BUS 644 WEEK 1 ASSIGNMENT

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Gaining Competitive Advantage Through Operations

Learning Objec�ves A�er comple�ng this chapter, you should be able to:

Understand how business processes create compe��ve capabili�es that enable organiza�ons to sa�sfy customer requirements. Explain how opera�ons management can maintain an organiza�on's compe��ve edge through high-quality produc�on, convenient delivery, effec�ve customer service, and compe��ve cost. Describe key business processes including strategy development, product development, system crea�on to produce services and goods, and order fulfillment. Discuss why opera�ons are strategically important. List and define the steps necessary to link opera�ons to corporate strategy. Describe how opera�ons managers use informa�on technology to increase produc�vity, improve quality, provide a safer environment, and reduce costs.

A compe��ve advantage gives an organiza�on the edge over its compe��on. By improving profits, increasing market share, and expanding into new areas, opera�ons can work toward achieving this desired advantage.

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Control Brand; The Ba�le to Get on Your Plate: High Stakes in the Food Industry

2.1 Achieving Competitive Advantage

Opera�ons presents top management with many opportuni�es to develop compe��ve advantages. A compe��ve advantage is a capability that customers value, such as short delivery lead-�me or high product quality that gives an organiza�on an edge against its compe��on. When properly used, opera�ons can be an important tool for improving profits, increasing market share, and developing new markets. A firm's market share is its percentage of sales in a par�cular market, that is, its sales divided by total sales for all organiza�ons compe�ng in a par�cular market.

An organiza�on creates a compe��ve advantage by giving customers what they want in a be�er way than other companies. What do customers want, or in other words, what do they value? Figure 2.1 provides a model for understanding how an organiza�on can deliver compe��ve advantage to its customers. An organiza�on should know its external environment (threats and opportuni�es) and its internal environment (strengths and weaknesses), and have a clear understanding of the customers it is trying to serve. This is o�en called "SWOT analysis," for strengths, weaknesses, opportuni�es, and threats. An in-depth understanding of customer requirements allows the firm to determine

a set of compe��ve capabili�es that will enable it to delight, rather than merely sa�sfy, customers. These compe��ve capabili�es are, in turn, the result of well-designed business processes. These key business processes are cross-func�onal and require opera�ons managers to work closely with their counterparts in accoun�ng, finance, informa�on systems, marke�ng, and other disciplines within the organiza�on.

A list of factors that customers value is provided in Figure 2.1. The factors that customers value as well as the rela�ve importance of each factor vary from industry to industry and from customer to customer, but this list presents a good star�ng point. Figure 2.1 also provides a set of compe��ve capabili�es that are affected by decisions made by opera�ons managers. These compe��ve capabili�es help the organiza�on meet customer requirements, although there is not a one-to-one correla�on between a compe��ve capability and a customer requirement. For example, flexibility in opera�ons enables firms to meet specific customer needs quickly, but it may also impact product quality and price.

Figure 2.1: Model for developing compe��ve advantage

As shown in Figure 2.1, organiza�ons must create business processes that enable the organiza�on to improve the compe��ve capabili�es needed to meet customer requirements, thereby sa�sfying customers. However, an organiza�on's impact on compe��ve capabili�es is not immediate, that is, no firm can create flexibility, produc�vity, or quality. Compe��ve capabili�es are indirectly impacted through effec�ve design and the implementa�on of the business processes that help the firm meet customer requirements. Figure 2.1 also provides a list of business processes that are related to opera�ons. This list also may vary from industry to industry and from company to company within the same industry. Other processes not listed, such as those to recruit personnel or raise capital, are important, but they are not discussed in this text mainly because they are not central elements of opera�ons management.

Upcoming sec�ons in this chapter examine customer requirements, compe��ve capabili�es, business processes, and technology, which is a cri�cal tool for developing compe��ve advantage. Coverage of the environmental factors o�en appears in a course on business strategy or business policy and, with the excep�on of global compe��on and technology, will not be discussed here.

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Because gasoline is, essen�ally, an undifferen�ated product, customers purchase it based on convenience, price, service, and loca�on.

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2.2 Customer Requirements

Customers are at the core of business opera�ons. Sa�sfying customer requirements leads to a compe��ve advantage if an organiza�on can meet needs be�er than its compe�tors. If these requirements were equally valued by all customers, regardless of product or industry, assessing customer requirements would be easy. However, there is no universal set of customer requirements for all industries or for all customers within one industry. For example, customers who purchase gasoline buy based on convenience, price, and service because gasoline is (despite industry claims to the contrary) an undifferen�ated or standard product that is virtually iden�cal from one company to the next. On the other hand, many customers buy automobiles based on product features, performance, quality, and price because automobiles are differen�ated products. Some automobile buyers are less concerned about price and buy for the status associated with a highpriced, high-performance luxury car with all possible features. The same customer may have requirements that change over �me, so organiza�ons must con�nuously measure and evaluate customer requirements.

To be successful at building compe��ve advantage, organiza�ons should know who their customers are, and what their customers want. By understanding their customers' requirements, organiza�ons can build a compe��ve advantage that enables them to compete in global markets. Understanding these customer requirements is essen�al for focusing on the right compe��ve capabili�es and designing the best business processes. A brief descrip�on of customer requirements is listed in Figure 2.1.

Mee�ng specific customer needs—Value is created by precisely mee�ng specific customer needs. For example, one approach to providing payroll so�ware is to provide a generic package that many firms can use, but that does not exactly fit any given customer's needs. The generic package is usually less expensive than a so�ware package wri�en specifically for a par�cular organiza�on. The generic package may require extra work by the customer, or the customer may decide to pay an addi�onal fee to have the so�ware customized to meet its needs. A compe��ve advantage can be gained by crea�ng so�ware with built-in flexibility, so that it meets the different needs of various customers. The compe��ve advantage of the so�ware is greatly enhanced when this flexibility is offered and the price is close to the price for so�ware that lacks this flexibility. This approach, some�mes called mass customiza�on, enables firms to design, produce, and quickly deliver products that meet specific customer needs at a price that rivals mass-produc�on. Mass customiza�on is the firm's ability to produce differen�ated products with cost effec�veness, volume effec�veness, and responsiveness to customers' needs. Volume effec�veness is the ability to produce goods and services in large enough quan��es to meet overall demand. Quick response—It is usually an advantage for customers to have products available immediately upon request. Late delivery may create delays, increase costs, and create other problems for customers. Early delivery o�en creates storage problems, raises the risk of the� or damage as the item sits in inventory, and increases the need for working capital to carry inventory. Long lead �mes force customers to commit to the purchase decision before they need the product. This situa�on can lead to mistakes because the circumstances may change during the lead �me. For example, buying next summer's wardrobe at a clearance sale in September incurs substan�al risk for the style-conscious consumer. Similar problems occur when organiza�ons force their customers to contend with long lead �mes when placing orders. Product performance and features—Generally, high-performing products with many features are preferred by consumers, especially when acquired for li�le or no addi�onal cost. Organiza�ons that are innova�ve in design and produc�on of services and goods can achieve this. When it was first proposed that automobiles come equipped with air bags to increase safety, there was great concern that the cost of the air bag (es�mated at about $600–700 each) would make the price of an automobile too high for the average consumer. Today, air bags are touted as an important safety feature; some vehicles have six, seven, or more. The cost of air bags has dropped drama�cally because of be�er design, economies of scale in produc�on, and produc�vity improvement through learning how to make the product be�er and cheaper—o�en called the learning curve. This is true for a variety of goods and services from the iPhone to automa�c braking systems for vehicles, to mobile phone plans that offer more minutes as well as data downloads and Internet access at lower prices than voice-only plans from a few years ago. Product quality—To the customer, product quality means fitness for use. Does the product do what the customer wants, and does it perform well? Quality is broadly defined and can include both product performance and features. Price—The amount paid for a service or good is s�ll important to consumers. In fact, it is the other half of the value equa�on. Value is what a customer gets for the price paid. Service—Service is broadly defined. It includes companion ac�vi�es, such as helping to arrange financing for a purchase or helping to install equipment. It also includes service a�er the sale—advice on opera�ng a piece of equipment, providing repair parts, and processing warranty claims. If an organiza�on can provide be�er service than its compe�tors, it may achieve a compe��ve advantage.

A barber chair can easily be adjusted to best fit each customer's height. This exemplifies opera�onal flexibility, which is the ability to alter produc�on processes in response to customer demands, with minimal costs or delays.

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2.3 Competitive Capabilities

Compe��ve capabili�es are the outcomes of well-designed business processes and, in turn, enable a firm to sa�sfy its customer requirements. They are outcomes that an organiza�on has achieved, such as flexibility, so that a customer's needs can be met precisely, or produc�vity, so that costs can be kept low. The purposes of this discussion are to iden�fy and define some of the most important capabili�es required by most organiza�ons and to describe how they might be achieved. The list of compe��ve capabili�es in Figure 2.1 is not intended to be exhaus�ve. The emphasis is on opera�ons and discussion focuses primarily on opera�ng issues and concerns.

Flexibility

Flexibility, as defined for opera�ons, is the ability to modify produc�on from one product to another in response to customer demands with minimal costs and delays. With flexibility, customer sa�sfac�on increases and delivery �me is reduced. Flexibility in opera�ons may be as simple as a barber's chair that can be adjusted for a customer's height. It may be an employee at a medical clinic who can schedule pa�ents, access electronic medical records, and bill insurance companies for medical claims. It may be a metal-bending press that can quickly be changed to produce a van door panel or a car hood. Flexibility can be helpful in gaining a compe��ve advantage in a variety of ways:

With the ability to produce a wide variety of products quickly and cheaply, marke�ng can meet specific customer demands more closely and at a lower cost. Timely deliveries are possible because flexibility implies that inexpensive and quick changes can be made from one product to another. Changeover costs are reduced because it takes less �me and effort to change produc�on resources, thereby reducing opera�ng costs. When sudden shi�s in market preference occur, the cost of redesigning facili�es and equipment is reduced because the system can more easily adapt to producing new and different products.

Marke�ng departments would like to sa�sfy all demands made by any customer because selling is part of the job. Sales can be more easily achieved when a wide variety of products is available for customer choice. Marke�ng also aims to avoid any unnecessary delays in delivering the service or good. Reques�ng that opera�ons keep adequate stock of inventory for all items is one approach that can be used in the produc�on of goods. Inventory, however, is very expensive to hold. Also, a high level of inventory does not ensure that the firm has what the customer wants because companies o�en have in inventory what is not selling, rather than what is selling. An organiza�on can maintain quick delivery and s�ll keep finished goods inventory low through reducing the changeover �me between products, thereby adjus�ng produc�on to meet the customer's needs.

Real World Scenarios: Flint Auto Stamping Creates Flexibility Through Set-up Time Reduc�on

Flint Auto Stamping uses flexibility to gain a compe��ve advantage. Stamping involves sending flat sheets of steel through a series of large presses that shape the metal by hi�ng it with dies (molds). The dies are formed to the shape of the finished product. Flint Auto Stamping produces le�-front and right-front quarter panels (fenders) for cars. To change from le� to right quarter panels, the press must be stopped, and the dies that shape the metal must be changed. At Flint Auto Stamping, 4–8 hours are required to change dies. If they change dies each day, they will spend four to eight hours each day without produc�on. Because of these delays, management will probably choose long produc�on runs so the changeover �mes and costs will not be excessive. Longer produc�on runs will lead to greater inventory of one part. Demand for the quarter panel not being produced must be sa�sfied from inventory because car assembly requires both front quarter panels at the same �me.

If the �me required to make the change was reduced to only 15 minutes, then management could afford more changeovers because less �me would be taken away from produc�on. More changes mean less inventory buildup, because the �me un�l the next change is short and less inventory is needed to supply the part that is not being produced. Less inventory leads to lower cost, which is a compe��ve advantage.

Greater flexibility is a result of good planning and effec�vely organized changeover procedures that use wri�en documenta�on and dedicated people—engineering, management, and labor—who are willing to work together. Flexibility can also be enhanced through the applica�on of the most current technologies.

For service organiza�ons, flexibility can be achieved by cross-training employees. Many service opera�ons are labor intensive; if an organiza�on wants to deliver a variety of services, it is important to train employees to perform more than one func�on. For example, an automo�ve repair firm may repair brakes, align wheels, and install ba�eries. If it has only one person who specializes in performing each service, it may have customers wai�ng for ba�eries, while no work is being done in brakes and wheel alignments, and two idle workers are present. Cross training can eliminate a problem such as this.

Flexibility in the produc�on process also permits facili�es to adapt to market changes. Disrup�ve technology, geo-poli�cal change, and global trade can cause rela�vely quick changes. Drama�c changes make it difficult for companies to maintain their compe��veness. Without the flexibility to adjust, firms may face lower profitability, declining market share, and even bankruptcy.

Highlight: Market Changes in Communica�on, Automo�ve, and Health Care Industries

The advent of farming equipment caused farm labor in the United States to decline from 95% to less than 3%. This shi� allowed workers to focus on crea�ng and producing consumer goods and services.

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iPhone as Disrup�ve Technology. A disrup�ve technology is a product that is substan�ally be�er than exis�ng products: The iPhone is one such example. Disrup�ve technology makes it difficult for other companies to compete. For several years, the iPhone was available only with AT&T service, but as service expanded to include Verizon as an op�on, a large segment of the market purchased the iPhone. This had a nega�ve impact on sales of the BlackBerry unit sold by Research In Mo�on (RIM), and RIM is struggling to regain lost market share with new products that are designed to compete with the iPhone. So far, these products have not been successful compe�tors. As a result, the stock price for RIM dropped from more than $80 per share to less than $15 in a very short �me. Over the same period of �me, Apple's stock price has increased to more than $600 per share. Supplying new, be�er performing products to the market more quickly could possibly have helped RIM maintain its market share and financial performance. Apple's ability to design and improve its technology quickly—flexibility in design and produc�on—and RIM's inability to do the same determine in large part their rela�ve performance.

Oil Price and the U.S. Automobile Industry. Since 1973, the date of the first oil embargo, the U.S. automobile industry has faced several major changes in market preference between large and small cars. Prior to the embargo, gasoline was selling for $.30/gallon, but a�erward, gasoline doubled to $.60/gallon, sending shock waves through the industry. In the early-1980s, the price more than doubled again to about $1.30/gallon. In 1986, with crude oil prices falling, the price of gasoline dropped drama�cally to about $.70/gallon. However, the price soared again in 1990 to about $1.50/gallon, only to drop again in 1998 to $1.10/gallon. From 2000 to 2004, the price of gasoline fluctuated from as high as $1.90/gallon to as low as $1.20/gallon. By 2007, it approached $5.00/gallon, but it was back below $2.00 a gallon the next year. As of late-2012, it stands at about $3.50/gallon, and it is not clear what the cost will be in the future.

Each drama�c increase in gasoline prices has decreased the demand for large vehicles with 8-cylinder engines and increased the demand for more fuel-efficient small cars with 4-cylinder engines. Once gasoline prices stabilized (or at least remained stable for a while) larger vehicles with 8-cylinder engines were in demand once again. For many years, the produc�on lines that machined the engines were not flexible; they were set up to make only one type of engine. It was very �me consuming and costly to shi� produc�on from 8-cylinder engines to 6-cylinder or 4-cylinder engines, and it was just as expensive to shi� back when gasoline prices dropped. This inflexibility was a func�on of equipment design. When determining the most effec�ve level of flexibility, decision makers in the automobile industry should consider the tradeoffs between shi�s to new technology, extra costs of designing and opera�ng flexible machining centers for engine blocks, and the cost of conver�ng inflexible systems each �me crude oil prices dras�cally change.

Global Trade and Health Care. For many years, items once manufactured in the United States such as apparel, furniture, and televisions, have been produced in other countries, such as Mexico, China, and India. Now, global trade is impac�ng health care as well as hospitals. Other countries are a�emp�ng to lure U.S. pa�ents abroad for surgical and other procedures because the costs for these procedures are far less in other countries. This small but growing trend, called medical tourism, may eventually impact hospitals in the same way that global trade has impacted manufacturing. Health care providers must find ways to keep costs in check or reduce them, improve service quality, and enhance customer service to maintain their market posi�on.

Productivity

Produc�vity is a mathema�cal calcula�on; it is the ra�o of the outputs achieved divided by the inputs consumed to achieve those outputs. As produc�vity increases, organiza�ons can do the same work with less effort, or can do more work with the same effort. Increases in produc�vity reduce costs, lower prices, and provide a basis for compe�ng in world markets. While produc�vity is defined by a mathema�cal equa�on, efficiency is a general descriptor of the �me or effort needed to do work. Efficiency is o�en used to mean achieving an outcome with a minimum amount of effort, that is, no waste. In this way, efficiency addresses the same challenges as produc�vity, which is a precise measure. More is discussed about produc�vity in a later chapter.

Produc�vity improvements are beneficial to the organiza�on, to management, to consumers, and to workers. In any situa�on, there are limits on resources, capital and equipment, material and energy, and labor. Addi�onally, none of these resources is free. If an organiza�on can produce more products with fewer resources, while improving quality, it will achieve two significant advantages. First, the unit cost of the product will decline because less labor or fewer materials are required to produce each unit. This, in turn, makes the product cost less and the company more price compe��ve. Second, there will be unused resources that can be used to develop and produce new products and enhance exis�ng products. When significant increases in produc�vity have been achieved, revolu�onary changes in resource alloca�on have occurred. These types of shi�s in resource alloca�on have changed the face of economic development in the United States three �mes.

The First Revolu�on

Increases in farming produc�vity resul�ng from the development of be�er methods and machinery have caused farm labor in the United States to decline from 95% in the early 1800s to less than 3% today. Those who had been working on the farms then became free to work in other areas producing a vast array of consumer goods. It also provided the opportunity to expand leisure �me by reducing the work �me to only 40 hours per week. At the same �me, the prices consumers paid for food as

a percentage of income have declined dras�cally. Consumer goods such as automobiles, home appliances, and electronic gadgets were developed and produced by labor freed from farming tasks. These changes have improved business opportuni�es, created new jobs, and improved living standards. These improvements would not have been possible without the development of be�er methods and machinery that allowed companies to reallocate their human and physical resources from farming to the produc�on of goods.

The Second Revolu�on

During the late-1800s and the first half of the 1900s, improvements in manufacturing produc�vity freed resources for the rapid expansion of service opera�ons. As manufacturers invested in equipment to automate produc�on, less labor was needed to make the same amount of finished goods. Banking, health care, insurance, retail, and other service

industries grew because of the labor freed by mechanizing opera�ons. Greater opportuni�es for services became possible because labor produc�vity improvements in manufacturing allowed the U.S. economy to do more with fewer people and resources. This is how real improvement in living standards can be made.

The Third Revolu�on

The next wave of produc�vity improvements began in the 1950s with the development and commercial applica�on of computers. This phase, which some call the post-industrial era, began with large, difficult to operate mainframe computers used by governments and a few very large businesses. Improvements have progressed with the use of large scale databases, telecommunica�ons technology, the personal computer, the Internet, and smart devices. Now, the possibili�es and poten�al uses of these kinds of technologies are endless. As this technology is applied to problems in decision making on the factory floor, in the office, in the hospital, in government, and so and on, produc�vity of blue- and white-collar workers will increase. This technology allows fewer people to do more work.

Building Quality into Products

For firms to remain compe��ve in today's global markets, they must produce high-quality products. To remain cost-compe��ve, organiza�ons must find ways to improve product quality without increasing costs. Technological advances can lead to reduced costs, improved product performance, and enhanced quality. Enhancements in quality can result from applying new technology (such as advances in micro and robo�c surgery), developing new materials (such as high-strength carbon fiber composite materials to replace steel), and improving opera�ons through be�er management and training.

Highlight: Building a Culture of Quality: China and Japan

The importance of building quality into products is evident in a growing reluctance to purchase certain products, including food and toys from China because of well-publicized failures in China's produc�on systems. For China to maintain and grow its economy through global trade, it must create a culture of quality that will root out these problems, and build products that customers will seek out and pay a price premium to obtain. This is the approach Japan has taken, beginning in the 1950s under the leadership of W. Edward Deming and Joseph Juran. Using their quality principles, Japan changed its percep�on from low-quality trinket producer a�er World War II to the maker of high-quality, high-technology products by the 1970s. However, even with this renewed percep�on, a long history of high-quality products can be damaged. For example, the substan�al quality defects involving Toyota automobiles with unintended accelera�on have had a significant and nega�ve impact on sales. The quality defects and the impact of the 2011 tsunami on key suppliers' ability to deliver components have lowered Toyota from the number one spot in worldwide automobile sales, a posi�on now occupied by General Motors (GM).

High Quality and Low Costs: The Ideal

At one �me, many consumers believed the old adage "You get what you pay for." As a result, consumers thought they had to pay more to get high quality. Although this statement has intui�ve appeal, history has shown that improvements in quality can be achieved while costs are held constant or even reduced. Consumer electronics such as flat panel televisions and home security systems have seen large improvements in quality while prices have remained the same or have dropped substan�ally. The flat panel televisions of today offer be�er picture quality and features for about a third of the price of those from 10 years ago. Research and development has helped to drive these improvements. Automobiles, which have risen in price over the past 30 years, have had substan�al innova�on and improvement, drama�cally enhancing quality. Passenger safety, fuel economy, entertainment and naviga�on systems, and rear view cameras are now mainstay features. The price of today's vehicles compared with vehicles from 30 years ago is rela�ve if prices are adjusted for infla�on.

It is true that high quality can be achieved with high costs and that there will always be a market for exclusive products. But mass-market appeal requires the right combina�on of quality and lower costs, as illustrated in Figure 2.2. Organiza�ons that can come closest to achieving this ideal product will have a tremendous advantage over the compe��on.

Figure 2.2: Blending quality and costs

Moving Toward the Ideal Through Technology

To move toward the ideal of high quality and low costs, improvements in product and process technology should be considered. Recall from Chapter 1 that product technology refers to the way the product func�ons, and process technology refers to the way the product is made.

A look back at the evolu�on of television provides a perspec�ve on product technology's poten�al impact on quality and cost. In the mid-1950s, when color television was first introduced, televisions had a large picture tube and a dozen or more smaller tubes inside, and each unit cost about $600. Minimum wage at the �me was $1.00/hour. Picture quality was poor and the life of a color television set was only a few years. Refinements in technology, including transistors and printed circuit boards, allowed producers to reduce costs and significantly improve quality. In 1982, a 25-inch color console television cost about $500. With today's digital technology, a 50-inch, non-3D, flat panel television costs about $600, and the minimum wage is now more than $7.00/hour. Televisions are now an especially good bargain because these prices are not adjusted for infla�on.

Process technology is the method of making a product, so it may not be possible to see the improvement in the product itself. For example, gall bladder surgery is rou�nely completed using microsurgery, which is less invasive, takes less �me, and has a shorter recovery period than other methods. The product remains the same, removal of a non-

During the past 30 years, substan�al innova�ons have been made to enhance the quality of today's cars. Features include improved passenger safety, fuel economy, and entertainment and naviga�on systems.

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E-business is an electronic pla�orm that enables fundamental changes in the way organiza�ons, supply chains, and customers interact.

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performing gall bladder, but only the process and the quality change. In manufacturing, improvements in process may also include the use of machines to complete difficult and demanding jobs. It is likely that most vehicles currently on the road are held together with spot-welding completed by robots rather than people. Robots will not �re or fail to show up for work. Robots can complete high-quality welds and place them in the exact same loca�on each �me. By placing the weld in precisely the right place each �me, fewer welds are needed to make a strong frame than if placed by humans. In most cases, mechanized welding of all types is a process improvement that leads to faster, cheaper, and stronger welds than manual welding.

Moving Toward the Ideal Through Be�er Management

Higher quality and lower costs can also be achieved through be�er management prac�ces, including quality and cost-management programs that trim waste from opera�ons, be�er training and mo�va�on for employees, and greater a�en�on to machine maintenance.

But which should be first: new technologies or improved management prac�ces? Improved management prac�ces should come first. Full benefits from implemen�ng new technology will result when exis�ng opera�ons are well understood and running properly. Implemen�ng new technology prior to correc�ng poor management systems usually leads to li�le, if any, return on the organiza�on's investment. If managers are having difficulty with exis�ng opera�ons processes, it is unlikely that they will be able to understand and control more sophis�cated technology and opera�ons.

Time

Compe�ng on �me has become an important way to build compe��ve advantage because rapid market changes place a premium on quick response. Time-based compe��on is a strategy of seeking compe��ve advantage by quickening the pace of cri�cal organiza�onal processes, such as product development, order entry, produc�on, distribu�on, and service. The emphasis is on end-to-end �me (i.e., aggregate �me) from the genera�on of new product concepts to the delivery of finished products, rather than the �me to perform specific tasks or func�ons. Time is a fundamental business performance variable. Time, therefore, becomes one of the cri�cal objec�ves for organiza�ons redesigning their business processes. Organiza�ons such as Hewle�-Packard, L.L. Bean, and GE are compe�ng on �me. Each company is quickly introducing new products. These companies, and many others, are reducing �me from product development as well as order fulfillment.

E-Business

E-business (i.e., electronic business) o�en means different things to different people. E-business involves the use of electronic pla�orms to conduct company business. It means applying computer and informa�on technology to design, plan, and manage opera�ons and to track transac�ons between organiza�ons and suppliers, and between an organiza�on and its customers. Two decades ago, computer systems focused on repor�ng results and tracking performance. Today, computer technology has become a proac�ve tool for working with suppliers and customers. The primary reasons for the differences between the e-business systems of today and the computer systems of 20 years ago include advances in so�ware development, and substan�al improvements in speed, power, size, and costs of hardware. Today, processing speeds, database capacity, telecommunica�ons capability, networking, and handheld devices (among others) have improved exponen�ally while costs have dropped dras�cally. These improvements are powerful forces that enable e-business solu�ons to make fundamental changes in the ways that organiza�ons, supply chains, and customers interact.

E-business can be divided into two elements: business-to-business (B2B), or supply chains, and business-to- consumer (B2C), or customer rela�onships. B2B refers to transac�ons between organiza�ons in a supply chain, such as IBM selling computer services to Priceline.com or Boeing. B2C refers to transac�ons between an organiza�on and its final customer, such as Amazon.com selling books or music to consumers via the Internet.

Supply Chain Management

Supply chains encompass all ac�vi�es associated with the flow and transfer of goods and services, from raw material extrac�on, through use by the organiza�on that sells to the final consumer. In oil refining, that includes everything from loca�ng and pumping crude oil, to the sale of gasoline at the service sta�on. Informa�on flows in both direc�ons along the supply chain while materials flow, at least ideally, in a consistent and orderly fashion toward the final consumer. Service providers play an essen�al role in helping organiza�ons design, plan, and manage these informa�on and material flows so that efficiency, speed, and on-�me delivery are achieved. Engineering firms design and install material handling systems, transporta�on companies move materials between facili�es, and computer-based companies design and implement informa�on systems to help manage these ac�vi�es.

Supply chain management is the integra�on of these ac�vi�es through improved supplier rela�onships to achieve a sustainable compe��ve advantage for all members in the supply chain. It is an essen�al ingredient for

compe��on. Progressive organiza�ons have recognized that compe��on is no longer between individual firms, such as between Toyota and Ford, or between GM and Volkswagen, rather it is between their respec�ve supply chains. The development, design, produc�on, marke�ng, and delivery of a new car should be a coordinated effort that begins with extrac�ng raw materials from the earth, con�nues through design, fabrica�on, and assembly, and ends with fit and finish in the dealer's showroom. When a customer purchases a car from Ford, for example, the customer chooses the output of the en�re supply chain and pays all the par�cipants in that chain. To be successful, Ford must develop methods to manage the supply chain beginning with basic materials, such as iron ore, sand, and crude oil, and ending with the dealer. That does not necessarily mean ownership or even direct

control, but it does imply mechanisms that influence decision making and impact performance. These rela�onships should work to the benefit of all the par�cipants. The impacts of supply chain and supply chain management are evident in two recent examples.

Highlight: Supply Chains Are Keys to Success

When Chrysler and General Motors faced bankruptcy in late-2008 and 2009, there was grave concern for what would happen to the supply chain. Many of Chrysler's and General Motors' suppliers were also suppliers to Ford, Honda, Toyota, and other assembly plants in the United States. Bankruptcy of Chrysler and General Motors would most likely lead to bankruptcy of key suppliers, which could create problems with the en�re automobile industry in the United States. To resolve this issue, the bankruptcies were orchestrated so the two automakers and their suppliers con�nued business. The automakers exited bankruptcy stronger and more likely to succeed. The recent successes of Chrysler and General Motors, as well as Ford (which did not file for bankruptcy) illustrate the success of these efforts.

The tsunami that hit Japan in 2011 created significant damage to key automo�ve suppliers in Japan, and forced Toyota to scale back produc�on. Many of these suppliers were located in the vicinity of the tsunami, and product facili�es were damaged and buildings were without power, making cleanup and produc�on difficult. Despite the comprehensive and effec�ve con�ngency plans in place, the magnitude of the disaster was so large that Toyota could not maintain worldwide produc�on.

Customer Rela�onship Management

Customer rela�onship management (CRM) is a process to create, maintain, and enhance strong, value-laden associa�ons with customers (both individuals and organiza�ons) that purchase products. CRM moves beyond short-term transac�ons to build long-term rela�onships with valued customers, distributors, and dealers. Firms using CRM a�empt to build strong economic and social connec�ons by promising and delivering high-quality goods and services at a fair price and in a �mely manner. Increasingly, firms are focusing on building mutually beneficial rela�onships with customers, distributors, and dealers instead of working to maximize the profit on any individual transac�on. Firms can use the following ideas to develop stronger rela�onships with customers.

Financial benefits—Firms can build value and sa�sfac�on by adding financial benefits. For example, airlines offer frequent flyer programs, hotels provide room upgrades to guests with a certain number of visits, and supermarkets give preferred customers discounts on items. Social benefits—Firms can build allegiance by increasing their social bonds with customers by learning individual needs and then personalizing service. Ritz-Carlton hotel employees treat customers as individuals by a�emp�ng to learn and use their names. The hotel records specific informa�on about customer preferences in a database, and other Ritz-Carlton hotels around the world use this informa�on. Customers with a special request in one hotel should find that request met the next �me they stay at a Ritz-Carlton hotel, even if it is in another city or country. Structural �es—Firms can add value by crea�ng addi�onal support services that make it easier to buy products from them. A business might supply customers with special equipment or online links that help them manage their orders. For example, Dell creates personalized websites for its large commercial customers that provide most of the informa�on and support the customer may need. In addi�on to handling purchases, the site also supplies tailored technical support, diagnos�c tools, and other features designed for the customer.

Real World Scenarios: Amazon Makes It Easy

Amazon.com started as an online bookseller about 20 years ago, sta�ng that its goal was to become the largest bookseller in the world. The company grew rapidly for several years before it encountered very challenging �mes when the dot-com bubble burst. Amazon understood that its compe��ve advantage was access to a large, growing, loyal customer base, so it expanded its services to include a wide variety of products. Amazon also decided to provide brokerage services to other companies, so its customers could have access to a wider selec�on of products. Items found on Amazon's website may be owned, warehoused, and shipped by Amazon's partner company. Amazon receives a por�on of the selling price without any associated costs except lis�ng the items on its website. Amazon is o�en the first place that many online shoppers search when buying almost any product. This growth in business has driven Amazon's stock price from single digits a�er the dot-com bust to nearly $200/share. It also has driven many brick and mortar book stores out of business and nearly forced others into bankruptcy.

The lunar landing required a coopera�ve effort of several teams. This feat would have been impossible to achieve if only one team had been working toward this goal.

AP Photo/NASA/Neil A. Armstrong

Control Brand; The Entrepreneurs, Part 2: TOMS Shoes and Frontera Foods

2.4 Designing Business Processes That Build Competitive Capabilities

Organiza�ons do not control customer sa�sfac�on directly. When a customer purchases a product, it is through the consump�on of the product that customer sa�sfac�on is achieved. As shown in Figure 2.1, focusing on business processes is a cri�cal factor in achieving compe��ve capabili�es, which leads to customer sa�sfac�on, which, in turn, leads to organiza�onal success. An organiza�on may have several different processes and many sub-processes within each process. The discussion here is limited to four key processes that most organiza�ons have, and that are substan�ally impacted by opera�ons: strategy development, product development, development of systems to produce services and goods, and order fulfillment.

Strategy Development

As described in Chapter 1, strategy should drive an organiza�on toward its ul�mate objec�ve. A strategy considers the threats and opportuni�es in the environment, and it measures the strengths and weaknesses of the organiza�on. Strengths, weaknesses, opportuni�es, and threats represent inputs to strategy development. The strategic planning process provides a path toward the organiza�on's objec�ves. This path includes se�ng goals, developing ac�on plans for achieving the goals, and determining resource requirements. Developing a strategy requires a team with specialized knowledge from different func�onal areas or disciplines. When opera�onal plans are linked to financial, marke�ng, engineering, and informa�on systems development plans, synergy can result. Synergy involves coopera�ve ac�ons (teamwork) in which the total effect of the ac�ons is greater than the sum of the individual effects (i.e., the whole is greater than the sum of its parts). For example, pu�ng a man on the moon is a feat that required a coopera�ve effort no single part of the team could have achieved, no ma�er how long and hard it worked. A brief descrip�on of the process for strategy development is provided later in this chapter.

Product Development

Product development is a teamwork-oriented process that begins with the organiza�on's strategy and analysis of the markets as inputs. The team develops a product concept, generates a product design, and provides a process design for producing the service or good, which are the outputs. Knowledge regarding customer preferences, technology, opera�ng capabili�es, financial constraints, distribu�on systems, and so on, should be available from specialists in accoun�ng, finance, marke�ng, research and development, engineering, informa�on systems, and opera�ons.

Developing Systems to Produce Services and Goods

Developing systems to produce the services and goods designed in the product development process requires firms to assemble resources—people, facili�es and equipment, and material and energy. These resources may be part of the organiza�on, or they may be contracted by another firm. Important knowledge inputs needed to develop an effec�ve produc�on system are the product and process designs created in the product development process. These designs help to guide decision making.

Tradi�onally, these topics are included in opera�ons management, but organiza�ons that want to ensure success recognize the interdisciplinary nature of these tasks. Accoun�ng and financial informa�on is necessary for decision making, and human resources are necessary to make the system work. Engineering principles, especially industrial engineering, are an important founda�on of this design for both services and goods. More is covered on this topic later in the book.

Order Fulfillment

This process involves all the steps required to sa�sfy a customer's order, from obtaining an order and entering it into the organiza�on's informa�on system, to delivering the order. The primary inputs are from the customer, marke�ng, and the people responsible for designing the facility that will produce the service or good. The desired output is a sa�sfied customer, not the delivered product. While this difference may seem small, it is important to remember that an organiza�on is only successful when customers are sa�sfied. Order fulfillment should be a highly integra�ve teamwork-oriented process that includes many disciplines and ac�vi�es, such as sales, credit verifica�on, analysis of working capital needs, and selec�ng shipping routes and transporta�on alterna�ves. Producing the services and goods intended to sa�sfy customer requirements is an important part of order fulfillment. This execu�on is dependent upon the organiza�on's ability to plan and manage opera�ons, including produc�on planning, scheduling, inventory control, purchasing and material management, and project management. These ac�vi�es influence and are affected by ac�vi�es carried out in other parts of the order fulfillment process. Details of the order fulfillment process from the opera�ons management perspec�ve are provided later in the book.

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2.5 Strategy Development and Operations

Strategy begins with the organiza�on's goals and includes the key policies that are established to direct ac�ons toward mee�ng those goals. As an organiza�on defines its corporate strategy, a framework is created that enables the firm to develop a set of func�onal strategies consistent with and integrated to the corporate objec�ves. Research and development, marke�ng, engineering, opera�ons, and other func�onal areas need to develop objec�ves, plans, and programs that are consistent with corporate goals.

An advantage that can be achieved by improving opera�ons should be pursued because it fits the organiza�on's overall goals, not because it fits a narrowly defined opera�ng objec�ve, such as minimizing transporta�on costs. Minimizing transporta�on costs, for example, may not be in the best interests of an organiza�on if inventory holdings or other costs would increase too much, or if product quality or on-�me delivery would be nega�vely affected. Opera�onal goals should be important only when they help the organiza�on reach its objec�ves. The following sec�ons describe how corporate strategy is linked to opera�ng strategy.

Linking Corporate Strategy to Operations

Corporate strategy and opera�ng strategy must be carefully linked. Opera�ons can become a posi�ve factor contribu�ng to organiza�onal success, rather than a nega�ve or neutral factor. To make this happen, facili�es, equipment, and training should be viewed as a means to achieve organiza�onal, rather than opera�onal, objec�ves.

Real World Scenarios: Midas and Genoa Ford, Same Service but Not Compe�tors

A typical Midas shop and the service center at a dealership such as Genoa Ford provide the same service, but are they really compe�tors? Each has adopted different strategies and tailored their opera�ons to fit those strategies.

Midas is in the automo�ve repair business. Its strategy is to provide a narrow range of services at low cost. Na�onal adver�sing is used to develop wide geographical coverage. The company is not a full service repair shop, but concentrates on muffler repair, brakes, and shock absorbers. It is successful because it quickly delivers quality services at low cost. How are opera�ons important to Midas?

1. Limited service requires a limited inventory that allows convenient storage close to where materials are needed to perform opera�ons. 2. Mul�ple shops and limited service permit careful engineering of the necessary hand tools and work procedures. These special tools and work procedures make shop employees

more efficient. Midas can apply the same tools and methods to a large number of shops, ensuring that ini�al engineering costs are easily covered. 3. Because employees have few varia�ons in service, they learn how to perform these jobs more quickly. 4. Workers' skill levels and knowledge requirements focus on a limited area of service so they quickly become experts in a par�cular area.

As part of a Ford dealership, Genoa Ford's Service Center provides a full line of automo�ve repairs. In contrast to Midas, this service opera�on competes without adver�sing or na�onal appeal. It also has a different opera�ng strategy. In order to maintain the dealership, Genoa Ford must be able to sa�sfy a wide variety of customer needs. It offers transmission work, body work, engine repairs, and other tasks in addi�on to working on brakes, shocks, and mufflers as Midas does. Genoa Ford designs its opera�ons to match its objec�ves.

1. The facility is adaptable to changing needs. For example, on one day, a single repair stall may be used to wash a new car, repair a door lock, fix an air condi�oning leak, or tune an engine.

2. Genoa Ford has more tools than a specialist like Midas does because Genoa Ford offers a greater variety of jobs. 3. There is some job specializa�on among workers. All employees will not be able to do everything, but employees s�ll need a wide range of skills because Genoa Ford does not

have enough of one par�cular job to allow personnel to specialize. Cross-training is necessary. 4. The workers' skill levels and pay rates are higher than workers at Midas. 5. A significant inventory of many different parts is maintained. These parts are physically separated from the repair stalls and controlled by specialists in parts.

As a result of its strategy, Genoa Ford has higher costs and charges higher prices than Midas does for comparable work. When a car needs rou�ne exhaust system work, it can be taken to a na�onal chain such as Midas. Generalists, such as Genoa Ford, can complete more difficult jobs and repair work that is paid for by Ford as part of its new car warrantee program.

Analyzing, Appraising, and Designing

Management needs a strategic, top-down view of opera�ons to successfully link corporate strategy and opera�ng strategy. This process begins with analyzing the compe��ve environment, step 1 in the list, and ends with managing and controlling opera�ons, step 7. Some important ques�ons that define the process are provided in Table 2.1.

1. Analyzing the compe��ve environment (external environment—threats and opportuni�es) 2. Appraising the organiza�on's skills and resources (internal environment—strengths and weaknesses) 3. Formula�ng corporate strategy 4. Determining the implica�ons of corporate strategy for opera�ng strategy 5. Examining the limita�ons economics and technology place on opera�ons 6. Designing systems for opera�ons 7. Planning and managing opera�ons

Table 2.1: Analyzing, appraising, and designing

Stage of linking strategy

Key ques�ons

Analyzing In what market(s) is the organiza�on planning to compete? Who are the present compe�tors, and what are their strengths? Who are the poten�al entrants? What changes in government regula�ons or business condi�ons may alter the compe��ve environment?

Appraising What strengths does an organiza�on possess? How may these strengths be used to take advantage of certain opportuni�es in the environment? What technological exper�se and produc�on capabili�es are available? What markets or channels of distribu�on are open?

Formula�ng What are the goals and objec�ves of the organiza�on? What are the key policies for achieving goals? What policies will be set for minimizing security risks? How can customers be iden�fied? Who are the compe�tors?

Determining What are the strategic opera�ng decisions? Where should the facility be located to provide rapid response to customer needs at an acceptable cost? What process technology will be employed and at what capacity? What is the level of product quality? Is there a trade-off between product cost and quality? What level of flexibility is required to produce services and goods for this market? Is the market likely to change, making flexibility important?

Examining What are the specific limita�ons of the exis�ng opera�ons? What resources need to be improved or obtained in order to meet organiza�onal objec�ves? How large will a par�cular facility be? How should the produc�on resources be distributed? Should there be only a few large facili�es with their associated economies of scale? Would several smaller facili�es that are easier to manage be be�er?

Designing How should opera�ons be designed in order to meet the organiza�on's objec�ves? How can flexibility be designed within the system to an�cipate changing needs? What are the informa�on-processing capabili�es necessary to provide management with useful informa�on for decision making?

Planning How can the organiza�on use the resources available to meet present and projected customer needs? How might those resources be changed through addi�onal capital expenditures to sa�sfy changing demands? How well has the opera�ons func�on performed in mee�ng the established plans? Has it been successful at moving the organiza�on toward its short- and long-term objec�ves? Has opera�ons made the organiza�on stronger and given it a compe��ve advantage by making be�er quality products, providing improved service and shorter delivery lead �mes, or reducing costs?

All organiza�ons operate within an environment that is shaped by external factors and forces over which there is limited control. These factors include the level of technology, labor supply, social and poli�cal environment, and an array of compe�tors and poten�al compe�tors, both domes�c and interna�onal. Environmental legisla�on may drama�cally alter an organiza�on's cost of doing business in a way that does not affect compe�tors. New entrants into the market may possess strengths that provide a compe��ve advantage over firms already in the market. To be successful, an organiza�on should know about the market in which it will compete as well as its environment.

Airlines and hotels use computers connected to the Internet to take reserva�ons and to schedule flight crews and housekeeping.

Hemera/Thinkstock

2.6 The Role of Information Technology

The use of computers in service and manufacturing opera�ons is not new. In accoun�ng, computers are used to perform payroll, accounts receivable, and accounts payable func�ons. Computers are key to monitoring inventory levels and controlling quality. Airlines and hotels use computers to take reserva�ons and to schedule flight crews and housekeeping. Computer technology is used to monitor flow process in papermaking and oil refining and to control metal-cu�ng machines that shape parts needed in automobile engines and refrigerator compressors. In these situa�ons, computers provide feedback on opera�ons and can take correc�ve ac�on.

In addi�on to these applica�ons, which have been used for many years, computer and informa�on technology is being applied to other elements of business to create an informa�on-rich environment. In turn, these technologies provide access to data via sophis�cated, complex databases and the wealth of informa�on on the Internet. Worldwide travel registra�on sites Travelocity and Expedia are good examples of sophis�cated Internet databases. A short discussion of expert systems and decision support systems provides some basic understanding of these tools.

Expert Systems

An expert system employs human knowledge that has been stored in a computer to solve complex problems. To be considered an expert system, the system must have: (1) a method of acquiring knowledge, (2) a knowledge base (memory), and (3) an inference engine (brain) so it can reason. Knowledge acquisi�on is the accumula�on, transfer, and transforma�on of problem-solving exper�se from a source, usually a human expert. The expert may have more work than he or she can complete. The expert will eventually move on or re�re, so the idea of capturing the person's working knowledge in a computer-based expert system is very appealing. Knowledge engineers help the human expert structure the job by interpre�ng and integra�ng human answers, drawing analogies, posing examples, and iden�fying conceptual difficul�es.

The knowledge base can be thought of as a powerful database that contains facts such as the problem situa�on and theory in the problem area, as well as special rules that direct the use of the knowledge. The inference engine is a computer program that provides a methodology for reasoning. This component makes decisions about how to use the knowledge in the system. The inference engine interprets rules, maintains control over the problem, and enforces consistency as the recommended solu�on emerges. There are many poten�al applica�ons for expert systems, from genera�ng orders for inventory, diagnosing pa�ents, troubleshoo�ng equipment failure, advising on tax-sheltered annui�es, and scheduling produc�on.

Decision Support Systems

A decision support system (DSS) is a model-based set of procedures for processing data to assist managers in decision making. A DSS allows managers easy access to stored informa�on and provides easy-to-use tools for analysis. With these suppor�ng tools, management has the informa�on to more easily control complicated manufacturing and service opera�ons. A DSS is different from an expert system because an expert system has a rule base and an inference engine for decision making and a DSS does not. Once an expert system has been constructed, it can make a decision. On the other hand, a DSS provides informa�on to help managers make decisions. In a DSS, the manager provides the logic to structure the problem and ul�mately makes the decision.

A DSS can help a manager relate the demand for a product to the correct quan��es of materials to be ordered to make that product. If a manager has received an order for 10,000 hair dryers for next month, how does he or she know the number of electric motors, wire connectors, and plas�c parts to order? How does the order fit into the produc�on schedule? Does the organiza�on have sufficient capacity? What are the impacts on cost and quality if the orders are processed on certain machines? It becomes necessary to link these decisions by using the computer as a tool.

Role in Manufacturing

Computer-based control systems can be combined with manufacturing technology, such as robots, machine tools, and automated guided vehicles, to improve manufacturing opera�ons. In this role, the computer can assist in integra�ng these technologies into a lean and efficient factory capable of compe�ng in world markets. Organiza�ons such as Allen-Bradley, Black & Decker, and Boeing have used informa�on technology and factory automa�on to improve manufacturing opera�ons. This combina�on of informa�on technology and factory automa�on is o�en called computer-integrated manufacturing.

Computer-integrated manufacturing (CIM) blends developments in manufacturing with informa�on technology to achieve compe��ve advantage. When properly organized, CIM offers the opportunity to automate design, manufacturing, and produc�on planning and control.

Engineering design through computer-aided design (CAD) allows an organiza�on to rapidly make high-quality specialized designs. The designs can be tailored to meet individual customer needs. Flexible manufacturing systems (FMSs) can quickly produce a variety of high-quality products efficiently. A FMS also allows an organiza�on to produce highly specialized designs. Computer-based produc�on planning and control systems allow an organiza�on to cope with the complexity of managing facili�es that produce a wide variety of specialized products without losing efficiency.

When properly combined, these components can yield synergis�c results. An organiza�on can have more flexible and integrated opera�ons, be be�er equipped to manage complex opera�ons, and exercise be�er control than a company that operates without CIM. To merge these components into one coordinated whole, IT staff should integrate engineering, manufacturing, and business databases into a cross-func�onal decision support system. Once accomplished, the flexibility to respond to customer demands with low-cost, high- quality specialized products becomes a powerful compe��ve advantage.

Several supermarkets use automated warehouses and point-of-sale inventory systems to keep inventory costs low and product availability high.

Dick Luria/Photodisc/Thinkstock

Role in Service Operations

Service, by its defini�on, does not have a physical component. However, many organiza�ons classified as service providers produce both goods and services. These hybrid opera�ons include: restaurants, which sell food (a good) and prepare it (a service); department stores, which sell products as well as provide retailing services; and shops that sell parts and offer repair services.

Real World Scenarios: Kroger

Kroger supermarket's automated warehousing provides its compe��ve advantage. Retail food is a compe��ve business with low profit margins. To remain price compe��ve, Kroger must cut inventories and warehousing costs and maintain adequate supplies of thousands of products. To achieve these goals, Kroger has implemented automated warehouses and point-of-sale inventory tracking. The process begins when a customer purchases an item. An electronic scanner reads the bar code on the product. The cash register, which is really a computer terminal, records the sale of that item in the computer's database. At any �me, a store manager can tabulate sales by product. In addi�on, orders can be sent electronically to the automated warehouse. The orders are filled using automated stock pickers and shipped the next day. At the warehouse, computers help to track shipments to individual stores and place orders to suppliers, so that inventory costs in the warehouse are low, and product availability is kept high.

For many services, the tangible part of a product is not significant. Within these opera�ons, managers cannot buffer customer demand from the produc�on process with finished- goods inventory. Managers in service opera�ons must find other ways to provide be�er and faster customer service. Implemen�ng informa�on systems that provide up-to-date and accurate informa�on about availability of the service and how customers can acquire it is one way to do this. Many opportuni�es exist for using computers and informa�on technology to improve service opera�ons and to gain compe��ve advantage. In order to remain compe��ve, future managers should understand this technology and be capable of implemen�ng it successfully. Tomorrow's managers will be expected to be more efficient and increase the quality of their work with these tools for improvement.

Real World Scenarios: BNY Mellon and Merck & Co.

BNY Mellon bank and others are using an expert system to successfully ba�le credit card fraud, which is a mul�billion dollar problem in the United States. The computer-based expert system examines 1.2 million accounts each day for many factors, such as an unusual number of transac�ons, charging large amounts, and changing pa�erns of expenditures. The system iden�fies nearly 100 cases each day that require more inves�ga�on. Mellon paid approximately $1 million for the so�ware, and predicted that it will pay for itself in 6 months.

Merck & Co., one of the largest drug companies in the world, decided to completely revamp its benefits system. To enroll more than 15,000 salaried employees using printed forms would have required Merck to double its personnel staff. Instead, the company spent $1 million to write computer so�ware and install 24 machines (similar to the ATMs at banks) to enroll its employees. Enrollment took only 5 weeks and not one person was added to the personnel staff. Merck is using similar systems to allow employees to adjust withholding allowances and reallocate their investment plan without speaking to personnel in payroll. Merck's so�ware prevents employees from selec�ng op�ons for which they are not eligible.

Chapter Summary

Sa�sfying customer requirements means building compe��ve capabili�es, such as flexibility, produc�vity, quality, and �me. Compe��ve capabili�es are the results of good business processes. Opera�ons should be viewed by top management as an opportunity to develop compe��ve advantage. When properly designed, opera�ons can increase an organiza�on's flexibility, reduce costs, enhance quality, and improve produc�vity. Opera�ons are strategically important to an organiza�on's success. Without this strategic view, an organiza�on can never reach its full poten�al. Links that connect opera�ons to an organiza�on's strategy begin with analysis of the compe��ve environment and include an appraisal of the organiza�on's skills, the implica�ons of corporate strategy for opera�ons, and the economic and technological limits of opera�ons. Computer and informa�on technology helps an organiza�on to achieve a compe��ve advantage. These systems provide informa�on to enhance decision making and improve control by integra�ng various parts of the produc�on process. Applying informa�on technology to service opera�ons is one way to achieve a compe��ve advantage.

Case Study

Midas

Assume that Midas is deciding whether it should add engine tune-ups to its exis�ng product line. Top management has called you in as a consultant to help it to analyze this opportunity. The first thing the consultant asks you to do is read the Midas and Genoa Ford Feature in this chapter.

Management is concerned about the impact that this new service will have on exis�ng opera�ons. Presently, the company has a policy that customers will not wait longer than 30 minutes for muffler service. How can Midas maintain that pledge? What methods for scheduling tune-up service might make it easier for Midas to keep its pledge? If reac�on to the new service is great, the shops may not have the capacity to sa�sfy demand. Should the company add capacity to exis�ng shops to take the extra load, or should it add more shops? How will the shop owners react to the new proposal? Assume that most of the shops are very profitable. Will the owners want higher profits?

Midas's management is looking for help in organizing its thinking and has asked you to respond to the following ques�ons in a two-page report. Your responses should include the cri�cal issues raised in the previous paragraph.

1. What are the an�cipated impacts upon opera�ng efficiency? How would you a�empt to minimize the nega�ve impacts? 2. Should some opera�ng prac�ces be changed to accommodate the tune-ups? 3. Should input be gathered from the shop owners? If so, what? 4. If Midas decides to launch this new program, how should it begin?

Discussion Ques�ons

Click on each ques�on to reveal the answer.

1. To be successful, organiza�ons should focus on customer requirements. List the ways opera�ons can help sa�sfy customer requirements, and discuss each briefly. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

To be successful at building compe��ve advantage, organiza�ons should know who their customers are and what their customers want. Opera�ons can help sa�sfy customer requirement.

a. Mee�ng specific customer needs: Customizing the product to meet specific customer requirements increases customer sa�sfac�on. Organiza�ons need to find ways to meet these needs that do not increase cost.

b. Quick response: Having products available for customers upon request is an advantage. Late delivery may increase costs, lower customer sa�sfac�on, and create other problems. Early delivery o�en creates storage problems, creates the poten�al for the� or damage as the item sits in inventory, and increases the need for working capital to carry inventory.

c. Product performance and features: Organiza�ons that design high-performing services and goods are preferred by consumers. This is especially true when these features and performance are acquired for li�le or no addi�onal costs.

d. Product Quality: A product should be able to meet customers' expecta�ons and perform the work they want. Product quality should be broadly defined to include fitness for use.

e. Price: Price is the other half of the value ques�on, and is an important part of the purchase decision.

f. Service: It may include equipment installa�on and a�er-sales-service such as advice on opera�ng equipment and providing repair parts. For services it could include on-line informa�on on product availability or other forms of support.

2. How can the following a�ributes help an organiza�on achieve compe��ve advantage? a. Flexibility b. Produc�vity c. Quality d. Supply chain management e. Customer rela�onship management (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

a. Flexibility is the ability to change between products with minimal costs and delays. With the flexibility to produce a wide variety of products, marke�ng can meet customer demand as closely as possible. Timely deliveries are possible because flexibility implies that inexpensive and quick changes can be made from one product to another. Changeover costs are reduced, which reduces opera�ng costs. Finally, when sudden shi�s in market preference occur, the cost to redesign facili�es and equipment is reduced because the system can more easily adapt to producing new and different products.

b. Produc�vity improvements can provide the organiza�on with a compe��ve edge. In any situa�on there are limited resources, limits on capital and equipment, material, energy and labor. Moreover, none of these resources are free. If an organiza�on produces more and be�er products with fewer resources, it will achieve two dis�nct advantages. First, the unit costs of the product will decline because less labor is required, making the product more compe��ve. Second, there will be unused resources that can be applied to develop and produce new and be�er products.

c. High quality, which can be defined as fitness for use, can be achieved at high costs and there will always be a market for these exclusive products. However, mass market appeal requires the right blend of improved quality and lower costs. An organiza�on that produces a higher quality product than its compe��on while using fewer resources (lower costs) will be able to quickly increase its share of the market.

d. Supply Chain Management is about ensuring that supply chains that produce the goods and provide the services are working effec�vely. Supply chains encompass all ac�vi�es associated with the flow and transfer of goods and services from raw material extrac�on through use by the organiza�on that sells to the final consumer. Supply chain management is the integra�on of these ac�vi�es through improved supplier rela�onships to achieve a sustainable compe��ve advantage for all members in the supply chain.

e. Customer Rela�onship Management (CRM) is a process to create, maintain, and enhance strong, associa�ons with customers, both individuals and organiza�ons. CRM moves beyond transac�ons to build long-term rela�onships with valued customers, distributors, and dealers. Increasingly, firms are focusing on building mutually beneficial rela�onships with customers, distributors, and dealers instead of working to maximize the profit on any individual transac�on. This can include interac�ons that involve financial benefits, learning customer needs and working to meet those, and providing support staff to help customers.

3. Why are the following business processes important? a. Strategy development b. Product development c. Systems to produce goods and services d. Order fulfillment (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

a. A strategy considers the threats and opportuni�es in the environment, and it measures the strengths and weaknesses of the organiza�on. These are inputs to strategy development. The strategy development process provides a path to the organiza�on's objec�ves. This path includes goals, ac�ons plans for achieving these goals, and related resource requirements. Strategy is the overall mechanism for coordina�ng organiza�onal efforts.

b. Product development involves crea�ng the product ideas and transforming these ideas into the new products which customers desire. Without an effec�ve product development process, an organiza�on would fail as, one-by-one, its products would be replaced by be�er products from its compe�tors.

c. Once product ideas are generated and product designs are created, it is necessary to create the systems that will produce them. This involves the acquisi�on of resources (facili�es, equipment, and people) that enable the organiza�on to make the good or provide the service. This includes decisions about capacity, facility loca�on, and facility layout as well as many other cri�cal decisions.

d. Order fulfillment is the process of sa�sfying a specific customer order. It involves all the steps required to sa�sfy a customer order from obtaining an order and entering it into the company's informa�on system to delivering the order. Order fulfillment is a highly integra�ve, teamwork-oriented process that includes many disciplines and ac�vi�es such as sales, credit verifica�on, analysis of working capital needs, and selec�ng shipping routes and transporta�on alterna�ves.

4. How and why are opera�ons strategically important? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Strategy begins with the organiza�on's goals and includes the key policies that are established to provide direc�on for mee�ng those goals. Opera�ng advantages should be pursued because they fit the organiza�on's goals, not because they fit some narrowly defined opera�ng objec�ve. When properly used, opera�ons can be an important tool for improving profits, increasing market share, and developing new markets. For example, increasing flexibility in opera�ons can reduce delivery lead �me and enhance the product variety available to the customer. Process improvements can increase product quality and lower the costs of the product. When opera�onal plans are linked with organiza�onal plans, opera�ons become part of the team that is working to reach the organiza�on's goals. Linking opera�onal plans to the plans of other func�onal areas within an organiza�on can have a posi�ve synergis�c effect. For example, marke�ng and opera�ons should work together to develop new products and processes for be�er mee�ng the customer needs.

5. How can an organiza�on link corporate strategy and opera�ons? Describe the process. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

To link strategy and opera�ons, management needs a strategic, top down view of opera�ons. The steps involved in linking strategy to opera�ons are: 1) Analysis of compe��ve situa�on (external environment); 2) Appraisal of an organiza�on's skills and resources; 3) Formula�on of corporate strategy; 4) Implica�ons of corporate strategy for opera�ng strategy; 5) Examina�on of the limita�ons of economics and technology on opera�ons; 6) Systems design for opera�ons; 7) Planning and managing opera�ons.

6. Describe the role of computer and informa�on technology in improving opera�ons. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

The use of computers in business is not new. Computers monitor inventory levels and help to control quality. They are also used to monitor flow processes. Computers provide feedback and self-correct problems. Computers are also used to control metal cu�ng machines. Computers help organize incoming orders, schedule produc�on and summarize results. Two growing areas for computer applica�ons are decision support systems and manufacturing automa�on. This new dual role for computers is o�en called Computer Integrated Manufacturing (CIM). CIM blends recent developments in manufacturing with informa�on technology to achieve compe��ve advantage.

7. Describe some ways that manufacturing opera�ons can use computer and informa�on technology to gain compe��ve advantage. (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Computer-based control systems can be combined with manufacturing technology, such as robots, machine tools, and automated guided vehicles, to improve manufacturing opera�ons. In this role, the computer can assist in integra�ng these technologies into a lean and efficient factory capable of compe�ng in world markets. Computer-integrated manufacturing (CIM) blends developments in manufacturing with informa�on technology to achieve compe��ve advantage. When properly organized, CIM offers the opportunity to automate design, manufacturing, and produc�on planning and control. An expert system uses human knowledge that has been stored in a computer to help the manager solve complex problems. A decision support system is a model-based set of procedures (or business rules) for processing data to assist managers in decision making.

8. Describe some ways that service opera�ons can use computer and informa�on technology to gain compe��ve advantage. Why are these methods different from those used by manufacturers? (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644

Many opera�ons, which are categorized as service opera�ons, actually provide a combina�on of services and goods. Restaurants and supermarkets are a good example. These opera�ons can use some of the manufacturing technologies described in the text. For example, supermarkets can use sophis�cated computer controlled warehousing and distribu�on systems to control inventory costs and significantly reduce the chance of a stock out.

However, for many services the tangible por�on of their product is insignificant. In these cases, managers cannot buffer demand from the produc�on process with finished goods inventory. This forces managers to find different approaches to smoothing differences between the organiza�on's ability to provide the service and customer demand.

These problems have led managers of service opera�ons to implement informa�on systems that provide extremely current and accurate informa�on. With this, service organiza�ons can provide customers with the latest informa�on about availability of service by �me and loca�ons. It also allows managers to make the best possible decisions.

Key Terms

Click on each key term to see the defini�on.

business-to-business (B2B) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Business to business Internet transac�ons; these are supply chain transac�ons.

business-to-consumer (B2C) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Business to consumer Internet transac�ons; these help firms manage customer rela�onships.

compe��ve advantage (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

An organiza�on's special abili�es, such as shorter delivery lead-�mes or higher quality products, which customers value and which gives the organiza�on an edge on its compe��on.

computer integrated manufacturing (CIM) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Blends recent developments in manufacturing with informa�on technology to achieve a compe��ve advantage.

customer rela�onship management (CRM) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

A process to create, maintain, and enhance strong, value-laden associa�ons with people and organiza�ons that buy products.

decision support systems (DSS) (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Systems that allow managers to easily access informa�on stored in a database and provide easy-to-use tools for analysis.

e-business (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Involves the use of electronic pla�orms to conduct company business. It has two types of transac�ons: business-to-business and business-to-consumer.

expert system (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

A computer-based approach that uses knowledge and inference procedures to solve problems that are difficult enough to require significant human exper�se for their solu�on. The knowledge and the inference procedures are a�empts to create a model of the best prac��oners in the field.

flexibility (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

The ability to modify produc�on from one product to another in response to customer demands, with minimal costs and delays.

knowledge engineer (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

One who helps human experts structure the problem by interpre�ng and integra�ng human answers, drawing analogies, posing examples, and iden�fying conceptual differences.

market share (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

An organiza�on's sales in a market divided by the total sales for that market.

produc�vity (h�p://content.thuzelearning.com/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/sec�ons/cover/books/AUBUS644.13.2/

Output from an ac�vity divided by total input to the ac�vity.