprise Resource Planning 518 The Evolution of ERP Systems 520 The Benefits and Costs of ERP 522 The Benefits of ERP Systems 522 The Costs of ERP Systems 523 Material Planning Systems 524 An Overview of Material Planning Systems 524 Objectives of MRP 525 Types of Demand 525 The Operating Logic of MRP 527 How MRP Works 532 Action Notices 536 Comparing Different Lot Size Rules 536 Capacity Requirements Planning (CRP) 538 Resource Planning Within OM: How It All Fits Together 540 xxii • Contents Resource Planning Across the Organization 540 THE SUPPLY CHAIN LINK 541 INTERACTIVE CASE: Virtual Company 587 INTERNET CHALLENGE: Batter Up 587 Selected Bibliography 588 THE SUSTAINABILITY LINK 541 Chapter Highlights 542 Key Terms 542 Formula Review 543 Solved Problems 543 Discussion Questions 546 Problems 547 CASE: Newmarket International Manufacturing Company (B) 549 CASE: Desserts By J.B. 551 INTERACTIVE CASE: Virtual Company 551 INTERNET CHALLENGE: The Gourmet Dinner 552 Selected Bibliography 552 CHAPTER 15 Scheduling 553 Basic Scheduling Concepts 554 Scheduling High-Volume Operations 554 Scheduling Low-Volume Operations 555 Shop Loading Methods 556 Developing a Schedule of Operations 560 Scheduling Performance Measures 561 Using Different Priority Rules 564 Sequencing Jobs through Two Work Centers 567 Optimized Production Technology 569 Scheduling Bottlenecks 569 Theory of Constraints 571 Scheduling Issues for Service Organizations 572 Scheduling Techniques for Service Organizations 572 Scheduling Employees 573 Developing a Workforce Schedule 574 Scheduling Within OM: Putting It All Together 576 Scheduling Across the Organization 576 THE SUPPLY CHAIN LINK 577 CHAPTER 16 Project Management 589 The Project Life Cycle 590 Project Management Concepts 591 Step 1: Describe the Project 592 Step 2: Diagram the Network 593 Step 3: Estimate the Project’s Completion Time 595 Step 3 (a): Deterministic Time Estimates 595 Step 3 (b): Probabilistic Time Estimates 598 Step 4: Monitor the Project’s Progression 603 Estimating the Probability of Completion Dates 604 Reducing Project Completion Time 606 Crashing Projects 606 The Critical Chain Approach 609 Adding Safety Time 609 Wasting Safety Time 609 Project Management Within OM: How It All Fits Together 611 Project Management OM Across the Organization 611 THE SUPPLY CHAIN LINK 612 THE SUSTAINABILITY LINK 612 Chapter Highlights 612 Key Terms 613 Formula Review 613 Solved Problems 614 Discussion Questions 618 Problems 618 CASE: The Research Office Moves 621 CASE: Writing A Textbook 622 INTERACTIVE CASE: Virtual Company 623 INTERNET CHALLENGE: Creating Memories 623 Selected Bibliography 624 Appendix A Solutions to Odd-Numbered Problems 625 THE SUSTAINABILITY LINK 577 Chapter Highlights 577 Key Terms 578 Formula Review 578 Solved Problems 578 Discussion Questions 582 Problems 583 CASE: Air Traffic Controller School (ATCS) 586 CASE: Scheduling At Red, White, And Blue Fireworks Company 586 Appendix B The Standard Normal Distribution 647 Appendix C p-Chart 648 NAME INDEX 651 SUBJECT INDEX 654 Contents • To view Supplemental Chapters A-D, please visit www. wiley.com/college/reid or your WileyPLUS Learning Space course. xxiii CASE: Exeter Enterprises B25 Selected Bibliography B26 SUPPLEMENT C SUPPLEMENT A Waiting Line Models C1 Spreadsheet Modeling: An Introduction A1 Elements of Waiting Lines C2 Links to Practice: Waiting for Fast Food C2 The Customer Population C3 The Service System C3 Arrival and Service Patterns C5 Waiting Line Priority Rules C5 Waiting Line Performance Measures C6 Single-Server Waiting Line Model C6 Multiserver Waiting Line Model C9 Changing Operational Characteristics C12 Larger-Scale Waiting Line Systems C13 Waiting Line Models Within OM: How It All Fits Together C14 Supplement Highlights C14 Key Terms C15 Formula Review C15 Solved Problems C15 Discussion Questions C18 Problems C18 CASE: The Copy Center Holdup C19 Selected Bibliography C19 What Are Models? A2 The Spreadsheet Modeling Process A3 Evaluating the Spreadsheet Model A4 Constructing the Model A6 Assessing Our Model A8 Using the Model for Analysis A10 Using Data Tables A13 Graphing the Model Results A16 Multiple-Criteria Decision Making A17 Relative and Absolute Cell Referencing A19 Entering Formulas in the Model A20 Useful Spreadsheet Tips A25 Important Excel Formulas A25 Spreadsheet Modeling Within OM: How It All Fits Together A27 Supplement Highlights A27 Key Terms A28 Discussion Questions A28 Problems A28 CASE: Diet Planning A30 Selected Bibliography A31 SUPPLEMENT D SUPPLEMENT B Introduction to Optimization B1 Optimization B2 Algebraic Formulation B3 Examining the Formulation B6 Spreadsheet Model Development B7 Testing the Model B8 Solver Basics B8 Setting Up and Running Solver B9 Solving the Problem B12 Interpreting the Solution B13 Solver Solution Reports B14 Outcomes of Linear Programming Problems B16 Optimization Within OM: How It All Fits Together B17 Supplement Highlights B18 Key Terms B18 Solved Problems B18 Discussion Questions B23 Problems B24 Master Scheduling and Rough-Cut Capacity Planning D1 Master Production Scheduling D2 MPS as a Basis of Communication D2 Objectives of Master Scheduling D3 Developing an MPS D4 Rough-Cut Capacity Planning D5 Evaluating and Accepting the MPS D8 Using the MPS D9 Stabilizing the MPS D12 Master Production Scheduling and Rough-Cut Capacity Planning within OM: How It All Fits Together D14 Supplement Highlights D14 Key Terms D15 Formula Review D15 Solved Problems D15 Discussion Questions D20 Problems D20 CASE: Newmarket International Manufacturing Company (C) D22 Introduction to Operations Management any of you reading this book may think that you don’t know what operations management (OM) is or that it is not something you are interested in. However, after reading this chapter you will realize that you already know quite a bit about operations management. You may even be working in an operations management capacity and have used certain operations management techniques. You will also realize that operations management is probably the most critical business function today. If you want to be on the frontier of business competition, you want to be in operations management. Today companies are competing in a very different environment than they were only a few years ago. To survive, they must focus on quality, time-based competition, efficiency, international perspectives, and customer relationships. Global competition, e-business, the Internet, and advances in technology require flexibility and responsiveness. Increased financial pressures require lean and agile organizations that are free of waste. This new focus has placed operations management in the business limelight because it is the function through which companies can achieve this type of competitiveness. Consider some of today’s most successful companies, such as Wal-Mart, Southwest Airlines, General Electric, Starbucks, Apple Computer, Toyota, FedEx, and Procter & Gamble. These companies have achieved world-class status in large part Learning Objectives After studying this chapter you should be able to 1 Define operations management. 2 Describe difference between manufacturing and service organizations. 3 Describe decisions that operations managers make. 4 Identify major historical developments in operations management. 5 Identify current trends in operations management. 6 Describe the flow of information between operations management and other business functions. © Abel Mitja Varela/iStockphoto M 1 1 2 CHAPTER 1 • Introduction to Operations Management due to a strong focus on operations management. In this book you will learn specific tools and techniques of operations management that have helped these and other companies achieve their success. The purpose of this book is to help prepare you to be successful in this new business environment. Operations management will give you an understanding of how to help your organization gain a competitive advantage in the marketplace. Regardless of whether your area of expertise is marketing, finance, MIS, or operations, the techniques and concepts in this book will help you in your business career. The material will teach you how your company can offer goods and services cheaper, better, and faster. You will also learn that operations management concepts are far-reaching, affecting every aspect of the organization and even everyday life. • What is Operations Management? MKT FIN Operations management (OM) The business function responsible for planning, coordinating, and controlling the resources needed to produce a company’s goods and services. Every business is managed through three major functions: finance, marketing, and operations management. Figure 1.1 illustrates this by showing that the vice presidents of each of these functions report directly to the president or CEO of the company. Other business functions—such as accounting, purchasing, human resources, and engineering—support these three major functions. Finance is the function responsible for managing cash flow, current assets, and capital investments. Marketing is responsible for sales, generating customer demand, and understanding customer wants and needs. Most of us have some idea of what finance and marketing are about, but what does operations management do? Operations management (OM) is the business function that plans, organizes, coordinates, and controls the resources needed to produce a company’s goods and services. Operations management is a management function. It involves managing people, equipment, technology, information, and many other resources. Operations management is the central core function of every company. This is true whether the company is large or small, provides a physical good or a service, is for-profit or not-for-profit. Every company has an operations management function. Actually, all the other organizational functions are there primarily to support the operations function. Without operations, there FIGURE 1.1 Organizational chart showing the three major business functions President or CEO Marketing V.P. of Marketing Manages: customer demands Generates: sales for goods and services Operations V.P. of Operations Manages: people, equipment, technology, materials, and information To produce: goods and/or services Finance V.P. of Finance Manages: cash flow, current assets, and capital investments What is Operations Management? • would be no goods or services to sell. Consider a retailer such as The Gap, which sells casual apparel. The marketing function provides promotions for the merchandise, and the finance function provides the needed capital. It is the operations function, however, that plans and coordinates all the resources needed to design, produce, and deliver the merchandise to the various retail locations. Without operations, there would be no goods or services to sell to customers. The role of operations management is to transform a company’s inputs into the finished goods or services. Inputs include human resources (such as workers and managers), facilities and processes (such as buildings and equipment), as well as materials, technology, and information. Outputs are the goods and services a company produces. Figure 1.2 shows this transformation process. At a factory the transformation is the physical change of raw materials into products, such as transforming leather and rubber into sneakers, denim into jeans, or plastic into toys. At an airline it is the efficient movement of passengers and their luggage from one location to another. At a hospital it is organizing resources such as doctors, medical procedures, and medications to transform sick people into healthy ones. Operations management is responsible for orchestrating all the resources needed to produce the final product. This includes designing the product; deciding what resources are needed; arranging schedules, equipment, and facilities; managing inventory; controlling quality; designing the jobs to make the product; and designing work methods. Basically, operations management is responsible for all aspects of the process of transforming inputs into outputs. Customer feedback and performance information are used to continually adjust the inputs, the transformation process, and the characteristics of the outputs. As shown in Figure 1.2, this transformation process is dynamic in order to adapt to changes in the environment. Proper management of the operations function has led to success for many companies. For example, in 1994 Dell Computer Corporation was a second-rate computer maker that managed its operations similarly to others in the industry. Then Dell implemented a new business model that completely changed the role of its operations function. Dell developed new and innovative ways of managing the operations function that have become one of today’s best practices. These changes enabled Dell to provide rapid product delivery of customized products to customers at a lower cost. The company has since expanded this model to use an analytics driven system. This has enabled Dell to identify certain models so common they could be stocked in preconfigured inventory. Ordered today the customer can have them tomorrow. Dell’s model is one many have tried to emulate and is the key to its being an industry leader. FIGURE 1.2 The transformation process Customer Feedback Inputs t
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4FSWJDFT 3 Role of operations management To transform organizational inputs into outputs. 4 CHAPTER 1 • Introduction to Operations Management LINKSTO PRACTICE Getty Images, Inc. THE E-TAILERS www.Amazon.com www.Barnesandnoble.com www.alibaba.com Just as proper management of operations can lead to company success, improper management of operations can lead to failure. This is illustrated by Kozmo.com, a Web-based home delivery company founded in 1997. Kozmo’s mission was to deliver products to customers— everything from the latest video to ice cream—in less than an hour. Kozmo was technology enabled and rapidly became a huge success. However, the initial success gave rise to overly fast expansion. The company found it difficult to manage the operations needed in order to deliver the promises made on its Web site. The consequences were too much inventory, poor deliveries, and losses in profits. The company rapidly tried to change its operations, but it was too late. It had to cease operations in April 2001. The Web-based age has created a highly competitive world of on-line shopping that poses special challenges for operations management. The Web can be used for on-line purchasing of everything from CDs, books, and groceries to prescription medications and automobiles. The Internet has given consumers flexibility; it has also created one of the biggest challenges for companies: delivering exactly what the customer ordered at the time promised. As we saw with the example of Kozmo.com, making promises on a Web site is one thing; delivering on those promises is yet another. Ensuring that orders are delivered from “mouse to house” is the job of operations and is much more complicated than it might seem. In the 1990s many dot-com companies discovered just how difficult this is. They were not able to generate a profit and went out of business. To ensure meeting promises, companies must forecast what customers want and maintain adequate inventories of goods, manage distribution centers and warehouses, operate fleets of trucks, and schedule deliveries while keeping costs low and customers satisfied. Many companies like Amazon.com manage almost all aspects of their operation. In fact, Amazon.com has been moving toward having its own delivery service. Other companies hire outside firms for certain functions, such as outsourcing the management of inventories and deliveries to UPS. Competition among e-tailers has become intense as customers demand increasingly shorter delivery times and highly customized products. Same-day service has become common in metropolitan areas. For example, Barnesandnoble.com provides same-day delivery in Manhattan, Los Angeles, and San Francisco. Amazon.com has significantly expanded same-day delivery locations. Understanding and managing the operations function of an on-line business has become essential in order to remain competitive. For operations management to be successful, it must add value during the transformation process. We use the term value added to describe the net increase between the final value of a product and the value of all the inputs. The greater the value added, the more productive a business is. An obvious way to add value is to reduce the cost of activities in the transformation process. Activities that do not add value are considered a waste; these include certain jobs, equipment, and processes. In addition to value added, operations must be efficient. Efficiency means being able to perform activities well and at the lowest possible cost. An important role of operations is to analyze all activities, eliminate those that do not add value, and restructure processes and jobs to achieve greater efficiency. Because today’s business environment is more competitive than ever, the role of operations management has become the focal point of efforts to increase competitiveness by improving value added and efficiency. Value added The net increase created during the transformation of inputs into final outputs. Efficiency Performing activities well and at the lowest possible cost. Differences between Manufacturing and Service Organizations • 5 Differences between Manufacturing and Service Organizations Organizations can be divided into two broad categories: manufacturing organizations and service organizations, each posing unique challenges for the operations function. There are two primary distinctions between these categories. First, manufacturing organizations produce physical, tangible goods that can be stored in inventory before they are needed. By contrast, service organizations produce intangible products that cannot be produced ahead of time. Second, in manufacturing organizations most customers have no direct contact with the operation. Customer contact occurs through distributors and retailers. For example, a customer buying a car at a car dealership never comes into contact with the automobile factory. However, in service organizations the customers are typically present during the creation of the service. Hospitals, colleges, theaters, and barber shops are examples of service organizations in which the customer is present during the creation of the service. The differences between manufacturing and service organizations are not as clearcut as they might appear, and there is much overlap between them. Most manufacturers provide services as part of their business, and many service firms manufacture physical goods that they deliver to their customers or consume during service delivery. For example, a manufacturer of furniture may also provide shipment of goods and assembly of furniture. A barber shop may sell its own line of hair care products. You might not know that General Motors’ greatest return on capital does not come from selling cars, but rather from postsales parts and service. Figure 1.3 shows the differences between manufacturing FIGURE 1.3 Characteristics of manufacturing and service organizations DEGREE OF CUSTOMER CONTACT Tangible Product High Manufacturing Organization t Physical product t Product can be inventoried t Low customer contact t Capital intensive t Long response time t Intangible product Intangible Product DEGREE OF TANGIBILITY OF PRODUCT OFFERING Low t Product cannot be inventoried t High customer contact t Short response time t Labor intensive Service Organization Manufacturing organizations Organizations that primarily produce a tangible product and typically have low customer contact. Service organizations Organizations that primarily produce an intangible product, such as ideas, assistance, or information, and typically have high customer contact. CHAPTER 1 • Introduction to Operations Management LINKSTO PRACTICE U.S. POSTAL SERVICE www.usps.com and services, focusing on the dimensions of product tangibility and the degree of customer contact. It shows the extremes of pure manufacturing and pure service, as well as the overlap between them. Even in pure service companies some segments of the operation may have low customer contact while others have high customer contact. The former can be thought of as “back room” or “behind the scenes” segments. Think of a fast-food operation such as Wendy’s, for which customer service and customer contact are important parts of the business. However, the kitchen segment of Wendy’s operation has no direct customer contact and can be managed like a manufacturing operation. Similarly, a hospital is a high-contact service operation, but the patient is not present in certain segments, such as the lab where specimen analysis is done. In addition to pure manufacturing and pure service, there are companies that have some characteristics of each type of organization. It is difficult to tell whether these companies are actually manufacturing or service organizations. Think of a post office, an automated warehouse, or a mail-order catalog business. They have low customer contact and are capital intensive, yet they provide a service. We call these companies quasi-manufacturing organizations. The U.S. Postal Service is an example of a quasi-manufacturing type of company. It provides a service: speedy, reliable delivery of letters, documents, and packages. Its output is intangible and cannot be stored in inventory. Yet most operations management decisions made at the Postal Service are similar to those that occur in manufacturing. Customer contact is low, and at any one time there is a large amount of inventory. The Postal Service is capital intensive, having its own facilities and fleet of trucks and relying on scanners to sort packages and track customer orders. Scheduling enough workers at peak processing times is a major concern, as is planning delivery schedules. Note that although the output of the U.S. Postal Service is a service, inputs include labor, technology, and equipment. The responsibility of OM is to manage the conversion of these inputs into the desired outputs. Proper management of the OM function is critical to the success of the U.S. Postal Service. It is important to understand how to manage both service and manufacturing operations. However, managing service operations is of especially high importance. The reason is that the service sector constitutes a dominant segment of our economy. Since the 1960s, the percentage of jobs in the service-producing industries of the U.S. economy has increased from less than 50 to over 80 percent of total nonfarm jobs. The remaining 20 percent are in the manufacturing and goods-producing industries. Figure 1.4 illustrates this large growth of the service sector. RICHARD B. LEVINE/NewsCom 6 Operations Management Decisions In this section we look at some of the specific decisions that operations managers have to make. The best way to do this is to think about decisions we would need to make if we started our own company—say, a company called Gourmet Wafers that produces praline–pecan cookies from an old family recipe. Think about the decisions that would have to be made to go from the initial idea to actual production of the product: that is operations management. Table 1.1 breaks these down into the generic decisions that would be appropriate for almost Operations Management Decisions • 7 FIGURE 1.4 U.S. employment by economic sector 100% PERCENTAGE OF WORKFORCE 90% 80% 70% 60% Service Producing 50% 40% 30% 20% Goods Producing (Manufacturing Construction) 10% 0% 1961 1976 1991 2006 2008 2010 2012 2014 YEAR Source: U.S. Department of Commerce any good or service, the specific decisions required for our example, and the formal terms for these decisions that are used in operations management. Note in the Gourmet Wafers example that the first decisions made were very broad in scope (e.g., the unique features of our product). We needed to do this before we could focus on more specific decisions (e.g., worker schedules). Although our example is simple, this decision-making process is followed by every company, including IBM, General Motors, Lands’ End, and your local floral shop. Also note in our example that before we can think about specific day-to-day decisions, we need to make decisions for the whole company that are long-term in nature. Long-term decisions that set the direction for the entire organization are called strategic decisions. They are broad in scope and set the tone for other, more specific decisions. They address questions such as: What are the unique features of our product? What market do we plan to compete in? What do we believe will be the demand for our product? Short-term decisions that focus on specific departments and tasks are called tactical decisions. Tactical decisions focus on more specific day-to-day issues, such as the quantities and timing of specific resources. Strategic decisions are made first and determine the direction of tactical decisions, which are made more frequently and routinely. Therefore, we have to start with strategic decisions and then move on to tactical decisions. This relationship is shown in Figure 1.5. Tactical decisions must be aligned with strategic decisions because they are the key to the company’s effectiveness in the long run. Tactical decisions provide feedback to strategic decisions, which can be modified accordingly. Strategic decisions Decisions that set the direction for the entire company; they are broad in scope and long-term in nature. Tactical decisions Decisions that are specific and short-term in nature and are bound by strategic decisions. 8 CHAPTER 1 • Introduction to Operations Management TABLE 1.1 Operations Management Decisions for Gourmet Wafers General Decisions to Be Made Decision Specific for Cookie Production Operations Management Term What are the unique features of the business that will make it competitive? The business offers freshly baked cookies “homemade” style, in a fast-food format. Operations strategy What are the unique features of the product? The unique feature of the cookies is that they are loaded with extra-large and crunchy pecans and are fresh and moist. Product design What are the unique features of the process that give the product its unique characteristics? A special convection oven is used to make the cookies in order to keep them fresh and moist. The dough is allowed to rise longer than usual to make the cookies extra light. Process selection What sources of supply should we use to ensure regular and timely receipt of the extract materials we need? How do we manage these sources of supply? The key ingredients, pecans and syrup, will be purchased from only one supplier located in South Carolina because it offers the best products. A relationship is worked out in which the supplier sends the ingredients on the exact schedule that they are needed. Supply chain management How will managers ensure the quality of the product, measure quality, and identify quality problems? A quality check is made at each stage of cookie production. The dough is checked for texture; the pecans are checked for size and freshness; the syrup is checked for consistency. Quality management What is the expected demand for the product? Expected sales for each day of the week have been determined; for example, it is expected that more cookies will be sold on weekdays and most during the lunch hours. Expected cookie sales for each month and for the year have also been determined. Forecasting Where will the facility be located? After looking at locations of customers and location costs, it is decided that the facility will be located in a shopping mall. Location analysis How large should the facility be? The business needs to be able to produce 200 cookies per hour, or up to 2000 cookies per day. Capacity planning How should the facility be laid out? Where should the kitchen and ovens be located? Should there be seating for customers? Decisions are made about where the kitchen will be located and how the working area will be arranged for maximum efficiency. The business is competing on the basis of speed and quality; therefore, the facility should be arranged to promote these features. There will be a small seating area for customers and a large counter and display case for buying. Facility layout What jobs will be needed in the facility, who should do what task, and how will their performance be measured? Two people will be needed in the kitchen during busy periods and one during slow periods. Their job duties are determined. One person will be needed for order taking at all times. Job design and work measurement How will the inventory of raw materials be monitored? When will orders be placed, and how much will be kept in stock? A different policy is developed for common ingredients, such as flour and sugar. These ingredients will be ordered every two weeks for a two-week supply. A special purchasing arrangement is worked out with the supplier of specialty ingredients. Inventory management Who will work on what schedule? Two people will work the counter in split shifts. One kitchen employee will work a full shift, with a second employee working part-time. Scheduling Operations Management Decisions • FIGURE 1.5 The relationship between strategic and tactical decisions STRATEGIC DECISIONS t
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Who will work the 2OE shift tomorrow? © K. L. Howard/Alamy Inc You can see in the example of Gourmet Wafers how important OM decisions are. They are critical to all types of companies, large and small. In large companies these decisions are more complex because of the size and scope of the organization. Large companies typically produce a greater variety of products, have multiple location sites, and often use domestic and international suppliers. Managing OM decisions and coordinating efforts can be a complicated task, and the OM function is critical to the company’s success. We can illustrate this point by looking at operations management decisions made by Texas Instruments (TI) in order to position itself for global collaboration with customers, distributors, and suppliers. TI realized its business was growing exponentially, with more than 120,000 monthly orders received and processed electronically. The coordination effort encompassed 56 factories, including subcontractors, and the management of over 45,000 products. To succeed, the company needed to develop a system to generate better forecasts, coordinate manufacturing of products, manage orders, and track deliveries. Managing and coordinating global operations management functions was considered paramount to the company’s success. TI adopted a comprehensive software package called enterprise resource planning (ERP) that integrates information throughout the organization, manages forecasts, and coordinates factory operations. Designing and implementing the ERP system at TI required an understanding of all the strategic and tactical operations decisions; otherwise, it would not be effective. The system has proven to be a success and a major achievement, enabling TI to consistently manage factory operations across the globe. LINKSTO PRACTICE TEXAS INSTRUMENTS INCORPORATED www.ti.com BEFORE YOU GO ON You should understand that operations management (OM) is the business function responsible for planning, coordinating, and controlling the resources needed to produce a company’s goods and services. OM is directly responsible for managing the transformation of a company’s inputs (e.g., materials, technology, and information) into finished products and services. OM requires a wide range of strategic and tactical decisions. Strategic decisions are long-range and very broad in scope (e.g., unique features of the company’s product and process). They determine the direction of tactical decisions, which are more short-term and narrow in scope (e.g., policy for ordering raw materials). All organizations can be separated into manufacturing and service operations, which differ based on product tangibility and degree of customer contact. Service and manufacturing organizations have very different operational requirements. 9 10 CHAPTER 1 • Introduction to Operations Management Historical Development Why OM? Business did not always recognize the importance of operations management. In fact, following World War II the marketing and finance functions were predominant in American corporations. The United States had just emerged from the war as the undisputed global manufacturing leader due in large part to efficient operations. At the same time, Japan and Europe were in ruins, their businesses and factories destroyed. U.S. companies had these markets to themselves, and so the post–World War II period of the 1950s and 1960s represented the golden era for U.S. business. The primary opportunities were in the areas of marketing, to develop the large potential markets for new products, and in finance, to support the growth. Since there were no significant competitors, the operations function became of secondary importance, because companies could sell what they produced. Even the distinguished economist John Kenneth Galbraith observed, “The production problem has been solved.” Then in the 1970s and 1980s, things changed. American companies experienced large declines in productivity growth, and international competition began to be a challenge in many markets. In some markets such as the auto industry, American corporations were being pushed out. It appeared that U.S. firms had become lax due to the lack of competition in the 1950s and 1960s. They had forgotten about improving their methods and processes. In the meantime, foreign firms were rebuilding their facilities and designing new production methods. By the time foreign firms had recovered, many U.S. firms found themselves unable to compete. To regain their competitiveness, companies turned to operations management, a function they had overlooked and almost forgotten about. The new focus on operations and competitiveness has been responsible for the recovery of many corporations, and U.S. businesses experienced a resurgence in the 1980s and 1990s. Operations became the core function of organizational competitiveness. Although U.S. firms have rebounded, they are fully aware of continued global competition, scarcity of resources, and increased financial pressure. Companies have learned that to achieve longrun success they must place much importance on their operations. Historical Milestones When we think of what operations management does—namely, managing the transformation of inputs into goods and services—we can see that as a function it is as old as time. Think of any great organizational effort, such as organizing the first Olympic games, building the Great Wall of China, or erecting the Egyptian pyramids, and you will see operations management at work. Operations management did not emerge as a formal field of study, however, until the late 1950s and early 1960s, when scholars began to recognize that all production systems face a common set of problems and to stress the systems approach to viewing operations processes. Many events helped shape operations management. We will describe some of the most significant of these historical milestones and explain their influence on the development of operations management. Later we will look at some current trends in operations management. These historical milestones and current trends are summarized in Table 1.2. Industrial Revolution An industry movement that changed production by substituting machine power for labor power. The Industrial Revolution The Industrial Revolution had a significant impact on the way goods are produced today. Before this time, products were made by hand by skilled craftspeople in their shops or Historical Development • TABLE 1.2 11 Historical Development of Operations Management Concept Time Explanation Industrial Revolution Late 1700s Brought in innovations that changed production by using machine power instead of human power. Scientific management Early 1900s Brought the concepts of analysis and measurement of the technical aspects of work design and development of moving assembly lines and mass production. Human relations movement 1930s to 1960s Focused on understanding human elements of job design, such as worker motivation and job satisfaction. Management science 1940s to 1960s Focused on the development of quantitative techniques to solve operations problems. Computer age 1960s Enabled processing of large amounts of data and allowed widespread use of quantitative procedures. Environmental issues 1970s Considered waste reduction, the need for recycling, and product reuse. Just-in-time systems (JIT) 1980s Designed to achieve high-volume production with minimal inventories. Total quality management (TQM) 1980s Sought to eliminate causes of production defects. Reengineering 1980s Required redesigning a company’s processes in order to provide greater efficiency and cost reduction. Global competition 1980s Designed operations to compete in the global market. Flexibility 1990s Offered customization on a mass scale. Time-based competition 1990s Based on time, such as speed of delivery. Supply chain management 1990s Focused on reducing the overall cost of the system that manages the flow of materials and information from suppliers to final customers. Electronic commerce 2000s Uses the Internet and World Wide Web for conducting business activity. Outsourcing and flattening of the world 2000s Convergence of technology has enabled outsourcing of virtually any job imaginable from anywhere around the globe, therefore “flattening” the world. Big data analytics 2010s Applies math and statistics to large volumes of structured and unstructured data to gain unprecedented business insights. homes. Each product was unique, painstakingly made by one person. The Industrial Revolution changed all that. It started in the 1770s with the development of a number of inventions that relied on machine power instead of human power. The most important of these was the steam engine, which was invented by James Watt in 1764. The steam engine provided a new source of power that was used to replace human labor in textile mills, machinemaking plants, and other facilities. The concept of the factory was emerging. In addition, the steam engine led to advances in transportation, such as railroads, that allowed for a wider distribution of goods. 12 CHAPTER 1 • Introduction to Operations Management About the same time, the concept of division of labor was introduced. First described by Adam Smith in 1776 in The Wealth of Nations, this concept would ...
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