MGT 601 The Functions of Modern Management / week 6 discussion 1 and responce and week 6 discussion 2 and responce.

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16 Managing Operations andIncreasing Productivity Chapter Outline

• Introduction • The Nature of Operations

Management • Planning and Designing

Operations Systems

• Managing the Supply Chain • Managing Inventory • Managing Quality • Managing Productivity

Learning Outcomes

After reading this chapter, you should be able to

• Define operations management and identify the activities associated with it.

• Determine the elements involved in planning and designing an operations system.

• Specify how managers oversee the supply chain.

• Understand the link between managing inventory and managing operations systems.

• Assess the importance of quality in the operations management process.

• Define productivity, explain why it is important, and propose ways to improve it.

• Evaluate operations issues in a franchise operation.

Inside Management: Trader Joe’s Secrets of Success

First founded in 1967 in California, Trader Joe’s now has nearly 400 stores nationwide. Despite its large reach, Trader Joe’s exudes the same neighborhood store atmosphere that it did back in 1967. The company’s excellent operations and customer service have generated a loyal customer following.

One of Trader Joe’s biggest assets is its uniqueness. In addition to retaining a neighborhood store feel, Trader Joe’s has smaller facilities and fewer product lines than comparable stores—a deliberate operational move intended to maintain its specialty image. Trader Joe’s stocks only about 4,000 items, compared to the 50,000 stocked by a typical grocery store. Inventory control has been key to reducing costs and keeping focus on a limited number of quality products. While many markets sell as many as 50 types of one food item, Trader Joe’s sells only a few. With sales of roughly $8.5 billion, Trader Joe’s also sets itself apart with its private label products. Today 80% of the company’s sales come from private label items.

Another attribute that sets Trader Joe’s apart from the competition is its operations and productivity. The company views its supply chain through the lens of efficiency—the less, the better. At any given time management aims to minimize the number of hands that touch a product. Trader Joe’s purchases directly from manufacturers, ships straight to distribution centers, and sends products on to stores. Trade Joe’s only expands into areas that can support its streamlined distribution system. In comparison to competitors, Trader Joe’s has crafted its distribution process to create efficiency and reduce costs. This efficiency increases productivity and allows customers to purchase premium products that are of consistent quality. The company also works to minimize employee turnover, which allows for maximum productivity, as this lowers recruiting, training, and employee start-up costs. Furthermore, retaining employees allows Trader Joe’s to offer customers access to very knowledgeable teams.

Trader Joe’s also excels at developing and maintaining quality products and supplier relationships. It employs four product developers who travel the world in search of best product/price combinations. Suppliers seek out such relationships; a contract with Trader Joe’s is highly coveted, in part because it charges less in fees and is known for making on- time payments.

Beginning in 2012 Trader Joe’s management team decided to sell only sustainable seafood. The company also does not carry products that contain genetically modified ingredients. These responsibility measures have caused Trader Joe’s to enjoy recognition as an ethical company. With its popularity continuing to rise, customers seem impressed by the way Trader Joe’s has redefined the grocery shopping experience (Trader Joe’s, 2016; Kowitt, 2010; “2010 World’s Most Ethical,” n.d.; Scherzer, 2013; Luna, 2011).

Michael Dwyer/Associated Press Trader Joe’s has redefined the typical grocery store by offering private label items and maintaining a specialty image.

Section 16.1The Nature of Operations Management

Introduction As the opening vignette illustrates, an organization’s operations function is crucial to its suc- cess. Operations management is a continual process that cannot become stagnant. Environ- mental changes (for example, in consumer demand) make it necessary for the operations function to constantly change. Frequently, environmental changes affect the resources the organization needs to attain its goals. In all societies, there is a limited supply of resources such as land, labor, capital, knowledge, time, and raw materials. Using these resources effi- ciently is critical to fulfill social needs and demands (such as education and health care), maintain competitiveness, and also survive. These conditions also hold true for businesses and other organizations. When a company wastes its resources, more efficient competitors are likely to gain an advantage and possibly even put the less efficient company out of busi- ness. Therefore, the operations function ensures that the firm uses resources as effectively and efficiently as possible.

In this chapter, we discuss the role of operations management in acquiring and managing the resources necessary to create goods and services, planning the processes that transform those resources into finished products, overseeing the transformation process, and making sure the products are of the quality that customers expect. We also look at the ways technol- ogy has changed production and operations and the increasing importance of productivity.

Operations management (OM) is the development and administration of the activities involved in transforming resources into goods and services. Operations managers oversee the transformation process, the planning and designing of operations systems, and the man- agement of inventory, quality, and productivity. OM is the core of most organizations because it is responsible for creating the products.

16.1 The Nature of Operations Management At the heart of OM is the transformation process through which inputs (resources such as labor, money, materials, information, and energy) are converted into outputs (goods, ser- vices, and ideas). The transformation process combines inputs in predetermined ways using equipment, administrative procedures, and technology to create a product (see Figure 16.1).

Section 16.1The Nature of Operations Management

Figure 16.1: The transformation process of operations management

Operations management is the development and administration of the activities involved in transforming resources into goods and services.

Inputs Land Labor Capital Time

Knowledge Raw materials

Information Energy

Transformation or Conversion Procedures Equipment Facilities

Technology

Control Standards(Feedback) (Feedback)

Outputs Goods

Services Ideas

Transformation takes place via one or more processes. In a business that manufactures oak furniture, for example, inputs pass through several processes before being turned into the final output (see Table 16.1). The first step of the transformation process is when the furni- ture maker strips oak trees of their bark and saws them into appropriate sizes. Next, the strips of oak lumber are dried, a second form of transformation. Third, the dried wood is routed into its appropriate shape and made smooth. Fourth, workers assemble the wood pieces. They then treat and stain or varnish the piece of assembled furniture. Finally, the completed piece is stored until delivery can be made.

Table 16.1: Inputs, outputs, and transformation processes in the manufacture of oak furniture

Inputs Transformation Outputs

Oak trees Cutting or sawing

Oak furniture

Labor Routing

Information/knowledge Measuring

Stain or varnish Assembling

Router and saw Staining/varnishing

Warehouse space/time Storing

Section 16.1The Nature of Operations Management

Different types of transformation processes exist for organizations that provide services, such as banks, colleges, and most nonprofit organizations. A bank transforms inputs such as employees, time, money, and equipment through processes such as filling out loan applica- tions and repayment agreements, cashing checks, and accepting deposits. Outputs of these processes include automobile loans, home mortgages, checking and savings accounts, and other financial products. Transformation processes occur in all organizations, regardless of what they produce or their objectives. For most organizations, the ultimate objective is for the produced outputs to be worth more than the combined costs of the inputs.

The operations manager oversees all activities that directly relate to the production of outputs, as shown in Figure 16.1. To ensure this process is completed within acceptable standards of quality and rate of output, managers control the production process by taking measurements (feedback) at various points during transformation and comparing them to previously estab- lished standards. When a manager discovers any deviation between the actual and desired outputs, corrective action is taken.

Historical Perspective Historically, operations was known as “production management,” or “manufacturing,” primar- ily because of the view that operations was limited to the manufacture of physical goods. The focus was on methods and techniques required to operate a factory efficiently. The change from “production” to “operations” represents a broadening of the discipline to include the increasing importance of service organizations. In addition, the term operations reflects the view that the operations function in its totality includes procedural considerations along with an analysis of inputs and outputs.

Today OM applies to a wide range of organizational activities and situations outside of manufacturing, such as health care, food service, banking, entertainment, retailing, educa- tion, transportation, and government. Thus, the terms manufacturing and production are used interchangeably to represent the activities and processes that make tangible products, whereas the broader term operations describes those processes used to make both tangible and intangible products.

Operations in Service Businesses Manufacturers and service providers are similar, yet different. Both types of organizations must make design and operating decisions. For example, an automobile manufacturer must determine where to locate a factory and how big it should be. Similarly, a bank’s manage- ment team must determine where to locate its main office and how large a building will be required. Manufacturers and service providers both schedule and control operations as well as allocate necessary resources. Although manufacturers and service providers often perform similar activities, they differ in several respects. These differences are classified in four basic ways.

Section 16.1The Nature of Operations Management

First, manufacturers and service providers differ in the nature and consumption of their outputs. For example, the term manufacturer implies that a firm makes tangible products, such as radios, basketballs, or watches. A service provider, on the other hand, produces intangible outputs such as airline travel or photo processing. The very nature of the service provider’s output often requires a higher degree of customer contact than the output of the manufacturer.

Second, manufacturers and service providers differ in the uniformity of their outputs. The human element present in providing personal services means that each one tends to be performed differently. Not all bank tellers, for example, wait on customers in the same way. Therefore, a service output tends to have high variability. If a barber or stylist performs 15 haircuts in a day, it is unlikely that any of them will be exactly the same. In manufacturing, however, the high degree of automation allows manufacturers to generate uniform outputs; thus, the operations are more smooth and efficient.

A third point of difference is the amount of labor required to produce an output. Service pro- viders are generally more labor intensive (require more labor hours) because of the high level of customer contact, the perishability of the output (that is, it must be consumed imme- diately), and the high degree of variation of inputs (customization). A manufacturer, on the other hand, is likely to be more capital intensive because of the machinery and technology required to mass-produce highly similar goods.

The final classification of differences between service providers and manufacturers involves how productivity is measured for each output provided. Manufacturers find measuring pro- ductivity much more straightforward because of the tangibility of the output and its high degree of uniformity. For the service provider, variations in demand (for example, more home loans are sought in some months than in others), variations in service requirements from job to job, and the intangibility of the product make productivity measurement more diffi- cult. Consider, for example, how much easier it is to measure the productivity of employees involved in the production of 100 automobiles as opposed to serving the needs of 100 bank or barbershop customers.

It is convenient to think of organizations as being either manufacturers or service providers, as we have been doing here. In reality, however, most organizations combine the two, with both tangible and intangible qualities embodied in what they produce. For example, auto- mobile manufacturers provide customer services such as toll-free hotlines and warranty protection, while banks may sell checks and other tangible products that complement their primarily intangible product offering. Thus, “products” can include both tangible physical goods as well as intangible services. The tangibility of an organization’s principal product tends to classify a company as either a manufacturer or a service provider. From an OM standpoint, this tangibility greatly influences the nature of its operational processes and procedures.

Section 16.1The Nature of Operations Management

Management Insights: UPS Adds Green Practices to Its Logistics

UPS is doing more with less. In 2012 the company increased its shipping volume by 2.3%. Normally, such an increase requires more resources, but not so at UPS; the company actually reduced its global greenhouse gas emissions by 2.1% from the previous year and decreased its global water consumption by 6%.

UPS embarked on these changes in March 2011, when it hired Scott Wicker to be its corporate sustainability officer. Wicker’s job was to oversee various green initiatives and embed sustainability into company operations. According to Wicker (2012), “Sustainability means we operate not only for the present, but for the future as well.” Wicker works with UPS to ensure that 14 key performance indicators are met. Many are related to sustainability, including those that pertain to water usage, emissions, and safety. The indicators act as standards that UPS can use as a quality-control measure regarding the progress of its sustainability initiatives. The company views sustainability as essential for its long-term success.

How has UPS been able to simultaneously increase its productivity and sustainability? It uses technology and data to calculate the resources it consumes and, based on these findings, determines ways to be more efficient. For instance, the company has been investing in more fuel-efficient vehicles for years. UPS has made other operational changes, such as reducing the number of stops that drivers make and revamping some of its transportation routes so as to save fuel. Although these changes may not seem terrifically significant, its U.S. package segment was able to cut 1.3 million gallons of fuel and 13,000 metric tons of emissions from its logistics operations compared to the year before. The company also targets eco-minded consumers by offering carbon neutral service for U.S. deliveries.

Although UPS is already considered to be a leader in fuel efficiency in the airline industry, the company announced its goal to reduce its airline carbon emissions 20% by 2020. Increasing sustainability in the logistics sector is a major concern. To demonstrate that it takes its responsibilities seriously, UPS was one of the first transportation and logistics firms to report Scope 3 emissions. This requires UPS to also measure indirect carbon emissions from 15 sources among its corporate value chain, including third parties it hires for transportation.

Already known for its consistent service quality, UPS is making itself more competitive by becoming an expert at incorporating green practices into all facets of its operations. UPS proves that companies with the drive to achieve sustainable outcomes are helpful not only for the environment, but for the bottom line as well (O’Mahony, n.d.; UPS, n.d.a, n.d.b, 2009; Treacy-Lenda, 2011; Clancy, 2011; Wicker, 2012).

Section 16.2Planning and Designing Operations Systems

16.2 Planning and Designing Operations Systems Before a company can produce any output or product, members of management must first decide what to produce and for what group of customers. They then determine which pro- cesses to use as well as what facilities are needed to make the products. These decisions make up operations planning. Although planning was once viewed as the sole realm of the produc- tion and operations department, today’s more successful companies involve many organiza- tional departments in these decisions, especially marketing and R&D.

Planning the Product Company leaders first identify what consumers want before designing a product. Most com- panies use market research to determine what kinds of goods and services to produce and which features they must possess. Market research also helps gauge demand for a product and identify how much consumers are willing to pay for it. Once management has an idea of these things they can plan how to make the product.

The company’s engineering or R&D department is charged with turning an idea for a product into a viable design that can be economically produced. In smaller companies, a single indi- vidual (perhaps the owner) may be solely responsible for this crucial activity. Regardless of who is responsible for product design, planning does not stop with a blueprint for a product or a description of a service; planning must also articulate an efficient production process to ensure that enough product is available to satisfy consumer demand. How does an automo- bile company transform steel, aluminum, glass, and other materials into a new car design? How does a day care center use toys, educational materials, and human labor to teach and care for children while their parents work? Operations managers plan for the types and quan- tities of materials needed to produce the product, the skills and quantity of people needed to make it, as well as the actual processes through which the inputs pass in their transformation to outputs.

Designing the Operations Processes Before a firm can begin production, management must determine the appropriate way to transform inputs into the desired outputs. Often, consumers’ specific needs and desires dic- tate the process. For example, customer needs require that all three-quarter-inch bolts have the same basic thread size, function, and quality; if they did not, engineers and builders could not rely on three-quarter-inch bolts in their construction projects. A bolt manufacturer, then, uses a standardized process so that all three-quarter-inch bolts are the same.

On the other hand, a bridge often must be customized so it is appropriate for the site and expected load. Furthermore, the bridge must be constructed on-site rather than in a factory. Such customization informs the various processes that can be used when manufacturing a product. For example, although most cars are made on an assembly line, some lines are highly automated while others are highly labor intensive. Planning operational processes involves two important areas: capacity planning and facilities planning.

Section 16.2Planning and Designing Operations Systems

Planning Capacity The term capacity refers to the maximum load that an organizational unit can carry or oper- ate at any given point in time. The unit of measurement may be a worker or machine, a depart- ment or branch, or even an entire plant. Maximum capacity can be stated in terms of the inputs or outputs provided. For example, an electric plant might state plant capacity in terms of the maximum number of kilowatt hours that can be produced without causing a power outage; a restaurant might state capacity in terms of the maximum number of customers that can be effectively, comfortably, and courteously served at any one particular time.

Capacity-planning decisions can be both long and short term. Long-term decisions tend to focus on overall capacity levels, such as when building a new plant. Short-term capacity deci- sions relate more to the effects that variations in demand have on capacity, as with the fluctu- ating demand of a seasonal product such as snow sleds (see Figure 16.2).

Figure 16.2: Short- and long-term capacity

Capacity-planning decisions can be both long and short term.

Jan. Minimum

Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Maximum

Level of ProductionO ve

ra ll

lo n

g -t

e rm

c a

p a

c it

Short-term monthly capacity needs for snow sleds

Usually, long-term capacity decisions are based on demand that has been forecasted over some time horizon. This forecasted demand is converted into capacity needs or requirements.

Short-term capacity decisions are based more on deviations from the norm or average demand. Such deviations are critical to the operations system, as they may result in ideal capacity at some points in time but be unable to meet demand at others. For example, automakers are tentatively developing electric cars to meet future regulation and growing demands for sus- tainability. At the same time, automakers carefully analyze consumer demand for the cars, recognizing that a desire for greater sustainability does not always translate into willingness to pay a higher price for a more sustainable vehicle. Automakers are therefore cautious about expanding capacity due to fears that expanding too quickly in this product area will result in too many cars and too little demand.

Section 16.2Planning and Designing Operations Systems

Efficiently planning the organization’s capacity needs, whether for the long or short run, is an important process for the operations manager. Capacity levels that fall short can result in unmet demand and, consequently, lost customers. On the other hand, when there is more capacity available than needed, operating costs are needlessly driven up due to unused and often expensive resources. To avoid such situations, organizational leaders must accurately forecast demand and then plan capacity based on these forecasts. Another reason why it is important to make sure capacity planning is efficient has to do with long-term commitment of resources. Once a capacity decision—such as factory size—has been implemented, it often becomes difficult to change without incurring substantial costs.

Planning Facilities After members of management determine what process will be used to create products, they then design and build an appropriate facility. Many products are manufactured in factories, but others are produced in stores, at home, or at the place where they ultimately will be used. Manufacturers must decide where to locate operations facilities, what layout is best for pro- ducing a particular product, and what technology to apply to the transformation process.

Facility Location Deciding where to locate an organization’s facilities is significant because, once the choice has been made and implemented, the firm must live with it due to the high costs involved in both establishing and relocating a facility. When managers resolve to relocate or open a new facility at a new location, they pay careful attention to the alternatives for such a move. Selecting the right site takes time, patience, and agreement among top managers, and veteran site searchers have learned that the process requires doing a lot of homework and having solid objectives (Finney, 1993). Though critical location factors vary by firm, the following are among the most common concerns: proximity to market, availability of raw materials, availability of transportation, availability of power, climatic influences, availability of labor, community characteristics (quality of life), and taxes and inducements.

The facility-location decision is complex because it involves evaluating many factors, some of which cannot be precisely measured. The decision’s long-term impact means it cannot be taken lightly.

Facility Layout Arranging the physical layout of an organization is a complex, highly technical task. Some industrial architects specialize in the design and layout of certain types of businesses. There are three basic layouts: fixed position, process, and product.

A company using a fixed-position layout has a central location for the product and brings all resources required to create the product to that location. An entity such as an office building, a microwave relay station, a house, a hydroelectric plant, or a bridge does not move. Com- panies that rely on fixed-position layouts are typically involved in large, complex tasks such as construction or exploration. They generally make a unique product, rely on highly skilled labor, produce very few units, and have high production costs per unit.

Section 16.2Planning and Designing Operations Systems

Firms that use a process layout organize the transformation process into departments that carry out related processes. For example, a metal fabrication plant may have a cutting depart- ment, a drilling department, and a polishing department. A hospital may have an X-ray unit and a rehabilitation unit, as shown in Figure 16.3. Organizations that use a process layout deal with smaller scale products than those that require a fixed-position layout. Their products are not necessarily unique but are significantly different. Doctors’ offices, custom-cabinet manufacturers, commercial printers, and advertising agencies are all examples of organiza- tions that use a process layout. Such firms tend to create products to customer specifications and produce relatively few units of each product. The low level of output usually results in a higher cost per unit of product.

Figure 16.3: A simplified process layout in a hospital

Organizations that use a process layout organize the transformation process into departments that carry out related processes.

Walk-in emergency

room

Intake

Triage

Admission

On-site treatment

Services

X-ray Blood work CAT scan

Rehabilitation

Treatment

Discharge

The product layout design requires that production be broken down into relatively simple tasks assigned to workers positioned along the line. Workers remain in one location, and the product moves from one worker to another. Each person performs his or her required tasks or activities in turn. An assembly line is the classic example of a product layout. Products made on assembly lines include automobiles, television sets, vacuum cleaners, toothpaste, and meals in a cafeteria. Organizations that use a product layout are characterized by their creation of standardized products, a large number of units produced, and the relatively low cost per unit of production.

Many companies require a combination of layout designs. For example, an automobile manu- facturer may rely on an assembly line (product layout) but may also use a process layout to manufacture parts. A commercial sign manufacturer may utilize the process layout but also need an assembly line to assemble the sign’s components. No matter which facility lay- out is used, the cost and efficiency of operations depend on the degree to which the layout is effective.

Section 16.2Planning and Designing Operations Systems

Technology Technology is the application of knowledge (tools, processes, procedures) to solve problems. Every industry has a basic, underlying technology that dictates the nature of its transforma- tion process. The steel industry continually tries to improve steelmaking techniques; the health care industry researches medical technologies and pharmaceuticals to try to improve the quality of health care products. Two developments that have strongly influenced the oper- ations of many businesses are computer applications and robotics.

Perhaps the most dramatic and exciting technological innovation, in terms of the potential impact for the future, is 3-D printing. This technology has applications in product design, actual manufacturing, product repair, health care, and various other industries. We have only scratched the surface for uses of 3-D printing.

Computer Applications Computers have been used for decades and on a relatively large scale since IBM introduced its 650 series in the late 1950s. Most of the early applications were for record keeping, such as processing payrolls and maintaining inventory records. Today most businesses would not be able to function without computers; many would not even exist.

The operations function uses computers in the product-design phase as well as to manu- facture products. These applications are generally referred to as computer-assisted design (CAD) and computer-assisted manufacturing (CAM), which are computerized approaches that link design and manufacturing, making information readily available. For instance, CAD is used in 3-D printing. Using CAD software, a 3-D image is developed. The CAD file is sent to the printer, which uses layers of liquid, powder, paper, or metal to construct a 3-D model. Thanks to CAD and CAM applications, new innovations such as 3-D printing are becoming more common (Toro, 2013).

Companies also use computers to monitor the transformation process, gather information about the equipment used to make the product, and collect information about the product as it moves through the stages of the transformation process. The computer provides informa- tion to an operator who may, if necessary, take corrective action.

In the monitoring mode, the computer itself does not take the corrective action, although in some highly automated systems, computers can control the production process. A computer compares data about the operation of the equipment and certain product characteristics with predetermined standards. When these comparisons are favorable, the process continues; if they are unfavorable, the computer is programmed to take corrective action. No direct inter- vention by human beings is needed.

In flexible manufacturing, computers direct machinery to adapt to different versions of similar operations. For example, with instructions from a computer, one machine can be pro- grammed to carry out its function for several different versions of an engine without shutting down the production line to refit the machines. In this way, an athletic shoe manufacturer might invest in a flexible manufacturing system that allows it to make 10 different styles and sizes of shoes on the same machinery.

Section 16.2Planning and Designing Operations Systems

Robotics An industrial robot is a machine designed to move materials, parts, tools, or special- ized devices through variable programmed motions in order to perform a variety of tasks (Ziskowsky, 1984). These “steel-col- lar” workers have become particularly important in industries such as nuclear power, hazardous-waste disposal, ocean research, and space construction and main- tenance—industries in which work would put human lives at risk. For instance, the Bechtel Corporation employed robots to clean up a contaminated nuclear reactor at Three Mile Island, the site of a much-publi- cized nuclear accident in 1979 (Miles, 1990).

Companies around the world use robots in numerous other production and operations environments. Robots are especially prevalent in the automobile industry, where they move materials and participate in assembly opera- tions such as spot welding and painting. Many other types of industries use industrial robots in their assembly operations, including those that make television sets, telephones, stereo equipment, and other products. Researchers continue to make more sophisticated robots, and some experts speculate that, in the future, newer versions will be able to engage in farm- ing, laboratory research, and even household activities. Some speculate that robots’ indus- trial era is ending as they become more sophisticated. Increasingly, robots are being operated independent of direct human control (Markoff, 2013).

Business Dilemma

What Would You Do?

Suppose you are a business consultant. In your role, you work with clients to help them develop strategies, define plans, and solve problems. Consider the following client’s case. Use your knowledge of this chapter’s core concepts to address the questions presented at the end of the case. Possible answers to these questions are included at the end of the chapter.

THE CLIENT: McWendy King

THE PLACE: Wichita, Kansas

McWendy King is one of the largest fast-food restaurant companies in the United States, with over 5,000 locations. The chain features a traditional fast-food menu with hamburgers, chicken, and roast beef sandwiches as well as other specialty sandwiches, salads, French fries, shakes, and so forth. McWendy King owns and directly operates

(continued)

Kynny/iStock/Thinkstock Industrial robots are becoming increasingly sophisticated and may eventually find applica- tions in farming and household tasks.

Section 16.2Planning and Designing Operations Systems

Business Dilemma (continued)

roughly 50% of its restaurants, and the others are operated by franchisees. Unlike in some other franchise systems, McWendy King’s franchisees are small-business operators who own just one or two outlets. This gives the franchised restaurants the advantage of being run by local businesspersons who are involved in the daily functions of their outlets. Such owner/operator involvement and control are not as evident in some of McWendy King’s major competitors.

One store manager of a company-owned restaurant in Peoria, Illinois, wanted to experiment with the development and sale of pizzas. After talking with his district manager, the store manager drafted a proposal and presented his ideas to the company’s headquarters in Wichita, Kansas. Company representatives were impressed with the insights, competitive analysis, profitability projections, and operational considerations presented. The executives believed the idea had merit, and they decided to test it in the midwestern region, working closely with the store in Peoria to do so.

Headquarters worked for months to develop the perfect fast-food pizza that could be produced quickly and required a minimum of equipment investment for the company and franchise locations. The company then tested the product in company-owned restaurants in the midwestern region. The final conclusion was that the pizza product would be successful, but not in the 12-inch size originally offered. Instead, research suggested that if only one size was offered, it should be 16 inches to accommodate families and those who like to save and reheat the product for later meals.

McWendy King presented the concept, with all the accompanying financial information, to its franchisees. The presentation indicated that each store would need to invest approximately $41,000 in equipment and employee training. In addition, because the 16-inch pizza box was too large to fit through the current store drive-through windows, all the stores would have to make structural modifications. The cost to redo each drive- through window was roughly $15,000.

The franchisees were aware that the company was testing the pizza concept but were not kept informed along the way of the operational considerations and costs. Unlike the company locations that had flat or declining sales, the franchise locations operated with significantly higher sales because they benefited from tighter owner control. The franchisees thus rejected the idea of making such sweeping changes to offer pizza. They suggested that the company look into other less costly ways to expand the McWendy King menu.

Questions

1. What should the head of franchise operations have taken into consideration when evaluating operational changes for the system?

2. What alternative ways to resolve the situation can you identify? Consider both quality and productivity for each alternative.

3. What role does communication play between the corporate and franchise organizations?

Section 16.3Managing the Supply Chain

16.3 Managing the Supply Chain Supply-chain management is an important component of operations. It involves managers connecting all members of the distribution system (Ferrell & Hartline, 2011). Supply-chain managers are involved with purchasing raw materials, managing inventory, routing, schedul- ing, managing finished products, and distributing them to customers. Many companies are placing increasing importance on supply-chain management, prompting some universities to begin offering degrees in this field (Korn, 2013). The supply chain is a complex system that requires different controls and monitoring systems to ensure compliance.

The supply chain deals with a variety of members, and mistakes sometimes occur. Supply- chain disasters are often the subject of major news stories. For instance, European customers were outraged when it was found that horse meat had made its way into frozen beef products (Korn, 2013). Managers need to understand the different functions of supply-chain manage- ment as well as their importance. Table 16.2 summarizes the different functions of supply- chain management.

Table 16.2: Functions of supply-chain management

Function Description Example

Purchase Buying all the materials needed by the organization

A factory’s procurement manager purchases the month’s first shipment of supplies.

Inventory control and management

Determining how many supplies and goods are needed and managing quantities on hand, where each item is, and who is responsible for it

The inventory control manager of a retailer determines how much stock needs to be ordered for next month.

Outsourcing Contracting business activities to independent companies

A consumer electronics firm out- sources the manufacturing of its products to Asia.

Routing Determining the sequence of opera- tions through which the product must pass

The operations manager of an automobile factory determines the order of operations for constructing a vehicle.

Scheduling Assigning work to specific depart- ments, machines, or persons

A fast-food restaurant assigns differ- ent tasks to different employees.

Purchasing Purchasing, also known as procurement, is the process of obtaining the materials required by the organization. Consider a hypothetical small business called Fleet Athletic Shoes, which manufactures athletic shoes and sells them primarily to sporting goods and department stores. Fleet Athletic Shoes buys leather and other raw materials, along with machines, equip- ment, manufacturing supplies (oil, electricity, and so on), and office supplies. People in the purchasing department locate and evaluate suppliers for these items. They must also be on

Section 16.3Managing the Supply Chain

the lookout for new materials or parts that will do a better job or cost less than those cur- rently being used. The purchasing department’s objective is to obtain items of the desired quality in the right quantities at the lowest possible cost. Moreover, there is a relationship- building dimension to purchasing. The individuals who work in this area seek to develop and maintain positive relations with suppliers.

The purchasing function can be complex. The average automobile, for example, has more than 16,000 different parts, each of which is supplied by a separate company. The impor- tance of the purchasing task is accentuated by the amount of money spent on these items. Furthermore, the nature of purchasing is changing and becoming highly competitive. The European Commission has shown an interest in green procurement practices (GPP) by public authorities in member states. GPP is a voluntary tool that EU states can use and is intended to create purchasing practices that will have less of an environmental impact (European Commission, 2013).

Not all organizations opt to purchase materials needed to create their products. They can often produce some materials more economically and efficiently than an outside supplier can. For example, Coors has found it makes sense to manufacture its own cans in a subsidiary plant. On the other hand, firms sometimes find it is not economical to make or purchase an item and instead arrange to lease it from another organization. Some airlines, for example, lease airplanes rather than buy them. Deciding whether to purchase, make, or lease an item generally depends on cost, product availability, and supplier reliability. Once the purchasing department has procured the items needed to create a product, some provision has to be made for storing the items until they are needed.

Inventory Control Inventory refers to all the materials a firm holds in storage for future use. Every raw mate- rial, part, and piece of equipment has to be accounted for, or controlled. Inventory control determines how many supplies and goods are needed, keeps track of quantities on hand, and specifies where each item is, along with the person responsible for it.

Inventory managers spend a great deal of time determining the proper inventory level for each item. The question of how many units to hold in inventory depends on variables such as the item’s usage rate, the cost of maintaining it in inventory, the cost of paperwork and other procedures associated with ordering or making the item, and the cost of the item itself. Sev- eral approaches can be used to determine how many units should be stored at one time and when additional inventory should be procured.

Economic Order Quantity To control the number of items maintained in inventory, managers determine how much of any given item they should order. One popular way to do so is to use the economic order quantity (EOQ) model, which identifies the optimal number of items to order while minimiz- ing certain annual costs that vary according to order size. We should note here that the pur- chase price per item is not generally included, because it does not change or vary with order size unless a quantity discount is a factor. The optimal order quantity (Qo) can be obtained by using the following formula:

Section 16.3Managing the Supply Chain

where D equals the annual demand in units; S equals the ordering cost (in dollars); and H is the carrying cost (in dollars per unit/year). Carrying and ordering costs are typically estimated values. Thus, the EOQ should be viewed as an approximation rather than an exact amount.

For example, assume that Fleet Athletic Shoes expects to sell 5,000 units (pairs) of its RXII model next year and buys shoelaces from a supplier at 10¢/unit (pair) of laces. The carrying costs are 5% of the purchase price, and the ordering costs are $10. How many units of laces should the shoe manufacturer order from its supplier per order?

The optimal order quantity is 4,472 pairs of laces per order. Notice that if Fleet Athletic Shoes orders only 4,472 units next year, there will be an eventual shortfall of 528 units. This exam- ple illustrates how EOQ provides an approximation of the number of units to order, rather than the exact amount.

Just-in-Time Inventory Management The just-in-time (JIT) inventory management concept minimizes the number of units in inventory by providing an almost continuous flow of items from suppliers to the production facility. It eliminates waste by using smaller inventories, which require less storage space and less investment. To illustrate, assume that Fleet Athletic Shoes buys 500 units of shoe- laces from a supplier per day. Traditionally, its inventory manager might order enough for 1 month at a time: 11,000 units per order (500 units per day times 22 workdays per month). The expense of such a large inventory could be considerable because of the cost of insurance, record keeping, rented storage space, and interest on credit. The JIT approach reduces these costs because shoelaces would be purchased in smaller quantities, perhaps in lot sizes of 500, which the supplier would deliver once each month. For such an approach to be effective, how- ever, the supplier must be extremely reliable and able to ship items efficiently.

Material-Requirements Planning Another technique firms use is material-requirements planning (MRP), a system that schedules the precise quantity of materials needed to make the product. The basic compo- nents of MRP are a master production schedule, bill of materials, and an inventory status file. At Fleet Athletic Shoes, for example, the inventory-control manager will look at the pro- duction schedule to determine how many shoes the company plans to make. She will then prepare a bill of materials, which is a list of all the materials needed to make that quantity of

Section 16.4Managing Inventory

shoes. Next, she determines the quantity of these items that Fleet already holds in inventory (to avoid ordering excess) and then develops a schedule for ordering and delivering the right number of materials to satisfy the firm’s needs.

The numerous parts and materials that go into a typical production process make it neces- sary to use a computer to use the MRP process. MRP is often used in conjunction with JIT inventory control. When these systems are correctly implemented, some potential benefits of using them include reduced inventory, reduced delivery lead times, more realistic commit- ments, and increased efficiency.

Manufacturing-Resource Planning Manufacturing-resource planning (MRPII) is another computerized system that helps a company control all of its resources, not just inventory needed for production. It includes data from every division within the organization to help executives plan all elements of the firm’s operations. Thus, it is sometimes called the “closed loop” MRP because it incorporates all aspects of the company (accounting, marketing, and so on) rather than just the manufacturing component. Here, Fleet Athletic Shoes might, based on market research information, utilize MRPII to allocate resources, including personnel and materials, to various regional areas in order to meet projected swings in demand for the company’s products. This is accomplished by adopting a focal production plan and using a unified database to plan, update, or change all organizational activities.

16.4 Managing Inventory After a facility is up and running, operations managers oversee the transformation process and control the inputs and outputs. There are three different types of inventory to manage. Raw materials inventory includes those materials that have been purchased to be used as inputs to make other products. Nuts and bolts are raw materials for an automobile manufac- turer, while hamburger patties, vegetables, and buns are raw materials for a fast-food restau- rant. Work-in-process inventory includes those products that are partially completed or are in transit. At McDonald’s, for example, a hamburger being cooked represents work-in-process inventory because it must go through several more stages before it can be sold. Finished- goods inventory includes those products that are ready for sale, such as a fully assembled car that is set to ship to a dealer.

Managing operations must be closely coordinated with inventory management. The produc- tion of televisions, for example, cannot be planned without knowing something about the availability of all the necessary materials, including the chassis, picture tubes, color guns, and other elements. Every item held in inventory carries a cost. For example, storing fully assembled televisions in a warehouse to sell to a dealer at a future date requires not only the use of space and the cost of utilities to cool, heat, or secure that space, but also the pur- chase of insurance to cover any losses that might occur due to fire or other unforeseen events. For this reason, managers keep a careful eye on inventory when they develop a production plan. Figure 16.4 displays two routes raw materials might take to reach finished production. One travels through the company’s manufacturing system; the other includes items procured through outsourcing.

Section 16.4Managing Inventory

Figure 16.4: Types of inventory

A sequence of three different types of inventory to manage.

Raw materials Outsourced work in progress

Raw materials Work in progress

Finished goods

Outsourcing Outsourcing occurs when business-related activities are contracted to independent compa- nies. Outsourcing is common, especially to overseas companies in which labor costs are often lower. Consequently, outsourcing is an important component of supply-chain management. Working with third-party companies often results in greater productivity at lower costs, but it introduces challenges as well. Firms must monitor their partners’ activities to ensure they comply with the company’s standards.

Many countries have drastically different standards than those in the United States. For instance, in China, it is not uncommon for factory workers to put in additional hours, even if it violates the maximum number of hours they are supposed to work. Apple supplier Fox- conn, for example, received negative attention after the public learned about the facility’s unsafe working conditions and abusive labor tactics. Apple was forced to respond immedi- ately because, as the hiring company, it is expected to ensure compliance among its suppliers and business partners.

Despite the difficulties, outsourcing offers competitive advantages for many major compa- nies. Nike, for instance, manufactures shoes in Asia. This lowers labor costs and incurs other benefits that are passed on to the end consumer. Outsourcing also enables businesses to receive help from experts in areas in which they are weak. An organization might outsource accounting or janitorial responsibilities to a third party that specializes in those areas.

Routing and Scheduling After all materials have been obtained and their use determined, operations managers then determine the maximum or optimum level of production. As part of this process, manage- ment must consider routing, or the sequence of operations through which the product must pass. For example, before employees at Fleet Athletic Shoes can begin sewing leather in the shape of a shoe, it must be cut and stretched into the appropriate sizes. Likewise, the material used in the shoe soles must be cut to size before it can be attached to the leather uppers. Rout- ing establishes the order of operations through which each shoe will pass, from being sheets and stacks of leather, rubber, and other raw materials to a finished and ready-to-wear shoe.

Section 16.4Managing Inventory

Once members of management know the departments or work stations the product must pass through and in what sequence, they can then schedule the work. Scheduling is assign- ing the work to be performed to individual departments or to specific machines or persons. At Fleet, cutting leather for the company’s high-top basketball shoes might be scheduled to be done by the “cutting and finishing” department on machines designed especially for that purpose.

Many approaches to scheduling have been developed, ranging from simple trial and error to highly sophisticated mathematical procedures. One popular scheduling technique is the program evaluation and review technique (PERT). PERT programs are normally reserved for new, complex projects; their use was made famous by the U.S. Navy as part of the Polaris missile program. PERT programs follow several steps, as shown in Figure 16.5.

Figure 16.5: A PERT chart

PERT programs are normally reserved for new, complex projects.

= Critical path

Time in weeks

Timp “0”

Project completion

4–68 –12

4–7

1–3 1–2

1–2

4– 6

1–2 3 –6

4–7 2 –4

3– 6 1– 4

6–1 0

5–7 1–42–

5–7

4–6 3–5

3–5 3

– 5

First, management identifies all tasks associated with completing the project. For a missile, this would include the creating body of the vehicle, the payload (bomb), and a steering device (telemetry); identifying the type of fuel to be used; and devising a method of communication so that the missile can be given instructions from the ground. In Figure 16.5 each change in the line’s direction indicates the completion of a smaller task in conjunction with a major ele- ment in the overall project.

Second, the tasks are placed in the order that will allow the project to be most efficiently completed. As Figure 16.5 shows, this arrangement leads to a set of lines, one for each major element of the project, with changes in direction signifying completed tasks along the way. Sometimes tasks overlap. For example, the body must be sufficiently large to carry both the payload and the fuel but at the same time as small as possible to avoid being intercepted or shot down. Therefore, the two major lines in Figure 16.5 overlap for those tasks.

Section 16.5Managing Quality

Third, the completion time for each task is estimated optimistically and pessimistically. This step provides a range of time for each task, as shown in the numbers for each task segment (change in line direction) in Figure 16.5.

Fourth, as the missile is being constructed, the team takes advantage of slack time. Slack time is calculated as follows:

Pessimistic estimate – Time of completion of a task = Slack time

Slack time is then allocated in one of two ways. First, any task that has not been finalized by its pessimistic estimate receives top priority. Workers use slack time to finish the task as quickly as possible, because it is holding up the entire process. Second, if all tasks are on schedule, the team works ahead on the critical path. This path is the longest one in the model (indicated in bold in Figure 16.5), which also represents the shortest time to completion of the entire project. Think of it this way: If there are five runners in a race, the race is not over until the last place runner crosses the finish line. The last place runner is on the critical path. Helping the runner get to the finish line more quickly shortens the entire race. Shortening the criti- cal path reduces the completion time of the entire project. For this reason, some refer to the PERT model by a different name: the critical path model.

Another popular technique used for scheduling is the Gantt chart, a bar chart that displays the relationship of various scheduling activities over time. Usually, the scheduling activities are listed vertically and the time frames horizontally. One of the main strengths of the Gantt chart is its simplicity (Adam & Ebert, 1991).

16.5 Managing Quality Quality reflects the degree to which a good or service meets the demands and requirements of the marketplace. Quality, like cost, is a critical element of OM, because too many defective products can quickly ruin a firm. A defective shoe, for example, could result in athletes getting injured and expose Fleet Athletic Shoes to lawsuits and declining sales. Quality is so impor- tant that it must be examined in the context of operations. Quality control refers to the activi- ties an organization undertakes to ensure its products meet its established quality standards (Johnson & Winchell, 1989).

To control quality many organizations establish TQM programs. TQM is an approach that strives to create a customer-centered culture; it defines quality for the organization and lays the foundation for activities aimed at attaining quality-related goals (Sashkin & Kiser, 1992). TQM is not merely a technique but a philosophy anchored in the belief that long-term success depends on a uniform commitment to quality in all sectors of the organization.

The TQM concept is based on five principles: produce quality work the first time, focus on the customer, adopt a strategic and holistic approach to improvement, seek continuous improvement, and achieve mutual respect and teamwork. TQM is an outgrowth of an Ameri- can approach to quality that led to changes in Japanese management practices immediately following World War II. Toyota became famous for its TQM approach.

Section 16.5Managing Quality

Establishing Standards Quality control involves comparing a product’s quality against established quality standards. Product specifications and quality standards must be established so the company can create a product that will compete in the marketplace. For example, Fleet Athletic Shoes may specify that each of its shoes have soles of a specified uniform thickness, that the toe and heel of each shoe should be reinforced to a specified level to ensure adequate support, and that each shoe be able to last for a specified number of miles of use. Production facilities are designed to make products that meet the desired specifications.

Quality standards can be incorporated into service activities. A fast-food restaurant, for instance, might set the standard that it wants to get customers through its drive- through within a certain amount of time. The less time spent in the drive-through, the more satisfied customers tend to be— and satisfied customers often translate to increased sales. At the same time, restau- rants must make sure they do not sacrifice quality for speed.

Quality control is also important for issues regarding customer payment. Ensuring the security of a customer’s personal informa- tion is paramount to customer loyalty and repeat visits. Target recently discovered the consequences of having lax security mea- sures in this area. At the beginning of the

2013 holiday shopping season, hackers installed malicious software onto stores’ debit and credit card swiping machines and stole the personal information of more than 70 million customers in a 2-week period. The fact that the security breach continued over such a long period of time reveals that Target did not have appropriate controls in place. In addition to reducing company profit forecasts by 20%, Target has incurred other costs related to the incident (Ziobro & Yadron, 2014).

One of the challenges to developing quality standards is that standards tend to vary by coun- try. For instance, while the United States might have one set of environmental standards, the European Union may have stricter environmental standards for products sold in that region. It can be hard for global companies to be aware of different countries’ various quality stan- dards. For this reason, the International Organization for Standardization (ISO), an inter- national standard-setting group, developed a set of international management standards. The ISO provides common standards that apply globally. ISO 9000 deals with quality and includes a framework companies can use to document records, train employees, test products, and fix defects. Companies from around the world have been certified by the ISO, including GE Ana- lytical Instruments (GE Power, n.d.). ISO 14000 provides a number of comprehensive envi- ronmental standards for businesses to ensure they limit their negative environmental impact and improve their environmental performance. Another standard that has become popular is ISO 26000. Intended as a guideline, ISO 26000 sets corporate social responsibility standards.

Payphoto/iStock/Thinkstock How quality standards are defined can vary by company and industry. A fast-food chain may set standards for the amount of time a cus- tomer spends waiting at a drive-through win- dow for service.

Section 16.5Managing Quality

Organizations that choose to adopt ISO 26000 must monitor and control their societal, envi- ronmental, cultural, legal, political, economic, and organizational diversity activities to com- ply with international standards for behavior (ISO, n.d.). Table 16.3 summarizes these three standards.

Table 16.3: ISO standards

Standard Type Description

ISO 9000 Quality management

Provides a framework for companies to document records, train employees, test products, and fix defects

ISO 14000 Sustainability Provides comprehensive environmental standards for busi- nesses to ensure they limit their negative environmental impact and improve environmental performance

ISO 26000 Corporate social responsibility

Standards that require members to monitor and control their societal, environmental, cultural, legal, political, economic, and organizational diversity and comply with international standards for behavior

Inspection Inspection reveals whether a product meets quality standards. Some product characteris- tics may be discerned using fairly simple inspection techniques. For example, weighing the contents of cereal boxes or measuring the time it takes for a customer to receive his or her hamburger constitutes an inspection. Other inspection techniques are more elaborate. Car manufacturers use automated machines to open and close car doors to test the durability of latches and hinges. The food-processing and pharmaceutical industries use various chemical tests to determine the quality of their outputs. Fleet Athletic Shoes might use a special com- puter that can accurately simulate long-term usage of a shoe to determine how long a runner can expect the shoe to last.

Inspection tests can be classified as performance or destructive. Repeatedly opening and closing car doors to determine the life expectancy of hinges and latches is a destructive test because the test lasts until the product fails. Performance testing, on the other hand, does not destroy or damage the product. Many software companies use performance tests to find and eliminate bugs in their programs, even asking customers worldwide to help conduct these tests. For example, Facebook asked its employees and mobile partners for help beta testing its prerelease Facebook for Android. By engaging the help of mobile partners such as Sony, Erics- son, and Huawei, Facebook (2013) tested how its app functioned on a wide variety of Android devices and gathered feedback on ways to improve it.

Organizations normally inspect purchased items, works in process, and finished items. Purchased items and finished items are inspected after the fact; the inspection of works in process is preventive. Purchased items and finished items are inspected to determine their level of quality. For items in process—such as an automobile moving down the assembly line, a booster rocket at an intermediate stage of completion, or an athletic shoe still being

Section 16.5Managing Quality

assembled—the purpose of inspection is to find defects before the product is completed so that corrections can be made.

Sampling An important question relating to inspection is how many items should be examined. If Fleet Athletic Shoes produces more than 500 shoes a day, should it inspect all of them or just some of them? At Alaska Airlines, hundreds of employees taste test the food to make sure it is acceptable for passengers (Woodruff, 2012). The decision to inspect 100% of the output or just part of it is made on the basis of how much the inspection process costs, its destructive- ness, and the importance of the item to the safety of consumers or others.

Some inspection procedures are quite expensive, use elaborate testing equipment, destroy products, and/or require a significant number of hours to complete. In such cases it is usu- ally desirable to take a sample of the output and test that. If the sample passes inspection, the inspector can assume that all the items in the lot from which the sample was drawn would also pass inspection. By using principles of statistical inference, management can employ sampling techniques that assure a relatively high probability of reaching the right conclu- sion—that is, rejecting a lot that does not meet standards and accepting a lot that does. Never- theless, there is always a risk of making an incorrect conclusion—accepting a population that does not meet standards (because the sample was satisfactory) or rejecting a population that does meet standards (because the sample contained too many defective items).

Human life and safety depend on certain items functioning properly, such as the navigational systems installed in commercial airliners. Even though it is very costly to inspect such items, the potential cost of a flawed systems in terms of human life and safety is too great to not inspect 100% of the output.

Continuous Improvement As part of the TQM philosophy, organizations must constantly look for ways to eliminate defects and improve operations. One strategy that many organizations have adopted for this process is Six Sigma, which involves improving existing processes and developing new ones to meet specific standards that require organizations to produce no more than 3.4 defects per million opportunities. Building on previous research, engineers at Motorola popularized the concept of Six Sigma after concluding that the company’s current methods of measur- ing defects were insufficient. Motorola built on this concept in the mid-1980s and used it to improve its operations. The organization estimates that Six Sigma initiatives saved it more than $16 billion (iSixSigma, n.d.). Six Sigma has since been adopted by thousands of com- panies. In 1995 GE’s CEO Jack Welch announced that Six Sigma would be a top priority for the firm during the subsequent 5 years. Each of GE’s businesses was held responsible for achieving Six Sigma results. Six Sigma was later expanded and continues to be applied at GE (Hoerl, 2002).

Section 16.6Managing Productivity

16.6 Managing Productivity Productivity has become increasingly critical in recent years, and its importance continues to grow. Productivity has become such a concern that Yahoo! eliminated the company’s work- from-home policy to bring employees back into the office, where it was believed they would be more productive (Miller, 2013). One of the primary objectives of the operations function is to increase productivity by using resources efficiently.

Measuring Productivity Productivity measures the relationship between outputs and inputs. It is usually expressed as a formula:

In general, productivity measurements can be classified as either partial productivity or total productivity. Partial productivity reflects output relative to a single input or some combina- tion of inputs. For instance, labor productivity is a common concern. Examples of labor pro- ductivity include labor hours, machine hours, and number of workers necessary to produce at a given level of output:

Total productivity reflects all the inputs used to obtain an output. For example, if we know that all inputs consist of labor, machines, and materials, we can use the following formula to express the total productivity measurement:

Note that this ratio requires that inputs and outputs be measured using a common unit such as cost or value. In the above example, the output(s) would need to be converted to a dollar value.

The Importance of Productivity Productivity is important on three levels. Organizations do not have unlimited resources, so they must determine how to allocate limited resources to different departments or divisions. Consequently, each department must use its allotted resources efficiently and effectively.

Section 16.6Managing Productivity

Moreover, the most productive departments are those most likely to be allocated more of the firm’s resources.

From the perspective of an entire organization, productivity represents a critical element of competitiveness. If a company can achieve the same level of output as its competitors using fewer resources, then it becomes more competitive. The company can charge the same price for its products and generate higher profit margins than its less productive competitors, or charge a lower price and thereby increase its sales at the expense of its less productive com- petitors. Walmart has adopted an everyday-low-price strategy designed to undercut its com- petitors’ prices. Its efficient distribution systems and agreements with suppliers make the firm more productive, which saves expenses and provides a competitive advantage.

Productivity is also important from a national perspective because a close relationship exists between a country’s productivity and its standard of living. High productivity levels are largely responsible for the high standards of living enjoyed by citizens of industrialized nations. Moreover, when productivity levels are not aligned with wages and prices, the nation’s econ- omy may be adversely affected. High wages and prices combined with low productivity may result in inflation. Modest gains in productivity can also convince employers to avoid hiring new workers, which contributes to unemployment (Rugaber, 2013).

In 1960 the United States accounted for 51% of industrialized nations’ total output, but its share had fallen to 22% by 1980. In contrast, Japan accounted for only 19% of industrialized nations’ total output in 1960, but its share climbed to 24% by 1980 (Adam & Ebert, 1992). In addition, over the past couple of decades, the United States has lost its dominance in the television, camera, and minor appliance industries to foreign competitors, particularly those in Asia. Recently, the United States has gained dominance in a surprising industry: oil and natural gas. The United States surpassed Russia as the world’s largest producer of these com- modities, due to its extensive shale formations (Rocco, 2013).

Improving Productivity Many factors affect productivity, including methods, capital, quality, technology, and manage- ment. Employees also play a significant role in improving productivity. Beyond their inputs, additional steps to improve productivity include the following:

1. Develop adequate productivity measurements. For example, if Fleet Athletic Shoes measures only the number of shoes it makes, management might ignore other pro- ductivity indicators such as wasted materials or product quality that paint a clearer picture of productivity.

2. Consider the “entire” or “whole” system when deciding on which operations to concen- trate. For most products, the production process is a closely integrated sequence of events that must take place in an exact order to achieve the desired results. If just one of these steps is not performed to satisfaction, the whole production process may be thrown off course. Only by considering the entire system as a whole will it be possible to detect relatively minor difficulties that may cause major problems.

3. Develop productivity improvement methods (such as work teams) and reward con- tributions. For example, Florida State University (n.d.) has a Prudential–Davis

Summary and Review

Productivity Awards Program that monetarily rewards individuals and teams within the school that have enhanced their department’s productivity.

4. Establish reasonable improvement goals. If goals are set too high, workers may be frustrated when they cannot achieve them. When goals are set too low, the company is not likely to reach its productive potential because it is not sufficiently challenging workers.

5. Make productivity improvements a priority for management, particularly top manage- ment. Management’s commitment is critical for the achievement of any goal, particu- larly those that concern productivity.

6. Publicize productivity improvements. Publicizing improvement not only tends to instill pride in those workers responsible for the improvements, it also poses some- what of a challenge to other workers to see if they too can improve the company’s overall productivity.

7. Use decision-support systems. Specialized computer systems allow managers and other workers to consider the effects of a wide range of possible factors on orga- nizational productivity. This makes it possible to more accurately predict decision outcomes.

8. Link incentives with productivity increases. For example, rather than merely giving employees automatic annual year-end bonuses, Fleet Athletic Shoes could base its bonuses on whether work teams or individual employees successfully met preset productivity goals.

9. Provide adequate training. Accenture is a good example of a company that offers adequate training. It provides approximately 67 hours of training per employee. The company also has a global learning portal that employees can access while on the job (Accenture, n.d.).

Note that employee attitudes have an important influence on productivity. Workers who are committed to and think positively about their jobs and company often have high overall pro- ductivity, all other things being equal. Ways to increase productivity by improving employees’ attitudes include providing sufficient job training, increasing job autonomy, providing finan- cial incentives, and eliciting and integrating employees’ input on productivity issues.

Unfortunately, when faced with the challenge of improving productivity, managers frequently focus on updating equipment rather than developing employees. In their book, In Search of Excellence, Tom Peters and Robert Waterman (1982) revealed that the best run organiza- tions view their employees “as the root source of quality and productivity gain” (p. 14). These firms achieve high productivity by respecting employees as individuals, trusting them, and “treat[ing] people as adults” (Peters & Waterman, 1982, p. 277). It is evident, then, that a key way to improve productivity is by developing and investing in employees.

Summary and Review • Define operations management and identify the activities associated with it. OM is the

development and administration of the activities involved in transforming resources into goods and services. Operations managers oversee the transformation process, the planning and designing of operations systems, and the managing of inventory, quality, and productivity.

Summary and Review

• Determine the elements involved in planning and designing an operations system. Operations planning is necessary before production can occur. Product design depends on what customers want and on the organization’s technical abilities. Facil- ity layout is the physical layout of an organization. Facilities may be arranged accord- ing to fixed-position layouts, process layouts, or product layouts. Where to locate an operations facility is a crucial decision that depends on proximity to the market; availability of raw materials, transportation, labor, and power; climatic influences; and community characteristics. Technology is also vital to operations, particularly CAD, CAM, flexible manufacturing, and robotics.

• Specify how managers oversee the supply chain. Supply-chain management is an important component of operations. It involves managers connecting all members of the distribution system to satisfy customers. Supply-chain management involves purchasing, inventory control and management, outsourcing, routing, and schedul- ing. Inventory refers to all the materials a firm holds in storage for future use. Inven- tory control involves determining how many supplies and goods are needed and keeping track of how many items are on hand, their location, and who is responsibil- ity for them. The EOQ model identifies the optimal number of items to order while minimizing certain annual costs that vary according to order size. The JIT inventory concept minimizes the number of units kept in inventory by providing an almost continuous flow of items from suppliers to the production facility. MRP is a system that schedules the precise quantity of materials needed to make a product. MRPII is another computerized system that helps a company control all of its resources, not just the inventory needed for production. There are three types of inventory: finished-goods inventory, work-in-process inventory, and raw materials inventory. Some companies choose to outsource certain business functions by contracting out business-related activities to independent companies.

After all materials have been obtained and their use determined, operations man- agers determine the maximum or optimum level of production. As part of this pro- cess, management considers routing, or the sequence of operations through which the product must pass. Once management knows through which departments or work stations the product will pass and in what order, it can then schedule the work. Scheduling involves assigning work to specific departments, machines, or persons. PERT and the Gantt chart are common scheduling methods.

• Understand the linkage between managing inventories and managing operations systems. Inventory management has three forms. Raw materials inventory includes those materials that have been purchased to be used as inputs for other products. Work-in-process inventory includes those products that are partially completed or in transit. Finished-goods inventory includes those products that are ready for sale, such as a fully assembled car that is set to ship to a dealer. If inventory is not care- fully managed, the entire operations system can suffer from bottlenecks and other problems.

• Assess the importance of quality in the OM process. Quality is a critical element of OM because low-quality products can threaten a firm. Quality control includes those activities undertaken to ensure that products meet established quality standards. TQM is an approach that strives to create a customer-centered culture; it defines quality for the organization and lays the foundation for activities aimed at attaining quality-related goals.

To control quality, company leaders first establish the standard of quality they desire and then inspect products to determine whether they meet that standard.

Summary and Review

ISO standards are a set of common international management standards that can be applied globally. ISO 9000 and 14000 are two common ISO standards for quality and sustainability. Inspection reveals whether a product meets quality standards. An important question relating to inspection is how many items should be included in the inspection process. In some cases it is desirable to take a sample of the output and just test that. Finally, an important part of quality control is continuous improve- ment. One such strategy that many organizations have adopted is Six Sigma, which involves improving existing processes and developing new ones to meet specific standards that require organizations to produce no more than 3.4 defects per mil- lion opportunities.

• Define productivity, explain why it is important, and propose ways to improve it. Pro- ductivity measures the relationship between outputs and inputs. Partial productivity reflects output relative to a single input or some combination of inputs; total pro- ductivity reflects all the inputs used to obtain an outputs. Productivity is important because it relates to how efficiently a firm (or nation) uses resources and thus its competitiveness. Productivity can be improved by developing adequate productivity measurements, establishing reasonable improvement goals, publicizing productiv- ity improvements, linking incentives to productivity increases, providing adequate training, and motivating employees to be more productive.

• Evaluate operations issues in a franchise operation. Evaluate the scenario described in the Business Dilemma box and come up with a compromise solution to the prob- lem. Your solution should enable all outlets to maintain quality and productivity standards.

Key Terms capacity The maximum load that an organi- zational unit can carry or operate at a given point in time.

computer-assisted design (CAD) A tech- nique that uses computer systems to create, modify, analyze, or optimize a design.

computer-assisted manufacturing (CAM) A technique that uses computer software to control machine tools and related machinery in the manufacturing of products.

economic order quantity (EOQ) model A model of inventory control that identifies the optimal number of items to order while minimizing certain annual costs that vary according to order size.

finished-goods inventory A type of inven- tory that includes those products that are ready for sale, such as a fully assembled car ready to ship to a dealer.

fixed-position layout A physical layout of a company that uses a central location for a product and brings all resources required to create it to that location.

flexible manufacturing A method of manufacturing in which computers direct machinery to adapt to different versions of similar operations.

Gantt chart A bar chart that shows the rela- tionship of various scheduling activities over time; a popular technique for scheduling.

industrial robot A machine designed to move materials, parts, tools, or special- ized devices through variable programmed motions to perform a variety of tasks.

inputs Resources such as labor, money, materials, information, or energy that are transformed by a process to become an output.

Summary and Review

inspection A part of quality control; reveals whether a product meets quality standards.

International Organization for Standard- ization (ISO) An international standard- setting group that developed a set of com- mon international management standards that can be applied globally.

inventory All the materials a firm holds in storage for future use.

inventory control The process of deter- mining how many supplies and goods are needed and keeping track of quantities on hand, where each item is, and who is respon- sible for it.

ISO 9000 An international management standard that deals with quality; provides a framework companies can use to document records, train employees, test products, and fix defects.

ISO 14000 An international management standard that provides a number of compre- hensive environmental standards for busi- nesses to ensure that limit their negative environmental impact and improve their environmental performance.

just-in-time (JIT) inventory manage- ment A type of inventory control that minimizes the number of units in inventory by providing an almost continuous flow of items from suppliers to the production facility.

manufacturing The activities and pro- cesses used to make tangible products; used interchangeably with the term production.

manufacturing-resource planning (MRPII) A computerized system that helps a company control all of its resources, not just inventory needed for production.

material-requirements planning (MRP) A planning system that schedules the precise

quantity of materials needed to make the product.

operations The processes used to make both tangible and intangible products.

operations management (OM) The devel- opment and administration of the activities involved in transforming resources into goods and services.

outputs The amount of goods, services, or ideas produced by a machine, factory, com- pany, or individual in a given time period.

partial productivity A productivity mea- surement that reflects output relative to a single input or some combination of inputs.

process layout A physical layout of a com- pany in which the transformation process is organized into departments that group related processes.

production The activities and processes used to make tangible products; used inter- changeably with the term manufacturing.

productivity The effectiveness of a com- pany as measured by the relationship between outputs and inputs.

product layout A physical layout of a company in which production is broken down into relatively simple tasks assigned to workers positioned along the line.

program evaluation and review tech- nique (PERT) A popular scheduling tech- nique whereby managers first break down a project into events and activities and then lay down their proper sequence, relation- ships, and duration in the form of a network.

purchasing The act of buying all the mate- rials needed by the organization; also known as procurement.

Summary and Review

quality The degree to which a good or ser- vice meets the demands and requirements of the marketplace.

quality control The activities an organiza- tion undertakes to ensure its products meet its established quality standards.

raw materials inventory A type of inven- tory that includes materials that have been purchased to be used as inputs for other products.

routing The sequence of operations through which a product must pass.

scheduling The process of assigning work to specific departments, machines, or persons.

Six Sigma A strategy that involves improv- ing existing processes and developing new ones to meet Six Sigma standards that require organizations to produce no more than 3.4 defects per million opportunities.

supply-chain management An operations component that occurs when managers con- nect all members of the distribution system to satisfy customers; an important compo- nent of operations.

total productivity A productivity mea- surement that reflects all the inputs used to obtain an output.

work-in-process inventory A type of inventory that includes products that are partially completed or in transit.

Ready Recall 1. What is the purpose of operations management (OM)? 2. Distinguish between operations, production, and manufacturing. 3. Compare and contrast a manufacturer versus a service provider in terms of OM. 4. In what industry would the fixed-position layout be most efficient? The process lay-

out? The product layout? Use real examples. 5. What criteria do businesses use when deciding where to locate a plant? 6. What is flexible manufacturing? How can it help firms improve quality? 7. Explain why organizations that use the just-in-time (JIT) inventory concept must have

zero defects in their inventory. 8. Describe the methods a firm might use to manage inventory. 9. When might a firm decide to inspect a sample of its products for quality rather than

test every product? 10. Explain why productivity is important to an organization or a nation. Include some

steps that can be taken to improve productivity.

Expand Your Experience 1. Compare and contrast OM at McDonald’s with that of Honda. Then compare and con-

trast OM at McDonald’s with that of Citibank. 2. Find an existing company that uses JIT inventory control, either in your local com-

munity or that has been reported on in a business journal. Why did the company decide to use the system? What have been JIT’s advantages and disadvantages for that particular company? What has been the overall effect on the quality of the company’s goods or services? What has been the overall effect on the company’s bottom line?

Summary and Review

3. Interview some local operations managers and ask why their companies decided to locate in your area. Compare and contrast the different criteria and report the results to your class.

Possible Answers to Business Dilemma Questions 1. The head of franchise operations should have considered that the franchisees would

not be capable of expanding to sell pizza. The venture will be very expensive for each franchise, considering that new equipment must be bought and drive-through win- dows must to be widened.

2. The franchise could compromise and make a smaller pizza. This would not cost as much, and there would be no need to spend extra money to expand the drive-through windows.

3. Communications between corporation headquarters and franchise organizations are not very good, as evidenced by the fact that the corporation didn’t even consider the franchisees when deciding on the expansion.

Strengthen Your Skills Operations Management and Services Read the following scenario and answer the questions. Use concepts from the chapter to defend your answer.

Scenario John Manor, the recently hired COO of Southern States Airlines, has decided to hire you as a consultant. Over the past few months, the airline has experienced several inefficiencies in ser- vice operations, such as long lines at the service desk and a lack of communication between employees and customers. This has resulted in a multitude of unhappy customers. From your experience in the industry, you are aware that smaller airlines tend to have better opera- tions and happier customers. Manor explains that the employees do not seem fully aware of the issues that exist. He wants them to engage and feel empowered in their positions, and he wants you to incorporate this into your recommendation. The following is a list of major issues that your recommendation needs to cover:

• Service employees are dismissive of customer questions about flight delays. This is due to a lack of information resulting from inefficient communication channels and a lack of training on how employees should respond to inquisitive consumers.

• There are issues with lost luggage because too many people are involved in the pro- cess of transporting it. Service desk employees also have no immediate way to track lost luggage.

• Service employees fail to acknowledge customers waiting to ask questions. They are often too involved in conversations with other service representatives.

• Flight attendants fail to provide adequate service; they don’t follow up with custom- ers on drinks, pick up trash, or perform other quality service activities.

• Pilots often refuse to give customers adequate information regarding flight delays after they board the plane.

Summary and Review

1. What is your analysis of Southern States Airlines’ problems in its transformation process? How do you recommend the inputs be improved so that the outputs are of higher quality?

2. How do you think that employees could be included in the solutions to these problems?

3. What kind of OM method(s) would you recommend for the luggage problem? 4. What are your recommendations for how technology could be used to solve problems

in this scenario? 5. How can communication improve? How can the flow of information improve the

transformation process? How would these improvements be implemented?

Case 16: Ford Motor Company—Managing Quality and Production in Just-in- Time Manufacturing Henry Ford established Ford Motor Company in 1903 in Dearborn, Michigan. At that time, only the very rich could afford to buy vehicles, and Ford wanted to make a car that the com- mon person could buy. The Model A was the company’s first vehicle, and this model was fol- lowed by several more over the first 5 years of the company’s existence. In 1908 Ford’s most famous model, the Model T, made its debut and was a catalyst for the company to achieve operational efficiency and mass production.

In the early years vehicle production was designed so that one worker built an entire vehicle over the course of about 8.5 hours. Ford was always searching for ways to make the pro- duction process more efficient in terms of time and cost. To do so, he set the vehicles up at assembly stations and assigned each worker a specified task. The workers would then go to each stand and perform their specific duty on each vehicle. This reduced worker production time from 8.5 hours to 2.5 minutes. Some workers were faster than others, which created bottlenecks in the production process. By 1913 Ford had perfected the system with a mov- ing assembly line. Workers remained stationary while the vehicle came to them when it was ready for their specialized task. This further reduced the amount of inputs (not only time, but parts as well) needed to produce the final output. This served as the model for the cost- effective, mass-production assembly line concept still used today.

Over the years, Ford Motor Company became known for mass-manufacturing capabilities, but the quality of its final products was lacking. In 2000 organizational leaders wanted to repo- sition Ford as a consumer products company by using the Six Sigma system, an innovative approach to OM aimed at improving quality. The process emphasizes quality in manufactur- ing and requires massive amounts of training. Ford identified the top quality complaints from customers and developed Six Sigma projects to address the issues. There are three criteria by which Ford chooses a project: its relation to customer satisfaction, its potential to reduce quality deficiencies by 70%, and its ability to save $250,000 in costs. Furthermore, to ensure quality and control in their Six Sigma projects, Ford utilizes a DMAIC cycle in which problems and their solutions are defined, measured, analyzed, improved, and controlled. Overall, the company has been able to successfully meet these standards.

To remain globally competitive, the company has used CAD to derive a model of the Ford Focus that could appeal to consumers around the world. This is all a part of a continued attempt to

Summary and Review

reduce the number of component parts and labor needed to make vehicles. Many compa- nies entering the global market tend to design vehicles specific to the tastes of a national or regional population. This drives up costs and reduces the quality of the final product. However, Ford CEO Alan Mulally conceived of the One Ford philosophy in order to produce a vehicle that is recognized and liked no matter where it is sold. This vehicle incorporates rec- ognizable Ford features—such as the curved roof and the function of the accelerator—that are known as Ford Global DNA.

Today Ford Motor Company is the second largest American automaker. In order to meet growing demand for its cars, the company is increasing its capacity. It has hired 3,500 hourly employees and plans to add 12,000 more over the next 2 years. Additionally, it is deviating from the traditional 2-week summer shutdown and is only shutting factories down for 1 week. Ford has also increased the number of shifts at factories from two to three or four at some locations. With its improved operational efficiencies, Ford appears to be gaining business (Goyette, 2013; Patton, 2000; O’Reilly, 2008; Szczesny, 2013; Seetharaman, 2013; Ford, 2012).

1. Describe some of the different processes Ford has used to improve its operational capacity.

2. How has Six Sigma improved the quality of Ford vehicles? 3. Why does Ford think it is important to develop a global car?