OM 4 Operations Management Part 1 Chapter 1 GOODS, SERVICES, AND OPERATIONS MANAGEMENT i want to be a director of a museum like this one day,” Carol said to her mom as they walked through Chicago Museum of Science and Industry. Carol’s family had just finished a tour of the 1944 German submarine known as the U-505 that was captured during World War II. They had spent the day learning about coal mines, the science of the human body, Dr. Seuss, and much more. As they walked past the museum offi ces, Carol noticed a directory of eight departments: t
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FYIJCJUTw learning outcomes After studying this chapter you should be able to: 1-1 Explain the concept and importance of operations management. 1-2 Describe what operations managers do. 1-3 Explain the differences between goods and services. 1-4 Describe a customer benefit package. 1-5 Explain the role of processes in OM and identify three general types of processes. 1-6 Summarize the historical development of OM. 1-7 Describe current challenges facing OM. Can you provide examples of the type of work activities and decisions that are made in each of these eight departments at the Chicago Museum of Science and Industry? AfriPics.com/Alamy Limited What do you think? 2 72417_ch01_ptg01_hr_002-023.indd 2 09/08/12 10:55 AM CHAPTER o 1-1 Operations Management 1 perations management (OM) is the science and art of ensuring that goods and services are created and delivered successfully to customers. OM includes the design of goods, services, and the processes that create them; the day-to-day management of those processes; and the continual improvement of these goods, services, and processes. Why is OM important? To answer this, we might first ask the question: What makes a company successful? In 1887, William Cooper Procter, grandson of the founder of Procter & Gamble, told his employees, “The first job we have is to turn out quality merchandise that consumers will buy and keep on buying. If we produce it efficiently and economically, we will earn a profit, in which you will share.” Procter’s statement—which is still as relevant today as it was over 100 years ago—addresses three issues that are at the core of operations management: efficiency, cost, and quality. Efficiency (a measure of how well resources are used in creating outputs), the cost of operations, and the quality of the goods and services that create customer satisfaction all contribute to profitability, and ultimately, the long-run success of a company. A company cannot be successful without people who understand how these concepts relate to each other, Operations management which is the essence (OM) is the science and art of ensurof OM, and can aping that goods and services are creply OM principles ated and delivered successfully effectively in makto customers. ing decisions. Hemis/Alamy . A variety of departments, including Security, Exhibit Maintenance, and Guest Operations, are required to keep a museum running smoothly. OM OM4 72417_ch01_ptg01_hr_002-023.indd 3 Chapter 1: Goods, Services, and Operations Management 3 09/08/12 10:55 AM The opening description of Chicago’s Museum of Science and Industry suggests that the way in which goods and services, and the processes that create and support them, are designed and managed can make the difference between a delightful or unhappy customer experience. That is what OM is all about! Operations management is the only function by which managers can directly affect the value provided to all stakeholders— customers, employees, investors, and society. The eight departments at Chicago’s Museum of Science and Industry highlight the importance of OM in designing and managing the museum. Each of these departments uses one or more processes to create customer value and ensure efficient operations. The guest call center, for example, must design processes to handle a wide variety of customer inquiries, forecast call volume, determine the number (capacity) of customer service representatives (CSRs) to have on duty by time of day, schedule them, design their jobs, and train them to deliver superior customer experiences. In fact, the museum does all of the activities described in the box “What Do Operations Managers Do?” m 1-2 OM in the Workplace any people who are considered “operations managers” have titles such as chief operating officer, hotel or restaurant manager, vice president of manufacturing, customer service manager, plant manager, field service manager, or supply chain manager. The concepts and methods of OM can be used in any job, regardless of the functional area of business or industry, to better create value for internal customers (within the organization) and for external customers (outside the organization). OM principles are used in accounting, human resources management, legal work, financial activities, marketing, environmental management, and every type of service activity. Thus, everyone should understand OM and be What Do Operations Managers Do? Some of the key activities that operations managers perform include the following: t
Forecasting: Predict the future demand for raw materials, finished goods, and services. t
Supply Chain Management: Manage the flow of materials, information, people, and money from suppliers to customers. t
Facility Layout and Design: Determine the best configuration of machines, storage, offi ces, and departments to provide the highest levels of effi ciency and customer satisfaction. t
Technology Selection: Use technology to improve productivity and respond faster to customers. t
Quality Management: Ensure that goods, services, and processes will meet customer expectations and requirements. t
Purchasing: Coordinate the acquisition of materials, supplies, and services. t
Resource and Capacity Management: Ensure that the right amount of resources (labor, equipment, materials, and information) is available when needed. t
Process Design: Select the right equipment, information, and work methods to produce high-quality goods and services effi ciently. t
Job Design: Decide the best way to assign people to work tasks and job responsibilities. t
Service Encounter Design: Determine the best types of interactions between service providers and customers, and how to recover from service upsets. t
Scheduling: Determine when resources such as employees and equipment should be assigned to work. t
Sustainability: Decide the best way to manage the risks associated with products and operations to preserve resources for future generations. able to apply its tools and concepts. Following are some examples of how our former students (who were not OM majors!) are using OM in their jobs. The concepts and methods of OM can be used in any job, regardless of the functional area of business or industry. 4 OM4 Part 1: Understanding Operations 72417_ch01_ptg01_hr_002-023.indd 4 09/08/12 10:55 AM SMART TRASH CONTAINERS & OPERATIONS A new solar-powered trash container on a Florida public road not only compacts the trash but also sends an e-mail for pickup when full. One side of the container is for recycling and the other for trash. Regular trash containers must be picked up several times a week. Each 300-pound solar-powered trash container costs about $3,800 but reduces the overall carbon footprint by lowering transportation costs, in addition to offering the environmental benefits of recycling. Compacting the trash also results in less pickups. The covered containers also protect animals from foraging through the trash and harming themselves and the environment. Cash-strapped cities such as Philadelphia and Chicago have bought hundreds of these “smart trash containers.” This smart and new way of collecting trash and recycling has a major impact on the operation of this government service (see box “What Do Operations Managers Do?”). First, there is less need to forecast when the containers are full, and better quality because the containers don’t overflow and contaminate the surroundings. In addi- r
Scheduling: Production schedules are created to ensure that enough product is available for both retail and wholesale customers, taking into account such factors as current inventory and soap production capacity. r
Quality management: Each product is inspected and must conform to the highest quality standards. If a product does not conform to standard (for example, wrong color, improper packaging, improper labeling, improper weight, size, or shape), then it is removed from inventory to determine where the process broke down and to initiate corrective action. tion, less trucks (resources) are required Richard Graulich/ZUMA Press/Newscom Without an understanding of OM, the company would never have gotjobs and processes are streamlined and ten off the ground! more efficient, the scheduling of trucks Tom James is a senior software (called vehicle routing) is more efficient developer for a small software develand reduces total miles travelled, and the opment company that creates sales trash collection system is more sustainproposal automation software. Tom uses OM skills in dealing with quality able in preserving resources for future and customer service issues related to generations. the software products he is involved Source: “Jupiter’s new solar-powered trash bins already having effect across Florida,” The Palm Beach Post in developing. He is also extensively News, October 24, 2011, http://www.palmbeachpost.com/news/jupiters-new-solar-powered-trash-binsalready-having-1929714.html. involved in project management activities related to the development process, including identifying tasks, assigning developers to tasks, estimatSoap Box Soap Company (soapboxsoapco.com) ing the time and cost to complete projects, and studymanufactures and sells natural soaps and body proding the variance between the estimated and actual time ucts. The company was created as an entrepreneurial it took to complete the project. He is also involved in venture by Shelly Decker and her sister. Shelly was an continuous improvement projects; for example, he seeks accounting and information systems major in college, to reduce development time and increase the efficiency of but she is involved in using OM skills every day: the development team. Tom was an information technology and management major in college. r
Process design: When a new product is to be inBrooke Wilson is a process manager for JPMorgan troduced, the best way to produce it must be deChase in the credit card division. After several years working termined. This involves charting the detailed steps as an operations analyst, he was promoted to a production needed to make the product. supervisor position overseeing “plastic card production.” r
Inventory management: Inventory is tightly conAmong his OM-related activities are the following: trolled to keep cost down and to avoid production r
Planning and budgeting: Representing the plastic that isn’t needed. Inventory is taken every four card production area in all meetings, developing weeks and adjusted in the inventory management annual budgets and staffing plans, and watching system accordingly. for the total trash collection system, OM4 72417_ch01_ptg01_hr_002-023.indd 5 Chapter 1: Goods, Services, and Operations Management 5 09/08/12 10:55 AM UNITED PERFORMANCE METALS: THE LIFE OF AN OPERATIONS MANAGER U nited Performance Metals, formerly known as Ferguson Metals, located in Hamilton, Ohio, is a supplier of stainless steel and high-temperature alloys for the specialty metal market. Ferguson’s primary production operations include slitting coil stock and cutting sheet steel to customer specifications with rapid turnaround times from order to delivery. With only 78 employees, about half of whom are in operations, the Director of Operations and Quality is involved in a variety of daily activities that draw upon knowledge of not only OM and engineering, but also finance, accounting, organizational behavior, and other subjects. He typically spends about 50 percent of his time working with foremen, supervisors, salespeople, and other staff through e-mail and various meetings, discussing such issues as whether or not the company has the capability to accomplish a specific customer request, as well as routine production, quality, and shipping issues. Although he makes recommendations to his direct reports, his interaction is more like a consultant than a manager; his people are fully empowered to make key decisions. The remainder of his time is spent investigating such issues as the technical feasibility and cost implications of new capital equipment or changes to existing processes, trying to reduce costs, seeking and facilitating design improvements on the shop floor, and motivating the workforce. For example, one project involves working with the Information Technology group to reduce the amount of paperwork required to process orders. Understanding specialty metals is certainly a vital part of this job, but the ability to understand customer needs, apply approaches to continuous improvement, understand and motivate people, work cross-functionally across the business, and integrate processes and technology define the job of an operations manager. In 2008, Ferguson Metals merged with AIM International as Coiled steel awaiting processing. Slitting coils into finished strips. technology that might affect the production of plastic credit cards. r
Inventory management: Overseeing the management of inventory for items such as plastic blank cards; inserts such as advertisements; envelopes, postage, and credit card rules and disclosure inserts. r
Scheduling and capacity: Daily to annual scheduling of all resources (equipment, people, 6 Courtesy of Ferguson Metals Courtesy of Ferguson Metals Courtesy of Ferguson Metals United Performance Metals. Some of Ferguson’s finished products. inventory) necessary to issue new credit cards and reissue cards that are up for renewal, replace old or damaged cards, as well as cards that are stolen. r Quality: Embossing the card with accurate customer information and quickly getting the card in the hands of the customer. Brooke was an accounting major in college. OM4 Part 1: Understanding Operations 72417_ch01_ptg01_hr_002-023.indd 6 09/08/12 10:55 AM A senior executive of the Hilton Corporation stated, “We sell time. You can’t put a hotel room on the shelf.” ompanies design, produce, and deliver a wide variety of goods and services that consumers purchase. A good is a physical product that you can see, touch, or possibly consume. Examples of goods include cell phones, appliances, food, flowers, soap, airplanes, furniture, coal, lumber, personal computers, paper, and industrial machines. A durable good is one that does not quickly wear out and typically lasts at least three years. Vehicles, dishwashers, and furniture are some examples. A nondurable good is one that is no longer useful once it’s used, or lasts for less than three years. Examples are toothpaste, software, clothing and shoes, and food. Goods-producing firms are found in industries such as manufacturing, farming, forestry, mining, construction, and fishing. A service is any primary or complementary activity that does not directly produce a physical product. Services represent the nongoods part of a transaction between a buyer (customer) and seller (supplier).1 Serviceproviding firms are found in industries such as banking, lodging, education, health care, and government. The services they provide might be a mortgage loan, a comfortable and safe place to sleep, a college degree, a medical procedure, or police and fire protection. Designing and managing operations in a goodsproducing firm is quite different from that in a service organization. Thus, it is important to understand the nature of goods and services, and particularly the differences between them. Goods and services share many similarities. They are driven by customers and provide value and satisfaction to customers who purchase and use them. They can be standardized for the mass market or customized to individual needs. They are created and provided to customers by some type of process involving people and technology. Services that do not involve significant interaction with customers (for example, credit card processing) can be managed much the same as goods in a factory, using proven principles of OM that have been refined over the years. Nevertheless, some very significant differences exist between goods and services that make the management of service-providing organizations different from goods-producing organizations and create different demands on the operations function.2 Dmitriy Shironosov/Shutterstock c 1-3 Understanding Goods and Services 1. Goods are tangible, whereas services are intangible. Goods are consumed, but services are experienced. Goods-producing industries rely on Stephen Coburn/Shutterstock A good is a physical product that you can see, touch, or possibly consume. OM4 72417_ch01_ptg01_hr_002-023.indd 7 A durable good is one that does not quickly wear out and typically lasts at least three years. A nondurable good is one that is no longer useful once it’s used, or lasts for less than three years. A service is any primary or complementary activity that does not directly produce a physical product. Chapter 1: Goods, Services, and Operations Management 7 09/08/12 10:56 AM Customers judge the value of a service and form perceptions through service encounters. Andersen Ross/Getty Images In addition, the customer and service provider often co-produce a service, meaning that they work together to create and simultaneously consume the service, as would be the case between a bank teller and a customer to complete a financial transaction. This characteristic has interesting implications for operations. For example, it might be possible to off-load some work to the customer by encouraging self-service (supermarkets, cafeterias, libraries) and self-cleanup (fast-food restaurants, campgrounds, vacation home rentals). The higher the customer participation, the more uncertainty the firm has with respect to service time, capacity, scheduling, quality performance, and operating cost. A service encounter is an interaction between the customer and the service provider. Some examples of service encounters are making a hotel reservation, asking a grocery store employee where to find the pickles, or making a purchase on a Web site. Service encounters consist of one or more moments of truth —any episodes, transactions, or experiences in which a customer comes into contact with any aspect of the delivery system, however remote, and thereby has an opportunity to form an impression.4 A moment of truth might be a gracious welcome by an employee at the hotel check-in counter, a grocery store employee who seems too impatient to help, or trying to navigate a confusing Web site. Customers judge the value of a service and form perceptions through service encounters. Therefore, employees who interact directly with customers, such as airline flight attendants, customer service representatives, and bank tellers, need to understand the importance of service encounters. Also, those who design Web sites and telephone menus that customers use in service encounters must also understand how they may influence customer perceptions. machines and “hard technology” to perform work. Goods can be moved, stored, and repaired, and generally require physical skills and expertise during production. Customers can often try them before buying. Services, on the other hand, make more use of information systems and other “soft technology,” require strong behavioral skills, and are often difficult to describe and demonstrate. A senior executive of the Hilton Corporation stated, “We sell time. You can’t put a hotel room on the shelf.”3 2. Customers participate in many service processes, activities, and transactions. Many services require that the customer be present either physically, on a telephone, or online for service to commence. A service encounter is an interaction between the customer and the service provider. Moments of truth are episodes, transactions, or experiences in which a customer comes into contact with any aspect of the delivery system, however remote, and thereby has an opportunity to form an impression. 8 3. The demand for services is more difficult to predict than the demand for goods. Customer arrival rates OM4 Part 1: Understanding Operations 72417_ch01_ptg01_hr_002-023.indd 8 09/08/12 10:56 AM and demand patterns for such service delivery systems as banks, airlines, supermarkets, call centers, and courts are very difficult to forecast. The demand for services is time-dependent, especially over the short term (by hour or day). This places many pressures on service firm managers to adequately plan staffing levels and capacity. 4. Services cannot be stored as physical inventory. In goods-producing firms, inventory can be used to decouple customer demand from the production process or between stages of the production process and ensure constant availability despite fluctuations in demand. Service firms do not have physical inventory to absorb such fluctuations in demand. For service delivery systems, availability depends on the system’s capacity. For example, a hospital must have an adequate supply of beds for the purpose of meeting unanticipated patient demand, and a float pool of nurses when things get very busy. Once an airline seat, a hotel room, or an hour of a lawyer’s day are gone, there is no way to recapture the lost revenue. 5. Service management skills are paramount to a successful service encounter. Service providers require service management skills such as knowledge and technical expertise (operations), cross-selling other products and services (marketing), and good human interaction skills (human resources). Service management integrates marketing, human resources, and operations functions to plan, create, and deliver goods and services, and their associated service encounters. OM principles are useful in designing service encounters and supporting marketing objectives. 6. Service facilities typically need to be in close proximity to the customer. When customers must physically interact with a service facility—for example, post offices, hotels, and branch banks—they must be in a location convenient to customers. A manufacturing facility, on the other hand, can be located on the other side of the globe, as long as goods are delivered to customers in a timely fashion. In today’s Internet age and with evolving service technologies, “proximity” need not be the same as location; many services are only a few mouse clicks away. 7. Patents do not protect services. A patent on a physical good or software code can provide protection from competitors. The intangible nature of a service makes it more difficult to keep a competitor from copying a business concept, facility layout, or service encounter design. For example, OM4 72417_ch01_ptg01_hr_002-023.indd 9 restaurant chains are quick to copy new menu items or drive-through concepts. These differences between goods and services have important implications to all areas of an organization, and especially to operations. These are summarized in Exhibit 1.1. Some are obvious, whereas others are more subtle. By understanding them, organizations can better select the appropriate mix of goods and services to meet customer needs and create the most effective operating systems to produce and deliver those goods and services. m 1-4 Customer Benefit Packages any goods and services are “bundled” in a certain way to provide value to customers. This not only enhances what customers receive, but can also differentiate the product from competitors. Such a bundle is often called a customer benefit package. A customer benefi t package (CBP) is a clearly defined set of tangible (goods-content) and intangible (service-content) features that the customer recognizes, pays for, uses, or experiences. The CBP is a way to conceptualize and visualize goods and services by thinking broadly about how goods and services are bundled and configured together. A CBP consists of a primary good or service, coupled Service management intewith peripheral grates marketing, human resources, and operations functions to plan, goods and/or sercreate, and deliver goods and services, and somevices, and their associated service times variants. A encounters. primary good or service is the “core” A customer benefi t package (CBP) is a clearly defined set of tan- offering that attracts customers and responds to their basic needs. For example, the primary service of a personal checking account is convenient financial transactions. gible (goods-content) and intangible (service-content) features that the customer recognizes, pays for, uses, or experiences. Peripheral goods or services are A primary good or service is the “core” offering that attracts customers and responds to their basic needs. Peripheral goods or services are those that are not essential to the primary good or service, but enhance it. Chapter 1: Goods, Services, and Operations Management 9 09/08/12 10:56 AM Exhibit 1.1 How Goods and Services Affect Operations Management Activities OM Activity Goods Services Forecasting Forecasts involve longer-term time horizons. Goodsproducing firms can use physical inventory as a buffer to mitigate forecast errors. Forecasts can be aggregated over larger time frames (e.g., months or weeks). Forecast horizons generally are shorter, and forecasts are more variable and time-dependent. Forecasting must often be done on a daily or hourly basis, or sometimes even more frequently. Facility Location Goods-producing facilities can be located close to raw materials, suppliers, labor, or customers/markets. Service facilities must be located close to customers/ markets for convenience and speed of service. Facility Layout and Design Factories and warehouses can be designed for efficiency because few, if any, customers are present. The facility must be designed for good customer interaction and movement through the facility and its processes. Technology Goods-producing facilities use various types of automation to produce, package, and ship physical goods. Service facilities tend to rely more on information-based hardware and software. Quality Goods-producing firms can define clear, physical, and measurable quality standards and capture measurements using various physical devices. Quality measurements must account for customer’s perception of service quality and often must be gathered through surveys or personal contact. Inventory/ Capacity Goods-producing firms use physical inventory such as raw materials and finished goods as a buffer for fluctuations in demand. Service capacity such as equipment or employees is the substitute for physical inventory. Process Design Because customers have no participation or involvement in goods-producing processes, the processes can be more mechanistic and controllable. Customers usually participate extensively in service creation and delivery (sometimes called co-production), requiring more flexibility and adaptation to special circumstances. Job/Service Encounter Design Goods-producing employees require strong technical and production skills. Service employees need more behavioral and service management skills. Scheduling Scheduling revolves around the movement and location of materials, parts, and subassemblies and when to assign resources (i.e., employees, equipment) to accomplish the work most efficiently. Scheduling focuses on when to assign employees and equipment (i.e., service capacity) to accomplish the work most efficiently without the benefit of physical inventory. Supply Chain Management Goods-producing firms focus mainly on the physical flow of goods,often in a global network,with the goal of maximizing customer satisfaction and profit, and minimizing delivery time, costs, and environmental impact. Service-providing firms focus mainly on the flow of people, information, and services, often in a global network, with the goal of maximizing customer satisfaction and profit, and minimizing delivery time, costs, and environmental impact. A similar classification of OM activities in terms of high/low customer contact was first proposed in the classic article: Chase, R. B., “Where does the customer fit in a service operation?” )BSWBSE
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3FWJFX November–December 1978, p. 139. those that are not essential to the primary good or service, but enhance it. A personal checking account might be supported and enhanced by such peripheral goods as a printed monthly account statement, designer checks and checkbooks, a special credit card, and such peripheral services as a customer service hot line and A variant is a CBP feature that deonline bill payment. parts from the standard CBP and is normally location- or firm-specific. It is interesting to note that today, many 10 business-to-business manufacturers, such as custom machining or metal fabricators, think of their core offering as service—providing customized design assistance and on-time delivery—with the actual good as peripheral. Finally, a variant is a CBP feature that departs from the standard CBP and is normally location- or firm-specific. A CBP can easily be expressed in a graphical fashion as shown in Exhibit 1.2. The CBP attributes and features (described in the circles) are chosen by management to fulfill certain customer wants and needs. For OM4 Part 1: Understanding Operations 72417_ch01_ptg01_hr_002-023.indd 10 09/08/12 10:56 AM Each good or service in the customer benefit package requires a process to create and deliver it to customers. © Cengage Learning 2013 needs. For example, if a customer need is to ensure the safety of their valuables Exhibit 1.2 A CBP Example for Purchasing a Vehicle in a hotel, a CBP feature that management might select is a room safe. Thus, Peripheral goods you would not put “safety of valuables” Variant Fishing Free Wash Pond on a CBP diagram, but rather “room Anytime safe.” A CBP diagram should reflect on the features management selects to fulFree fill certain customer wants and needs. High Credit Speed Reports The size of the circles in the CBP Internet Primary Good framework can signify the relative imVehicle Free portance of each good and service. In Gourmet some cases, goods and services content in Coffee & Replacement a CBP framework will be approximately Tea Parts equal. For example, McDonald’s (food Financing and fast service) and IBM (computers and Leasing Peripheral services and customer solutions) might argue that their primary goods and services are of equal importance, so a graphical representation would show two equal-sized and overlapping circles as the center of the CBP. example, financing and leasing, which are peripheral Verizon, for example, buys an iPhone from Apple services, meet the customer’s wants and needs of perfor about $600 and sells it to customers for $200. Vesonal financial security. In fact, if two vehicles have simrizon subsidizes each phone to make sales and capture ilar prices and quality levels, then the leasing program customers with its service contracts. Verizon tries to may be the key to which vehicle the customer buys. make up the short-term loss on the physical good by Vehicle replacement parts, a peripheral good, meet the the long-term gains on the service fees. Cell phones are customer’s wants and needs of fast service and safety. good examples of how goods and services are bundled A variant might be a fishing pond where kids can fish together for long-term profits.5 while parents shop for vehicles. When defining a CBP, don’t confuse the features determined by management with customers’ wants and D-Ozen/iStockphoto Buying More Than a Car OM4 72417_ch01_ptg01_hr_002-023.indd 11 People usually think that when they buy a new car, they are simply purchasing the vehicle. Far from it. Most automobiles, for example, bundle a good, the automobile, with many peripheral services. Such services might include the sales process, customized leasing, insurance, warranty programs, loaner cars when a major service or repair is needed, free car washes at the dealership, opportunities to attend a manufacturer’s driving school, monthly newsletters sent by e-mail, and Web-based scheduling of oil changes and other service requirements. Such bundling is described by the customer benefit package framework.6 Chapter 1: Goods, Services, and Operations Management 11 09/08/12 10:56 AM Exhibit 1.3 Examples of Goods and Service Content Fast-Food Restaurant Toothpaste Automobile Brakes and Mufflers Symphony, Play, and Movie Computer Diagnosis and Repair Bicycle Psychiatric Session College High Goods Content (Tangible) (Pure Goods) Finally, we may bundle a group of CBPs together. One example would be a combined land-cruise vacation to Alaska, which might consist of a bundle of CBPs such as the travel agency that books the package and optional land excursions from the ship; the land-tour operator that handles hotels, transportation, and baggage handling; and the cruise line that provides air travel, meals, and entertainment. Bundled CBPs raise some interesting issues about pricing strategies and partnerships among firms. For example, a firm might actually be able to charge a premium price for the bundled CBPs than if purchased separately, or alliances between hotels and airlines provide discounted vacation packages that are less expensive than if booked separately. In most cases, many “goods” and “services” that we normally think of have a mixture of both goods and service content. Exhibit 1.3 illustrates a continuum of goods and service content with several examples. Toothpaste, for instance, is high in goods content, but when you purchase it, you are also purchasing some services, such as a telephone call center to field customer questions and complaints. Similarly, a bicycle might seem like a pure good, but it often includes such services as safety instruction and maintenance. At the other extreme in Exhibit 1.3 are psychiatric services, A process is a sequence of which are much higher in activities that is intended to service content, but might create a certain result. include goods such as a 12 Automobile Loan and Leasing Low Goods Content (Intangible) (Pure Service) © Cengage Learning 2013 Medicine Prescription bill, books, and medical brochures that support the service. Attending a symphony, play, or movie is essentially a pure service, but may include program brochures and ticket stubs that offer discounts at local restaurants as peripheral goods. e 1-5 Processes ach good or service in the customer benefit package requires a process to create and deliver it to customers. A process is a sequence of activities that is intended to create a certain result, such as a physical good, a service, or information. A practical definition, according to AT&T, is that a process is how work creates value for customers.7 Processes are the means by which goods and services are produced and delivered. For example, think of a car wash. A car wash process might consist of the following steps: check the car in, perform the wash, inspect the results, notify the customer that the car is finished, quickly deliver the car back to the customer, and pay the bill. In designing such a process, operations managers need to consider the process goals, such as speed of service, a clean car, no vehicle damage, and the quality of all service encounters. OM managers would ask questions such as: Should the car be cleaned inside as well as outside? How long should a customer be OM4 Part 1: Understanding Operations 72417_ch01_ptg01_hr_002-023.indd 12 09/08/12 10:56 AM Biztainment—(Huh?) Why would someone pay, for example, to crush grapes with her feet? Might it be that the process of doing this is as valuable to the customer as the outcome itself? Entertainment is the act of providing hospitality, escapism, fun, excitement, and/or relaxation to people as they go about their daily work and personal activities. The addition of entertainment to an organization’s customer benefit package provides unique opportunities for companies to increase customer satisfaction and grow revenue. Biztainment is the practice of adding entertainment content to a bundle of goods and services in order to gain competitive advantage. The old business model of just selling and servicing a physical vehicle is gone. For example, a BMW automobile dealership in Fort Myers, Florida, opened a new 52,000-square-foot facility that offers a putting green, private work areas, a movie theater, wireless Internet access, massage chairs, a golf simulator, and a café, so that customers have multiple entertainment options during their visits. Biztainment can be applied in both manufacturing and service settings. Consider the following examples: t
Manufacturing—old and new factory tours, showrooms, customer training and education courses, virtual tours, short films on how things are made, driving schools, history lessons on the design and development of a physical good t
Retail—shopping malls, simulators, product demonstrations, climbing walls, music, games, contests, holiday decorations and walk-around characters, blogs, interactive store designs, aquariums, movie theaters, makeovers t
Restaurants—toys, themes, contests, games, characters, playgrounds, live music t
Agriculture—pick-your-own food, mazes, make-your-own wine, grape-stomping, petting zoos, farm tours t
Lodging—kids’ spas, health clubs, casinos, cable television, arcades, massage, wireless Internet, arts and crafts classes, pools, family games, wildlife, miniature golf t
Telecommunications—picture mail, text and video messaging, music and TV downloads, cool ring tones, designer phones, iPhone “apps” Some organizations that use entertainment as a means of enhancing the firm’s image and increasing sales that you might be familiar with are the Hard Rock Café, Chuck E. Cheese, and Benihana of Tokyo restaurants; cable TV shows like How It’s Made; the Las Vegas Treasure Island casino/hotel pirate battle; and so on. The data show the value of biztainment. For example, BuildA-Bear Workshop boasts an average of $600 per square foot in annual revenue, double the U.S. mall average, and Holiday Inns found that hotels with holidomes have a 20 percent higher occupancy rate and room rates that are, on average, $28 higher.8 expected to wait? What types of chemicals should be used to clean the car? What training should the employees who wash the cars and interact with the customer have? Key processes in business typically include order, assembling a dishwasher, or providing a home mortgage; 2. support processes, such as purchasing materials and supplies used in manufacturing, managing inventory, installation, health benefits, technology acquisition, day care on-site services, and research and development; and 1. value creation processes, focused on producing or delivering an organization’s primary goods or services, such as filling and shipping a customer’s ZUMA Press/Newscom 3. general management processes, including accounting and information systems, human resource management, and marketing. OM4 72417_ch01_ptg01_hr_002-023.indd 13 It is important to realize that nearly every major activity within an organization involves a process that crosses traditional organizational boundaries. For example, an order fulfilment process might involve a salesperson placing the order; a marketing representative entering it on the company’s computer system; a credit check by finance; picking, packaging, and shipping by distribution and logistics personnel; invoicing by finance; and installation by field service engineers. Thus, a process does not necessarily Chapter 1: Goods, Services, and Operations Management 13 09/08/12 10:56 AM PAL’S SUDDEN SERVICE: BEST-IN-CLASS OPERATIONS MANAGEMENT P al’s Sudden Service is a small chain of mostly drive-through quick-service restaurants located in northeast Tennessee and southwest Virginia. Pal’s competes against major national chains and outperforms all of them by focusing on important customer requirements such as speed, accuracy, friendly service, correct ingredients and amounts, proper food temperature, and safety. Pal’s uses extensive market research to fully understand customer requirements: conve- nience; ease of driving in and out; easy-to-read menus; simple, accurate order-system; fast service; wholesome food; and reasonable price. To create value, Pal’s has developed a unique ability to effectively integrate production and service into its operations. Pal’s has learned to apply world-class management principles and best-in-class processes in a customer-driven approach to business excellence that causes other companies to emulate its systems. Every process is flowcharted and analyzed for opportunities for error, and then mistake-proofed if at all possible. Entry-level employees—mostly high school students in their first jobs— receive 120 hours of training on precise work procedures and process standards in unique self-teaching, classroom, and on-thejob settings, and reinforced by a Courtesy of Pal’s Sudden Service “Caught Doing Good” program that reside within a department or traditional management function. All organizations have networks of processes that create value for customers (called value chains, which we explore in Chapter2). For example, Pal’s Sudden Service (see the box above) begins with raw materials and suppliers providing items such as meat, lettuce, tomatoes, buns, and packaging; uses intermediate processes for order taking, cooking, and final assembly; and ends with order delivery and, hopefully, happy customers. 1-6 OM: A History of Change and Challenge i n the last century, operations management has undergone more changes than any other functional area of business and is the most important factor in competitiveness. That is one of the reasons why every business student needs a basic understanding of the field. Exhibit 1.4 is a chronology of major themes that have changed the scope and direction of operations management over the last 14 provides recognition for meeting quality standards and high-performance expectations. In such performance measures as complaints, profitability, employee turnover, safety, and productivity, Pal’s has a significant advantage over its competition. half century. To better understand the challenges facing modern business and the role of OM in meeting them, let us briefly trace the history and evolution of these themes. 1-6a A Focus on Effi ciency Contemporary OM has its roots in the Industrial Revolution that occurred during the late 18th and early 19th centuries in England. Until that time, goods had been produced in small shops by artisans and their apprentices without the aid of mechanical equipment. During the Industrial Revolution, however, many new inventions came into being that allowed goods to be manufactured with greater ease and speed. The inventions reduced the need for individual artisans and led to the development of modern factories. As international trade grew in the 1960s, the emphasis on operations efficiency and cost reduction increased. Many companies moved their factories to low-wage countries. Managers became enamored with computers, robots, and other forms of technology. Although advanced technology continues to revolutionize OM4 Part 1: Understanding Operations 72417_ch01_ptg01_hr_002-023.indd 14 09/08/12 10:56 AM Exhibit 1.4 Seven Eras of Operations Management Focus on cost and efficiency Focus on quality Focus on customization and design Focus on time Focus on service and value Focus on sustainability Focus on data and analytics Cost minimization....……........………………………………………............................…..........................Sustainability Mass production………………………………....................….......................…............................Mass customization Manufacturing-based technology.....……...…………...................................................Information-based technology Focus on goods……………………………….....................…………...............................Focus on value and analytics Local markets………….......................………………………..……….......................….........................Global markets © Cengage Learning 2013 .........1960s..................1970s..................1980s...................1990s.....................2000s.................2010s.................2020s Chad Ehlers/Getty Images and improve production, in the 1960s and 1970s technology was viewed primarily as a method of reducing costs, and distracted managers from the important goal of improving the quality of goods and services and the processes that create them. American business was soon to face a rude awakening. Today, about 90 percent of the jobs in the U.S. economy are in service-providing processes. OM4 72417_ch01_ptg01_hr_002-023.indd 15 Chapter 1: Goods, Services, and Operations Management 15 09/08/12 10:56 AM How do you support sustainability? 1-6b The Quality Revolution As Japan was rebuilding from the devastation of World War II, two U.S. consultants, W. Edwards Deming and Joseph Juran, were sought extensively by Japanese industry. Deming and Juran told Japanese executives that continual improvement of quality would open world markets, free up capacity, and improve their economy. The Japanese eagerly embraced that message. They embarked on a massive effort to train the workforce, using statistical tools developed at Western Electric and other innovative management tools to identify causes of quality problems and fix them. They made steady progress in reducing defects and paid careful attention to what consumers wanted. Those efforts continued at a relentless pace until, by the mid 1970s, the world discovered that Japanese goods had fewer defects, were more reliable, and better met consumer needs than American goods. As a result, Japanese firms captured major shares of world markets in many different industries such as automobiles and electronics. Thereafter, quality became an obsession with top managers of nearly every major company and its impact continues to be seen today. In 1987 the U.S. government established the Malcolm Baldrige Award to focus national attention on quality. 1-6c Customization and Design As the goals of low cost and high product quality became “givens,” companies began to emphasize innovative designs and product features to gain a competitive edge. Quality meant much more than simply defect reduction; quality meant offering consumers new and innovative products that not only met their expectations, but also surprised and delighted them. Inflexible mass-production methods that produced high volumes of standardized goods and services using unskilled or semiskilled workers and expensive single-purpose equipment, though very efficient and cost-effective, were inadequate for the new goals of increased good and service variety and continual product improvement. The operating system had to change. New types of operating systems emerged that enabled companies to manufacture goods and services better, cheaper, and faster than their competitors, while facilitating innovation and increasing variety. The 16 Internet began to help companies customize their goods and services for global markets. 1-6d Time-Based Competition Companies that do not respond quickly to changing customer needs will lose out to competitors that do. An example of quick response is the production of the custom-designed Motorola pager, which is completed within 80 minutes and often can be delivered to the customer the same day. As information technology matured, time became an important source of competitive advantage. Quick response is achieved by continually improving and reengineering processes—that is, fundamentally rethinking and redesigning processes to achieve dramatic improvements in cost, quality, speed, and service. That task includes developing products faster than competitors, speeding ordering and delivering processes, rapidly responding to changes in customers’ needs, and improving the flow of paperwork. 1-6e The Service Revolution While the goods-producing industries were getting all the attention in the business community, the popular press, and in business school curricula, service industries were quietly growing and creating many new jobs in the U.S. economy. In 1955, about 50 percent of the U.S. workforce was employed in goods-producing industries and 50 percent in service-providing industries. Today, about four of every five U.S. jobs are in services. Exhibit 1.5 documents the structure of the U.S. economy and where people work. This aggregate mix between goods-producing and service-providing jobs is 81.8 percent service and 18.2 percent goods. There are many interesting industry comparisons in Exhibit 1.5, but let’s point out just a few. Manufacturing, for example, accounts for 11.6 percent of total U.S. employment, or about 1 in 10 jobs. Today, state and local government jobs are 11.9 percent of total jobs, that is, about the same percent as manufacturing. Many other countries, such as France and the United Kingdom, also have a high percentage of total jobs in the service sector. Where are you going to work? OM4 Part 1: Understanding Operations 72417_ch01_ptg01_hr_002-023.indd 16 09/08/12 10:57 AM Exhibit 1.5 In addition, estimates are that at least 50 percent of the jobs in goods-producing industries are serviceand information-related, such as human resources management, accounting, financial, legal, advertising, purchasing, engineering, and so on. Thus, today, about 90 percent of the jobs in the U.S. economy are in service-providing processes [81.8 � (.5)(18.2%) � 90.9%]. This means that if you are employed in the United States, you will most likely work in a service- or information-related field. Because of these statistics, a principal emphasis in this book is on services—either in service-providing industries such as health care and banking or understanding how services complement the sale of goods in goods-producing industries such as machine tools and computers. U.S. Employment by Major Industry U.S. Industry Percent of Total Employment Goods-Producing Sector Construction 4.1% Agriculture 2.2 Mining 0.3 Fishing, Forestry, Hunting, and Misc. Manufacturing 0.1 11.6 Durable Goods* 7.0 Nondurable Goods** 4.6 Total 18.2% 1-6f Sustainability Service-Providing Sector Transportation 3.0% Communication and Public Utilities 1.7 Wholesale Trade 4.5 Finance, Insurance, and Real Estate 5.2 Agricultural Services 0.7 Hotels and Lodging 1.5 Personal Services 1.0 Business Services 8.0 Auto Repair and Parking 1.1 Motion Pictures 0.5 Amusement and Recreation Services 1.4 Health Services 8.6 Legal Services 0.8 Education Services 2.2 Child Care and Other Services 2.6 Membership Organizations 2.1 Museums and Zoological Gardens 0.1 Engineering, Architectural, and Management Services 3.1 Retail Trade and Services Federal Government Services State and Local Government Services Miscellaneous Services Total Grand Total In today’s world, sustainability has become one of the most important issues that organizations face, and it is placing increased pressure on all goods-producing and service-providing organizations worldwide. Sustainability refers to an organization’s ability to strategically address current business needs and successfully develop a long-term strategy that embraces opportunities and manages risk for all products, systems, supply chains, and processes to preserve resources for future generations. Sustainability can be viewed from three perspectives: environmental, social, and economic. r
Environmental sustainability is an organization’s commitment to the long-term quality of our environment. Environmental sustainability is important because environmental concerns are placing increased pressure on all goods-producing and service-providing organizations across the globe. r
Social sustainability is an organization’s commitment to maintain healthy communities and a society that improves the quality of life. Social sustainability is important because every organization must 15.7 1.6 11.9 Sustainability refers to an organization’s ability to strategi- 4.6 cally address current business needs and successfully develop a long-term strategy that embraces opportunities and manages risk for all products, systems, supply chains, and processes to preserve resources for future generations. 81.8% 100.0% Source: United States Bureau of Labor Statistics. Environmental sustainability is an organization’s com- *Durable goods are items such as instruments, vehicles, aircraft, computer and offi ce equipment, machinery, furniture, glass, metals, and appliances. **Nondurable goods are items such as textiles, apparel, paper, food, coal, oil, leather, plastics, chemicals, and books. OM4 72417_ch01_ptg01_hr_002-023.indd 17 mitment to the long-term quality of our environment. Social sustainability is an organization’s commitment to maintain healthy communities and a society that improves the quality of life. Chapter 1: Goods, Services, and Operations Management 17 09/08/12 10:57 AM protect the health and well-being of all stakeholders and their respective communities, treat all stakeholders fairly, and provide them with essential services. Economic sustainability is an organization’s commitment to address current business needs and economic vitality, and to have the agility and strategic management to prepare successfully for future business, markets, and operating environments. Business analytics is a process of transforming data into actions through analysis and insights in the context of organizational decision making and problem solving. Exhibit 1.6 Examples of Sustainability Practices Environmental Sustainability t
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Economic sustainability is an organization’s commitment to address current business needs and economic vitality, and to have the agility and strategic management to prepare successfully for future business, markets, and operating environments. Economic sustainability is important because staying in business for the long term, expanding markets, and providing jobs are vital to national economies. Today, all organizations have access to an enormous amount of data and information. In OM, data are used to evaluate operations performance, quality, order accuracy, customer satisfaction, delivery, cost, environmental compliance, and many other areas of the business. Leveraging such data is fast becoming a necessity in creating competitive advantage. A new discipline has emerged in recent years called business analytics. Business analytics is a process of transforming data into actions through analysis and insights in the context of organizational decision making and problem solving.9 Business analytics is used to understand past and current performance (descriptive analytics), predict the future by detecting patterns and relationships in data (predictive analytics), and identify the best decisions (prescriptive analytics). The supplementary chapters available on the CourseMate Web site that accompanies this book provide an introduction to some key analytical techniques used in OM. With this book we also provide a unique set of Microsoft Excel spreadsheet templates that we will present throughout the text to facilitate the use of analytic techniques. The templates are found on worksheets in OM4 Spreadsheet Templates on the OM4 Part 1: Understanding Operations 72417_ch01_ptg01_hr_002-023.indd 18 09/08/12 10:57 AM Table 1.1 Summary of Excel Spreadsheet Templates Template Chapter Reference Description Break-Even VLC Taguchi Little’s Law Location Analysis Center of Gravity Capacity Moving Average Exponential Smoothing ABC EOQ FQS Safety Stock FPS Safety Stock Single-Period Inventory Agg. Plan–Level Agg. Plan–Chase Aggregate Planning Sequencing Six Sigma Pareto x-Bar and R-Chart p-Chart c-Chart Process Capability Work Measurement Learning Curve Single-Server Queue Multiple-Server Queue Queue Simulation Inventory Simulation Decision Analysis 2 3 6 7 9 9 10 11 11 12 12 12 12 12 13 13 13 14 14 15 16 16 16 16 Supplementary Chapter A Supplementary Chapter A Supplementary Chapter B Supplementary Chapter B Supplementary Chapter D Supplementary Chapter D Supplementary Chapter E Computes a break-even point and optimal outsourcing decision Computes the value of a loyal customer (VLC) Computes the Taguchi loss function and economic tolerance Computes flowtime, throughput, or work-in-process using Little’s Law Computes total costs to determine least cost location for production Finds and plots the center of gravity Computes capacity measures Calculates and plots moving average forecasts Calculates and plots exponential smoothing forecasts Conducts ABC inventory analysis Finds the economic order quantity and plots the cost functions Computes safety stock and reorder point for fixed-quantity inventory systems Computes safety stock and reorder point for fixed-period inventory systems Finds the optimal ordering quantity for a single-period inventory systems with uniform or normal demand Evaluates aggregate planning using a level production strategy Evaluates aggregate planning using a chase production strategy General Template for Aggregate Planning Computes flowtime, lateness, and tradiness for job sequencing problems Computes DPU, dpmo, and sigma level Finds and plots a Pareto distribution Plots an x-bar and R-chart for quality control Plots a p-chart for quality control Plots a c-chart for quality control Computes process capability measures and a frequency distribution and histogram Calculates normal and standard times for work measurement studies Computes the time to produce the first 100 units for a learning curve Calculates measures for a single-server queue Calculates measures for a multiple-server queue Performs a single-server queuing simulation for discrete arrival and service time distributions Performs a fixed-quantity inventory simulation Computes decision strategies for payoff tables for both minimize and maximize objectives CourseMate Web site. Table 1.1 summarizes where the templates are best used. o 1-7 Current Challenges in OM M is continually changing, and all managers need to stay abreast of the challenges that will define the future workplace. Among these are technology, globalization, changing customer expectations, a changing workforce, the loss of manufacturing jobs in Western nations, and building sustainability as part of an organization’s corporate responsibility. OM4 72417_ch01_ptg01_hr_002-023.indd 19 r
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business and must manage their operations. With advances in communications and transportation, we have passed from the era of huge regional factories with large labor forces and tight community ties to an era of the “borderless marketplace.” Value chains now span across many continents. Chapter 1: Goods, Services, and Operations Management 19 14/08/12 9:38 AM The “Great Disconnect” of U.S. Manufacturing The biggest manufacturing challenges in the United States today are the loss of manufacturing jobs and simultaneously a labor shortage of high-tech production skills. One survey from the Manpower Group calls this situation the “Great Disconnect.” Although U.S. unemployment is high, 52 percent of U.S. employers say they cannot find qualified talent to fill their jobs. While simple work tasks get automated or sent overseas, and the U.S. workforce ages and begins to retire, high-tech jobs in the United States go unfilled. Today’s manufacturers are seeking workers who can combine skills ranging from computers to hydraulics and pneumatics to operate, maintain, and troubleshoot equipment. What are U.S. companies doing to meet these challenges? MAG Industrial Automation in Kentucky, for example, reinstituted an apprenticeship program to develop skilled field service technicians. GE Aviation, which has invested $34 million in advanced manufacturing systems since 2007, is piloting teams of 10 to 20 workers who assume responsibility for all operations in their areas. Others are partnering with local governments and educational institutions to train new workers.10 Operations managers must continue to find better ways to manage and improve global value chains to compete against those of competitors. r
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FOvironment, manufacturers must stay ahead of consumers’ needs by increasing product innovation, speeding up timeto-market, and operating highly effective global supply chains. However, many emerging concepts, such as sustainability and green manufacturing, genetic engineering, nanotechnology, new methods of energy generation, and robotic medical equipment, provide new and exciting opportunities for revitalizing manufacturing through OM.11 OM4 Part 1: Understanding Operations 72417_ch01_ptg01_hr_002-023.indd 20 09/08/12 10:57 AM Discussion Questions manager” for your education, how could process thinking improve your performance as a student? 1. Explain how operations management activities affect customer experiences described in the Museum of Science and Industry anecdote at the beginning of this chapter. What “moments of truth” would a customer encounter? 2. Explain why a bank teller, nurse, or flight attendant must have service management skills. How do the required skills differ for someone working in a factory? What are the implications for hiring criteria and training? 4. Do you think you will be working in manufacturing or services when you graduate? What do you think will be the role of manufacturing in the U.S. economy in the future? 5. Select one of the OM challenges and investigate it in more detail. Be ready to present what you found to the class in at most a 10-minute presentation. 3. Why is process thinking important in operations management? Thinking of yourself as an “operations Problems and Activities 7. Provide some examples similar to those in Exhibit 1.3, and explain the degree of goods and services content for these examples. 1. Describe a customer experience you have personally encountered where the good or service or both were unsatisfactory (for example, defective product, errors, mistakes, poor service, service upsets, and so on). How might the organization have handled it better and how could operations management have helped? 2. Interview a manager at a local company about the work he or she performs. Identify (a) the aspects of the job that relate to OM (as in the OM activities in the box “What Do Operations Managers Do?”) and (b) an example of primary, support, and general management processes. 3. Evaluate how the activities described in the box “What Do Operations Managers Do?” can be applied to a student organization or fraternity to improve its effectiveness. b. a fire department c. a restaurant d. an automobile repair shop OM4 72417_ch01_ptg01_hr_002-023.indd 21 r
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SFTUBVSBOU 4. Review the box for Pal’s Sudden Service and find Pal’s Web site. Based on this information, describe all of the OM activities that occur in a typical day at Pal’s. 6. Choose one of the following services and explain, using specific examples, how each of the ways that services differ from manufactured goods applies. 8. Draw the customer benefit package (CBP) for one of the items in the following list and explain how your CBP provides value to the customer. Make a list of a few example processes that you think would be necessary to create and deliver each good or service in the CBP you selected and briefly describe issues that must be considered in designing these processes. 9. One of our students, who had worked for Taco Bell, related a story of how his particular store developed a “60-second, 10-pack club” as an improvement initiative and training tool. The goal was to make a 10-pack of tacos in a minute or less, each made and wrapped correctly, and the total within 1 ounce of the correct weight. Employees received recognition and free meals for a day. Employees strove to become a part of this club and, more important, service times dropped dramatically. Techniques similar to those used to improve the taco-making process were used to improve other products. Explain how this anecdote relates to process thinking. What would the employees have to do to become a part of the club? Chapter 1: Goods, Services, and Operations Management 21 09/08/12 10:57 AM 10. Research and write a short one-page paper that describes two new examples of how organizations are using biztainment to gain competitive advantage. 11. Search the Web for an organization that has defined its sustainability strategy and policy, and give examples of how the organization is implementing it. Write a paper describing what you found (maximum of two typed pages). 12. Describe new ways for how your college or university can apply the sustainability practices in Exhibit 1.6. Summarize your results in a short paper. 14. Research and write a short paper describing how business analytics have been applied to problems and decisions in operations management. Use the information in the box “What Do Operations Managers Do?” to help your search process. 15. Search recent articles in your local newspaper and business magazines such as Fortune, Business Week, Fast Company, and so on and identify OM concepts and issues that are discussed. How do these fit into the classification in the box “What Do Operations Managers Do?” in this chapter? 13. Research and write a short paper on job opportunities related to sustainability. Zappos Case Study Ethan Miller/Staff/Getty Images Zappos (www.zappos.com) is a Las Vegas–based onnever outsourced his call center because he considers line retailer that has been cited in Fortune’s list of the the function too important to be sent to India. Job one Best Companies to Work For and Fast Company’s list for these front-liners is to delight callers. Unlike most of the world’s most innovative companies. In fact, its inbound telemarketers, they don’t work from a script. remarkable success resulted in Zappos being bought by They’re trained to encourage callers to order more than Amazon for $850 million in 2009. Zappos was founded one size or color, because shipping is free in both diin San Francisco in 1999 and moved to Las Vegas for rections, and to refer shoppers to competitors when a the cheap real estate and abundant call center workproduct is out of stock. Most important, though, they’re ers. The company sells a large implored to use their variety of shoes from nearly imaginations. Which every major manufacturer and means that a customer has expanded its offerings to having a tough day handbags, apparel, sunglasses, might find flowers on watches, and electronics. Dehis or her doorstep spite the crippling economic the next morning. One downturn, sales jumped almost Minnesota customer 20 percent in 2008, passing complained that her the $1 billion mark two years boots had begun leakahead of schedule. ing after almost a year The company’s first core of use. Not only did value is “Deliver WOW through the Zappos customer service,” which is obvious if service representative youíve ever ordered from Zappos. Zappos provides free shipping in both directions on send out a new pair— It provides free shipping in both all purchases. in spite of a policy that directions on all purchases. only unworn shoes are It often gives customers surprise upgrades for faster returnable—but she also told the customer to keep the shipping. And it has a 365-day return policy. In 2003, old ones, and mailed a hand-written thank-you.12 Over Zappos made a decision about customer service: it views 95 percent of Zappo’s transactions take place over the any expense that enhances the customer experience Web, so each actual customer phone call is a special as a marketing cost because it generates more repeat opportunity. “They may only call once in their life, but customers through word of mouth. CEO Tony Hsieh that is our chance to wow them,” Hsieh says. 22 OM4 Part 1: Understanding Operations 72417_ch01_ptg01_hr_002-023.indd 22 09/08/12 10:57 AM Zappos uses a sophisticated computer system known as Genghis to manage its operations. This includes an order entry, purchasing, warehouse management, inventory, shipping, and e-commerce system. It tracks inventory so closely that customers can check online how many pairs of size 12 Clarks Desert boots are available in the color sand. For employees, it automatically sends daily e-mail reminders to call a customer back, coordinates the warehouse robot system, and produces reports that can specifically assess the impact on margins of putting a particular item on sale. Free shipping has become a customer expectation. Research has found that online customers abandon their virtual shopping carts up to 75 percent of the time at the end of their order entry process when they can’t get free shipping. Other online retailers have copied the free-shipping policies of Zappos. L.L. Bean, for example, now provides free shipping and free returns with no minimum order amount. OM4 72417_ch01_ptg01_hr_002-023.indd 23 Case Questions for Discussion 1. Draw and describe the customer benefit package that Zappos provides. Identify and describe one primary value creation, one support, and one general management process you might encounter at Zappos. 2. Explain the role of service encounters and service management skills at Zappos. How does Zappos create superior customer experiences? 3. Describe how any three of the OM activities in the box “What Do Operations Managers Do?” impact the management of both the goods that Zappos sells and the services that it provides. 4. Explain how this case illustrates each of the seven major differences between goods-producing and service-providing businesses. Chapter 1: Goods, Services, and Operations Management 23 09/08/12 10:57 AM
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