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128 PART 3 | Organizing
C6H A P T E R
Operations Management
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LEARNING OUTCOMES
6.1 Tell What is operations management, and what
is its role? 129
6.2 Define What is the nature
and purpose of value chain management? 133
6.3 Describe How is value
chain management done? 136
6.4 Discuss What are some contemporary issues in
managing operations? 141
That coffee you love so much at your local Starbucks location starts as coffee beans (berries) plucked from fields of coffee
plants. From harvest to storage to roasting to retail to cup,
Starbucks understands the important role each value chain participant plays. Starbucks offers a selection of coffees from around the world, and its coffee buyers personally travel to the coffee-growing regions of Latin America, Africa/Arabia, and Asia/ Pacific to select and purchase the highest-quality arabica beans. There are many potential challenges in “transforming” the raw material into the quality product and experience that customers expect at Starbucks—weather, shipping and logistics, technology, political instability, and so forth.
Although these operations management challenges are signifi- cant, the most challenging issue facing Starbucks today may be bal- ancing its vision of the uniquely Starbucks coffee experience with the realities of selling a $5 latte in today’s world. Starbucks prod- ucts have become an unaffordable luxury for many. As revenues and profits declined during the economic downturn, CEO Howard Schultz realized that “the company needed to change almost every- thing about how it operates.” Recessionary and competitive pres- sures forced Starbucks away from its “anti-fast-food” focus to become more streamlined. Stores implemented “lean” initiatives such as keeping items in the same place, moving drink toppings closer to where drinks are handed to customers, and altering the order of assembly. Stores witnessed increases of up to 20 percent in transactions.
Lean techniques have to be balanced with quality objectives. Starbucks sped up drink preparation using a model in which baristas produced as many drinks as possible, but later chose to reduce the speed of service to ensure the highest customer value experiences.
Think About It
What uncertainties does Starbucks face in its value chain? Can Starbucks manage those uncertainties? If so, how? If not, why not?
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CHAPTER 6 | OperatiOns ManageMent 129
Every organization produces something, whether it’s a good or a service. Some, like Starbucks, produce both a good and a service. Technology has changed how production is done. This chapter focuses on organizations’ processes of operations management.
We also look at the important role that managers play in managing those operations.
W S OPERATIONS MANAGEMENT IMPORTANT
TO ORGANIzATIONS?
You’ve probably never given much thought to how organizations “produce” the goods and services that you buy or use. But it’s an important process. Without it, you wouldn’t have a car to drive or McDonald’s fries to snack on, or even a hiking trail in a local park to enjoy. Organizations need to have well-thought-out and well-designed operating systems, organizational control systems, and quality programs to survive in today’s increasingly competitive global environment. And it’s the manager’s job to manage those things.
What Is Operations Management?
The term operations management refers to the design, operation, and control of the transformation process that converts such resources as labour and raw materials into goods and services that are sold to customers. Exhibit 6-1 portrays a simplified overview of the transformation process of creating value by converting inputs into outputs. The system takes inputs—people, technology, capital, equipment, materials, and information— and transforms them through various processes, procedures, and work activities into finished goods and services. These processes, procedures, and work activities are found throughout the organization. For example, department members in marketing, finance, research and development, human resources, and accounting convert inputs into outputs such as sales, increased market share, high rates of return on investments, new and innovative products, motivated and committed employees, and accounting reports.
As a manager, you’ll need to be familiar with operations management concepts, regard- less of the area in which you’re managing, in order to achieve your goals more effectively and efficiently. Operations management focuses on several key competitive priorities: cost, quality, delivery, flexibility, and service.
Why is operations management so important to organizations and managers?
1. It encompasses processes in services and manufacturing organizations. 2. It is important in effectively and efficiently managing productivity.
3. It plays a strategic role in an organization’s competitive success.
EXHIBIT 6-1 The Operations System
Inputs Outputs
6.1 Tell What is operations management, and what is
• Technology • Capital
• Equipment • Materials
• Information
• Services
Transformation Process
operations management
The study and application of the transformation process.
transformation process
The process that converts resources into finished goods and services.
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130 PART 3 | Organizing
Some economists think the shipping container has done more for global trade than every trade agreement signed over the past
50 years. One proposal sees containers made from carbon-fibre composites to lower cost, increase security, and enhance tracking.6
How Do Service and Manufacturing
Firms Differ?
With a menu that offers more than 200 items made fresh each day, The Cheesecake Factory restaurants rely on a finely tuned production system. One food-service consultant says, “They’ve evolved with this highly complex menu combined with a highly efficient kitchen.”2
All organizations produce goods or services through the transfor- mation process. Simply stated, every organization has an operations system that creates value by transforming inputs into finished goods and services outputs. For manufacturers, the products are obvious: cars, cellphones, or food products. After all, manufacturing organiza- tions produce physical goods. It’s easy to see the operations manage- ment (transformation) process at work in these types of organizations because raw materials are turned into recognizable physical products. But that transformation process isn’t as readily evident in service organizations because they produce nonphysical outputs in the form of services. For instance, hospitals provide medical and health care ser- vices that help people manage their personal health; taxi companies
provide transportation services that move people from one location to another; cruise lines provide vacation and entertainment services; and residential plumbers and electri- cians ensure that we have running water and electricity where we live. All of these ser- vice organizations transform inputs into outputs. For example, look at your college. College administrators bring together inputs—instructors, books, academic journals, multimedia classrooms, and similar resources—to transform “unenlightened” students into educated and skilled individuals. Exhibit 6-2 illustrates the difference between goods and services.
The reason we’re making this point is that the Canadian economy, and to a large extent the global economy, is dominated by the creation and sale of services. Most of the world’s developed countries are predominantly service economies. In Canada, for instance, almost 78 percent of all economic activity is services, and in the United States it is nearly 77 percent.3 In lesser developed countries, the services sector is less important. For instance, in Nigeria it accounts for only 33 percent of economic activity; in Laos, only 37 percent; and in Vietnam, 38 percent.4,5
EXHIBIT 6-2 Goods Versus Services Tangible—have a physical form
Ownership is transferred
Delays can be tolerated
Intangible—are experienced
Ownership of service is not transferred to the customer
Time is more important and delays are more challenging
Can be stored in inventory
Production and consumption happen at the same time
Can be produced independently of the customer
Customers are much more involved
Quality can be measured by defects or deviations in manufacturing
Quality is based on customer perceptions
manufacturing organizations service organizations
Organizations that produce physical goods. Organizations that produce nonphysical products in the form of services.
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CHAPTER 6 | OperatiOns ManageMent 131 How Do Businesses Improve Productivity?
One jetliner has some 4 million parts. Efficiently assembling such a finely engineered product requires intense focus. Boeing and Airbus, the two major global manufacturers, have copied techniques from Toyota. However, not every technique can be copied because airlines demand more customization than do car buyers, and there are significantly more rigid safety regulations for jetliners than for cars.7 Amazon purchased robotics company Kiva Systems as part of its push to speed delivery and reduce order costs. Amazon is using 1400 Kiva robots in three of its warehouses, which could save the company almost $900 million per year due to higher operating efficiency across its massive order fulfillment–centre network. Another interesting potential is for Amazon to begin selling robots to other companies. Prior to its purchase, Kiva was charging about $2 million for a kit of robots and another $20 million for large installations.8
Although most organizations do not make products that have 4 million parts, and most organizations are unable to function without people, improving produc- tivity has become a major goal in virtually every organization. For countries, high productivity can lead to economic growth and development. Employees can receive higher wages and company profits can increase without causing inflation. For individual organizations, increased productivity gives them a more competi- tive cost structure and the ability to offer more competitive prices.
The advent of robots that are cheap and safe enough to be used outside big factories is one factor in the rise of the robots. amazon is imagining a world where drones will deliver products to customers. Companies have used robots as grips on film sets and panel installers at solar- power plants. aerial robots—drones—are used by farm- ers to tend crops, by broadcasters to monitor traffic, and by architects to look for infrastructure in need of repair.9
Over the past decade, Canadian businesses have made dramatic improvements
to increase their efficiency. However, it is important to balance those improve-
ments with effectiveness. For example, H.J. ’s frozen-food plant
in Pocatello, Idaho, was the highest ranked factory for safety, cleanliness, and efficiency in 2011. In 2014, the plant was closed because of ineffective logistics,
such as shipping frozen enchiladas more than 1000 miles away from San Diego to
Idaho, and from there to distribution centres on the East Coast.10 These changes impacted Canadian operations as well, with the century-old Leamington, Ontario, plant closed amid much acrimony in November 2013.
Organizations that hope to succeed globally are looking for ways to improve produc- tivity. For example, began offering double lanes in many of its drive- throughs to improve speed and accuracy. The two-lane system would likely be more effective if one lane was dedicated for coffee-only customers. McDonald’s generates 70 percent of its revenues from drive-through customers and recently added a third high- speed window in many stores to counter the fact that the company’s drive-through time of 189 seconds is longer than Wendy’s (158 seconds) or Taco Bell (134 seconds).11 Accord- ing to a study from , a professor at Northwestern University in Chicago, “Every seven seconds of improvement amounts to an average gain of one percent of market share.”12 The Canadian Imperial Bank of Commerce, based in Toronto, automated its purchasing function, saving several million dollars annually.13 And Skoda, the Czech car company owned by Germany’s Volkswagen AG, improved its productivity through an intensive restructuring of its manufacturing process.14
Productivity = People + Operations Variables
Productivity is a composite of people and operations variables. To improve productiv- ity, managers must focus on both. Deming was an American statisti- cian, professor, author, lecturer, and consultant.15 He is widely credited with improving production in the United States during World War II, although he’s probably best known for his work in Japan. From 1950 onward, he taught Japanese top managers how to improve product design and product quality, testing, and sales, primarily through apply- ing statistical methods. Deming believed that managers, not workers, were the primary source of increased productivity. He outlined 14 points for improving management’s pro- ductivity (see Exhibit 6-3 for a visual representation of Deming’s work). A close look at these suggestions reveals Deming’s understanding of the interplay between people and
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132 PART 3 | Organizing
EXHIBIT 6-3 The Deming Chain Reaction: Improved Quality and the Bottom Line
operations. High productivity can’t come solely from good “people management.” The truly effective organization will maximize productivity by successfully integrating peo- ple into the overall operations system. For instance, customer lines snaking out the door have been an issue for the burrito chain Chipotle. The fast-food chain, with six locations in Canada, recently sped up service by six transactions per hour by implementing a sys- tem to leverage the strengths of its employees.16 Exhibit 6-4 illustrates the four pillars of its operations system.
Chiptole is a company that understands the important interplay between people and the operations system.
EXHIBIT 6-4 Expediters Mise en place
The Four Pillars of Chipotle’s Operations System
An extra person between cooks and cashiers
A zero tolerance policy for not having everything ready and in place for peak periods
Linebackers
The people who patrol the countertops, serving-ware, and bins of food so that the people servicing customers never turn their backs on them
Aces in their places
Having each branch’s top servers in the most important positions at peak times
Source: Adapted from “The Deming Chain Reaction,” The Deming Transformation Forum, http://www.transformationforum.org/Chain_Reaction.html.
What Role Does Operations Management Play in a
Company’s Strategy?
Modern manufacturing originated more than 100 years ago in the United States, primarily in Detroit’s automobile factories. The success that U.S. manufacturers experienced during World War II led manufacturing executives to believe that troublesome production problems had been conquered. These executives focused, instead, on improving other functional areas, such as finance and marketing, and paid little attention to manufacturing. However, as Canadian and U.S. executives neglected production, managers in Japan, Germany, and other countries took the opportunity to develop modern, technologically advanced facilities that fully integrated manufacturing operations into strategic planning
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What Is Value Chain Management and Why Is It Important?
6.2 Define What is the nature and purpose of value chain management?
What Is Value Chain Management? Let’s start from the beginning . . .
• Everyorganizationneedscustomerstosurviveandprosper.
• Customerswantvaluefromthegoodsandservices
they purchase or use, and they decide what has value.
• Organizationsmustprovidethatvaluetoattract
and keep customers.
• Valueisdefinedastheperformancecharacteristics,
features and attributes, and any other aspects of goods and services for which customers are willing to give up resources (usually money).
vector_master/fotolia
The following examples of closely integrated work activities among many different players are brought to you by . . . value chain management!
• Big management assignment due in one week and your computer crashes! No! Your custom-designed dream computer is built to your exact specifications and delivered
three days later. Management assignment doNe!
• Zero inventory warehousing. Order processing
that involves only one change of hands. It’s
happening at Siemens AG’s Computed
Tomography manufacturing plant in Forchheim,
Germany, because its 30 supplier partners share responsibility with the plant for overall process performance.
• Black & Decker’s handheld glue gun—totally outsourced to the leading glue gun manufacturer.17
The performance characteristics, features, attributes, and other aspects of goods and services, for which customers are willing to give up resources.
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• Value is provided to customers through transforming raw materials and other resources into some product or service that end users need or desire when, where, and how they want it.
That seemingly simple act of turning varied resources into something that customers value and are willing to pay for involves a vast array of interrelated work activities performed by different participants (suppliers, manufacturers, and even customers)—that is, it involves the value chain.18
• Value chain management (VCM) is externally oriented and focuses on both incoming materials and outgoing products and
services. VCM is effectiveness oriented
and aims to create the highest value for
customers.19
▪▪ Contrast VCM with supply chain management, which is efficiency oriented (its goal is to reduce costs and make the organization more productive) and internally oriented by focusing on efficient flow of incoming materials (resources) to the organization.
• Who has the power in the value chain?
▪▪ Is it the supplier providing needed resources and materials? After all, suppliers
have the ability to dictate prices and quality.
▪▪ Is it the manufacturer that assembles those resources into a valuable product or service? A manufacturer’s contribution in creating a product or service is critical.
▪▪ Is it the distributor that makes sure the product or service is available where and when the customer needs it?
intheskies/fotolia
▸Actually, it’s none of these!
In value chain management, customers
are the ones with the power.17
value chain
The entire series of work activities that add value at each step from raw materials to finished product.
value chain management (VCM)
The process of managing the sequence of activities and information along the entire value chain.
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