Week 3,4 Discussion 1 & 2

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Chapter 1: Operations Management and Value Chains Chapter Contents Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

Chapter 1 Operations Management and Value Chains

Chapter Introduction

1-1 Operations Management

1-2 OM in the Workplace

1-3 Understanding Goods and Services

1-4 The Concept of Value

1-5 Customer Benefit Packages

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.

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Chapter 1: Operations Management and Value Chains Chapter Introduction Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

Chapter Introduction

Apple’s significant profit margins are in large part due to a focus on its global supply chain and operational excellence.

Learning Objectives

After studying this chapter, you should be able to:

Explain the concept and importance of operations management.

Describe what operations managers do.

Explain the differences between goods and services.

Define the concept of value and explain how the value of goods and services can be enhanced.

Describe a customer benefit package.

Explain the difference between value chains and supply chains, and identify three general types of processes in a business.

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Contrast the three different frameworks for describing value chains.

Summarize the historical development of OM.

Describe key challenges facing OM.

Apple has mastered the art of blending physical goods with services to create value for its customers. Think iPod + iTunes, iPhone/iPad + apps, Apple stores + Genius Bar; well, you get the picture. Managing all operations involved—from the creation of goods and services through their delivery to the customer and postsale services—is one of Apple’s core competencies.

“Operations expertise is as big an asset for Apple as product innovation or marketing,” says Mike Fawkes, the former supply chain chief at Hewlett-Packard. “They’ve taken operational excellence to a level never seen before.”

Managers and engineers often work at global supplier and manufacturer sites to refine their operations, and designers work with suppliers to create new tooling equipment. When the iPad 2 debuted, Apple employees monitored every handoff point—suppliers, production, loading dock, airport, truck depot, and distribution center—to make sure each unit was accounted for and of the highest quality.

Apple’s retail stores give it a final operational advantage. The company can track demand by the store and by the hour, and adjust production forecasts daily. If it becomes clear that a given part will run out, teams are deployed and given approval to spend millions of dollars on extra equipment to undo the bottleneck. Apple’s significant profit margins are in large part due to this focus on its global supply chain and operational excellence.

What Do You Think?

Cite some other examples in which digital content has been combined with a physical good. How does this change the way companies must manage their operations?

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Chapter 1: Operations Management and Value Chains: 1-1 Operations Management Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

1-1 Operations Management Creating and delivering goods and services to customers depends on an effective system of linked facilities and processes, and the ability to manage them effectively around the world. Apple, for example, manages a large, global network of suppliers in countries such as Malaysia and Indonesia, and factories in the United States, China, and other countries to produce its physical goods, which must be coordinated with the development and production of software and other digital content, retail sales, and service and support. As the opening anecdote suggests, coordinating these goods-producing and service-providing processes can be challenging. Operations management (OM) (is the science and art of ensuring that goods and services are created and delivered successfully to customers) is the science and art of ensuring that goods and services are created and delivered successfully to customers. OM includes the design of goods, services, and the processes that create them; the day-to-day management of those processes; and the continual improvement of these goods, services, and processes.

The way in which goods and services, and the processes that create and support them, are designed and managed can make the difference between a delightful or an unhappy customer experience. That is what OM is all about! Operations management is the only function by which managers can directly affect the value provided to all stakeholders— customers, employees, investors, and society (See the box, “What Do Operations Managers Do?”).

What Do Operations Managers Do?

Some key activities that operations managers perform include the following:

Forecasting: predict the future demand for raw materials, finished goods, and services.

Supply chain management: manage the flow of materials, information, people, and money from suppliers to customers.

Facility layout and design: determine the best configuration of machines, storage, offices, and departments to provide the highest levels of efficiency and customer satisfaction.

Technology selection: use technology to improve productivity and respond faster to customers.

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Quality management: ensure that goods, services, and processes will meet customer expectations and requirements.

Purchasing: coordinate the acquisition of materials, supplies, and services.

Resource and capacity management: ensure that the right amount of resources (labor, equipment, materials, and information) is available when needed.

Process design: select the right equipment, information, and work methods to produce high-quality goods and services efficiently.

Job design: decide the best way to assign people to work tasks and job responsibilities.

Service encounter design: determine the best types of interactions between service providers and customers, and how to recover from service upsets.

Scheduling: determine when resources such as employees and equipment should be assigned to work.

Sustainability: decide the best way to manage the risks associated with products and operations to preserve resources for future generations.

Why is OM important? To answer this, we might first ask the question: What makes a company successful? In 1887, William Cooper Procter, grandson of the founder of Procter & Gamble, told his employees, “The first job we have is to turn out quality merchandise that consumers will buy and keep on buying. If we produce it efficiently and economically, we will earn a profit, in which you will share.” Procter’s statement—which is still as relevant today as it was over 100 years ago—addresses three issues that are at the core of operations management: efficiency, cost, and quality. Efficiency (a measure of how well resources are used in creating outputs), the cost of operations, and the quality of the goods and services that create customer satisfaction all contribute to profitability and ultimately the long-run success of a company. A company cannot be successful without people who understand how these concepts relate to each other, which is the essence of OM, and who can apply OM principles effectively in making decisions.

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Chapter 1: Operations Management and Value Chains: 1-2 OM in the Workplace Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

1-2 OM in the Workplace Many people who are considered “operations managers” have titles such as chief operating officer, hotel or restaurant manager, vice president of manufacturing, customer service manager, plant manager, field service manager, or supply chain manager. The concepts and methods of OM can be used in any job, regardless of the functional area of business or industry, to better create value for internal customers (within the organization) and for external customers (outside the organization). OM principles are used in accounting, human resources management, legal work, financial activities, marketing, environmental management, and every type of service activity. Thus, everyone should understand OM and be able to apply its tools and concepts. Following are some examples of how the authors’ former students (who were not OM majors!) are using OM in their jobs.

After graduating from college, Shelly Decker and her sister embarked on an entrepreneurial venture to manufacture and sell natural soaps and body products. Shelly was an accounting and information systems major in college, but she was using OM skills every day:

Process design: When a new product was to be introduced, the best way to produce it had to be determined. This involved charting the detailed steps needed to make the product.

Inventory management: Inventory was tightly controlled to keep cost down and to avoid production that wasn’t needed. Inventory was taken every four weeks and adjusted in the inventory management system accordingly.

Scheduling: Production schedules were created to ensure that enough product was available for both retail and wholesale customers, taking into account such factors as current inventory and soap production capacity.

Quality management: Each product was inspected and had to conform to the highest quality standards. If a product did not conform to standards (e.g., wrong color, improper packaging, improper labeling, improper weight, size, or shape), it was removed from inventory to determine where the process broke down and to initiate corrective action.

Without an understanding of OM, the company would never have gotten off the ground!

Tom James started as a senior software developer for a small software development company that creates sales proposal automation software. Tom uses OM skills in dealing with quality and customer service issues related to the software products, and he is also

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extensively involved in project management activities related to the development process, including identifying tasks, assigning developers to tasks, estimating the time and cost to complete projects, and studying the variance between the estimated and actual time it took to complete the project. He is also involved in continuous improvement projects; for example, he seeks to reduce development time and increase the efficiency of the development team. Tom was an information technology and management major in college.

Brooke Wilson began as a process manager for JPMorgan Chase in the credit card division. After several years of working as an operations analyst, he was promoted to a production supervisor position overseeing “plastic card production.” Among his OM-related activities are:

Planning and budgeting: Representing the plastic card production area in all meetings, developing annual budgets and staffing plans, and watching technology that might affect the production of plastic credit cards.

Inventory management: Overseeing the management of inventory for items such as plastic blank cards; inserts such as advertisements; envelopes, postage, and credit card rules and disclosure inserts.

Scheduling and capacity: Daily to annual scheduling of all resources (equipment, people, and inventory) necessary to issue new credit cards and reissue cards that are up for renewal, replace old or damaged cards, as well as cards that are stolen.

Quality: Embossing the card with accurate customer information and quickly getting the card in the hands of the customer.

Brooke was an accounting major in college.

United Performance Metals: The Life of an Operations Manager

United Performance Metals, formerly known as Ferguson Metals, located in Hamilton, Ohio, is a supplier of stainless steel and high-temperature alloys for the specialty metal market. Ferguson’s primary production operations include slitting coil stock and cutting sheet steel to customer specifications with rapid turnaround times from order to delivery. With only 78 employees, about half of whom are in operations, the director of operations and quality is involved in a variety of daily activities that draw upon knowledge of not only OM and engineering, but also finance, accounting, organizational behavior, and other subjects. He typically spends about 50 percent of his time working with foremen, supervisors, salespeople, and other staff discussing such issues as whether or not the company has the capability to accomplish a specific customer request, as well as routine production, quality, and shipping issues. The remainder of his time is spent investigating such issues as the technical feasibility and cost implications of new

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capital equipment or changes to existing processes, trying to reduce costs, seeking and facilitating design improvements on the shop floor, and motivating the workforce. The ability to understand customer needs, motivate employees, work with other departments, and integrate processes and technology are skills that all operations managers need.

Coiled steel awaiting processing.

AP Images/Mark Duncan

Slitting coils into finished strips.

Maskalin/Alamy Stock Photo

Some of Ferguson’s finished products.

Olaf Döring/imageBROKER/Getty Images

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Chapter 1: Operations Management and Value Chains: 1-3 Understanding Goods and Services Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

1-3 Understanding Goods and Services Companies design, produce, and deliver a wide variety of goods and services that consumers purchase. A good (is a physical product that you can see, touch, or possibly consume) is a physical product that you can see, touch, or possibly consume. Examples of goods include cell phones, appliances, food, flowers, soap, airplanes, furniture, coal, lumber, personal computers, paper, and industrial machines. A durable good (is one that does not quickly wear out and typically lasts at least three years.) is one that does not quickly wear out and typically lasts at least three years. Vehicles, dishwashers, and furniture are some examples. A nondurable good (is one that is no longer useful once it’s used, or lasts for less than three years.) is one that is no longer useful once it’s used, or lasts for less than three years. Examples are toothpaste, software, clothing and shoes, and food. Goods- producing firms are found in industries such as manufacturing, farming, forestry, mining, construction, and fishing.

A service (is any primary or complementary activity that does not directly produce a physical product.) is any primary or complementary activity that does not directly produce a physical product. Services represent the nongoods part of a transaction between a buyer (customer) and seller (supplier). Service-providing firms are found in industries such as banking, lodging, education, health care, and government. The services they provide might be a mortgage loan, a comfortable and safe place to sleep, a college degree, a medical procedure, or police and fire protection.

Designing and managing operations in a goods-producing firm is quite different from that in a service organization. Thus, it is important to understand the nature of goods and services, and particularly the differences between them.

Goods and services share many similarities. They are driven by customers and provide value and satisfaction to customers who purchase and use them. They can be standardized for the mass market or customized to individual needs. They are created and provided to customers by some type of process involving people and technology. Services that do not involve significant interaction with customers (e.g., credit card processing) can be managed much the same as goods in a factory, using proven principles of OM that have been refined over the years. Nevertheless, some very significant differences exist between goods and services that make the management of service-providing organizations different from goods- producing organizations and create different demands on the operations function.

1. Goods are tangible, whereas services are intangible. Goods are consumed, but services are experienced. Goods-producing industries rely on machines and “hard technology” to perform work. Goods can be moved, stored, and repaired, and

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Customers judge the value of a service and form perceptions through service encounters.

generally require physical skills and expertise during production. Customers can often try them before buying. Services, on the other hand, make more use of information systems and other “soft technology,” require strong behavioral skills, and are often difficult to describe and demonstrate. A senior executive of the Hilton Corporation stated, “We sell time. You can’t put a hotel room on the shelf.”

2. Customers participate in many service processes, activities, and transactions. Many services require that the customer be present either physically, on a telephone, or online for service to commence. In addition, the customer and service provider often coproduce a service, meaning that they work together to create and simultaneously consume the service, as would be the case between a bank teller and a customer to complete a financial transaction. The higher the customer participation, the more uncertainty the firm has with respect to service time, capacity, scheduling, quality performance, and operating cost.

A service encounter (is an interaction between the customer and the service provider.) Some examples of service encounters are making a hotel reservation, asking a grocery store employee where to find the pickles, or making a purchase on a website. Service encounters consist of one or more moments of truth (any episodes, transactions, or experiences in which a customer comes into contact with any aspect of the delivery system, however remote, and thereby has an opportunity to form an impression.) —any episodes, transactions, or experiences in which a customer comes into contact with any aspect of the delivery system, however remote, and thereby has an opportunity to form an impression. A moment of truth might be a gracious welcome by an employee at the hotel check-in counter, a grocery store employee who seems too impatient to help, or trying to navigate a confusing website. Customers judge the value of a service and form perceptions through service encounters. Therefore, employees who interact directly with customers or design service processes need to understand the importance of service encounters.

3. The demand for services is more difficult to predict than the demand for goods. Customer arrival rates and demand patterns for such service delivery systems as banks, airlines, supermarkets, call centers, and courts are very difficult to forecast. The demand for services is time-dependent, especially over the short term (by hour or day). This places many pressures on service firm managers to adequately plan staffing levels and capacity.

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4. Services cannot be stored as physical inventory. In goods-producing firms, inventory can be used to decouple customer demand from the production process or between stages of the production process and ensure constant availability despite fluctuations in demand. Service firms do not have physical inventory to absorb such fluctuations in demand. For service delivery systems, availability depends on the system’s capacity. For example, a hospital must have an adequate supply of beds for the purpose of meeting unanticipated patient demand, and a float pool of nurses when things get very busy. Once an airline seat, a hotel room, or an hour of a lawyer’s day are gone, there is no way to recapture the lost revenue.

5. Service management skills are paramount to a successful service encounter. Employees who interact with customers require service management skills such as knowledge and technical expertise (operations), cross-selling other products and services (marketing), and good human interaction skills (human resources). Service management (integrates marketing, human resources, and operations functions to plan, create, and deliver goods and services, and their associated service encounters) integrates marketing, human resources, and operations functions to plan, create, and deliver goods and services, and their associated service encounters. OM principles are useful in designing service encounters and supporting marketing objectives.

6. Service facilities typically need to be in close proximity to the customer. When customers must physically interact with a service facility—for example, post offices, hotels, and branch banks—they must be in a location convenient to customers. A manufacturing facility, on the other hand, can be located on the other side of the globe, as long as goods are delivered to customers in a timely fashion. In today’s Internet age, many services are only a few mouse clicks away.

7. Patents do not protect services. A patent on a physical good or software code can provide protection from competitors. The intangible nature of a service makes it more difficult to keep a competitor from copying a business concept, facility layout, or service encounter design. For example, restaurant chains are quick to copy new menu items or drive-through concepts.

These differences between goods and services have important implications to all areas of an organization, and especially to operations. These are summarized in Exhibit 1.1. Some are obvious, whereas others are more subtle. By understanding them, organizations can better select the appropriate mix of goods and services to meet customer needs and create the most effective operating systems to produce and deliver those goods and services.

Exhibit 1.1

How Goods and Services Affect Operations Management Activities

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OM Activity Goods Services

Forecasting Forecasts involve longer-term time horizons. Goods- producing firms can use physical inventory as a buffer to mitigate forecast errors. Forecasts can be aggregated over larger time frames (e.g., months or weeks).

Forecast horizons generally are shorter, and forecasts are more variable and time- dependent. Forecasting must often be done on a daily or hourly basis, or sometimes even more frequently.

Facility Location Goods-producing facilities can be located close to raw materials, suppliers, labor, or customers/markets.

Service facilities must be located close to customers/ markets for convenience and speed of service.

Facility Layout and Design

Factories and warehouses can be designed for efficiency because few, if any, customers are present.

The facility must be designed for good customer interaction and movement through the facility and its processes.

Technology Goods-producing facilities use various types of automation to produce, package, and ship physical goods.

Service facilities tend to rely more on information-based hardware and software.

Quality Goods-producing firms can define clear, physical, and measurable quality standards and capture measurements using various physical devices.

Quality measurements must account for customer’s perception of service quality and often must be gathered through surveys or personal contact.

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OM Activity Goods Services

Inventory/Capacity Goods-producing firms use physical inventory such as raw materials and finished goods as a buffer for fluctuations in demand.

Service capacity such as equipment or employees is the substitute for physical inventory.

Process Design Because customers have no participation or involvement in goods-producing processes, the processes can be more mechanistic and controllable.

Customers usually participate extensively in service creation and delivery (sometimes called coproduction), requiring more flexibility and adaptation to special circumstances.

Job/Service Encounter Design

Goods-producing employees require strong technical and production skills.

Service employees need more behavioral and service management skills.

Scheduling Scheduling revolves around the movement and location of materials, parts, and subassemblies and when to assign resources (i.e., employees, equipment) to accomplish the work most efficiently.

Scheduling focuses on when to assign employees and equipment (i.e., service capacity) to accomplish the work most efficiently without the benefit of physical inventory.

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OM Activity Goods Services

Supply Chain Management

Goods-producing firms focus mainly on the physical flow of goods, often in a global network, with the goal of maximizing customer satisfaction and profit, and minimizing delivery time, costs, and environmental impact.

Service-providing firms focus mainly on the flow of people, information, and services, often in a global network, with the goal of maximizing customer satisfaction and profit, and minimizing delivery time, costs, and environmental impact.

A similar classification of OM activities in terms of high/low customer contact was first proposed

in the classic article by R. B. Chase, “Where Does the Customer Fit in a Service Operation?”

(Harvard Business Review, November–December 1978, p. 139)

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Chapter 1: Operations Management and Value Chains: 1-4 The Concept of Value Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

1-4 The Concept of Value Today’s consumers demand innovative products, high quality, quick response, impeccable service, and low prices; in short, they want value in every purchase or experience. One of the most important points that we emphasize in this book is that the underlying purpose of every organization is to provide value to its customers and stakeholders.

Value (is the perception of the benefits associated with a good, service, or bundle of goods and services in relation to what buyers are willing to pay for them.) is the perception of the benefits associated with a good, service, or bundle of goods and services in relation to what buyers are willing to pay for them. The decision to purchase a good or service or a customer benefit package is based on an assessment by the customer of the perceived benefits in relation to its price. The customer’s cumulative judgment of the perceived benefits leads to either satisfaction or dissatisfaction. One of the simplest functional forms of value is:

If the value ratio is high, the good or service is perceived favorably by customers, and the organization providing it is more likely to be successful.

How to Increase Value?

To increase value, an organization must

increase perceived benefits while holding price or cost constant;

increase perceived benefits while reducing price or cost; or

decrease price or cost while holding perceived benefits constant.

In addition, proportional increases or decreases in perceived benefits as well as price result in no net change in value. Management must determine how to maximize value by designing processes and systems that create and deliver the appropriate goods and services customers want to use, pay for, and experience.

The focus on value has forced many traditional goods-producing companies to add services and, increasingly, digital content to complement their physical goods. A goods-producing company can no longer be viewed as simply a factory that churns out physical goods, because customer perceptions of goods are influenced highly by such facilitating services

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as financing and leasing, shipping and installation, maintenance and repair, and technical support and consulting. Today we see digital content such as apps, streaming videos, and social networks becoming vital to create customer value. Coordinating the operational capability to design and deliver an integrated package of physical and digital goods and services is the essence of operations management.

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Each good or service in the customer benefit package requires a process to create and deliver it to customers.

Chapter 1: Operations Management and Value Chains: 1-5 Customer Benefit Packages Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

1-5 Customer Benefit Packages “Bundling” goods, services, and digital content in a certain way to provide value to customers not only enhances what customers receive, but can also differentiate the product from competitors. Such a bundle is often called a customer benefit package. A customer benefit package (CBP) (is a clearly defined set of tangible (goods-content) and intangible (service-content) features that the customer recognizes, pays for, uses, or experiences.) is a clearly defined set of tangible (goods-content) and intangible (service-content) features that the customer recognizes, pays for, uses, or experiences. The CBP is a way to conceptualize and visualize goods and services by thinking broadly about how goods and services are bundled and configured together.

A CBP consists of a primary good or service coupled with peripheral goods and/or services, and sometimes variants. A primary good or service (is the “core” offering that attracts customers and responds to their basic needs.) is the “core” offering that attracts customers and responds to their basic needs. For example, the primary service of a personal checking account is convenient financial transactions. Peripheral goods or services (are those that are not essential to the primary good or service, but enhance it.) are those that are not essential to the primary good or service, but enhance it. A personal checking account might be supported and enhanced by such peripheral goods as a printed monthly account statement, designer checks and checkbooks, a special credit card, and such peripheral services as a customer service hotline and online bill payment. It is interesting to note that today, many business-to-business manufacturers such as custom machining or metal fabricators, think of their core offering as service—providing customized design assistance and ontime delivery—with the actual good as peripheral. Finally, a variant (is a CBP feature that departs from the standard CBP and is normally location or firm specific) is a CBP feature that departs from the standard CBP and is normally location or firm specific.

A CBP can easily be expressed in a graphical fashion, as shown in Exhibit 1.2. The CBP attributes and features (described in the circles) are chosen by management to fulfill certain customer wants and needs. For example, financing and leasing, which are peripheral services, meet the customer’s wants and needs of personal financial security. In fact, if two vehicles have similar prices and quality levels, then the leasing program may be the key to which vehicle the customer buys. Vehicle replacement parts, a peripheral good, meet the

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customer’s wants and needs of fast service and safety. A variant might be a fishing pond where kids can fish while parents shop for vehicles.

Exhibit 1.2

A CBP Example for Purchasing a Vehicle

When defining a CBP, don’t confuse the features determined by management with customers’ wants and needs. For example, if a customer need is to ensure the safety of their valuables in a hotel, a CBP feature that management might select is a room safe. Thus, you would not put “safety of valuables” on a CBP diagram, but rather “room safe.” A CBP diagram should reflect on the features management selects to fulfill certain customer wants and needs.

Finally, we may bundle a group of CBPs together. One example would be a combined land- cruise vacation to Alaska, which might consist of a bundle of CBPs such as the travel agency that books the package and optional land excursions from the ship; the land-tour operator that handles hotels, transportation, and baggage handling; and the cruise line that books air travel, and provides meals, and entertainment. Bundled CBPs raise some interesting issues about pricing strategies and partnerships among firms. For example, a firm might actually be able to charge a premium price for the bundled CBPs than if purchased separately, or alliances between hotels and airlines provide discounted vacation packages that are less expensive than if booked separately.

In most cases, many “goods” and “services” that we normally think of have a mixture of both goods and service content. Exhibit 1.3 illustrates a continuum of goods and service content with several examples. Toothpaste, for instance, is high in goods content, but when you purchase it, you are also purchasing some services, such as a telephone call center to field customer questions and complaints. Similarly, a bicycle might seem like a pure good, but it often includes such services as safety instruction and maintenance. At the other extreme in Exhibit 1.3 are psychiatric services, which are much higher in service content but might include goods such as a bill, books, and medical brochures that support the service.

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Attending a symphony, play, or movie is essentially a pure service but may include program brochures and ticket stubs that offer discounts at local restaurants as peripheral goods.

Exhibit 1.3

Examples of Goods and Service Content

Buying More Than a Car

People usually think that when they buy a new car, they are simply purchasing the vehicle. Far from it. Most automobiles, for example, bundle a good, the automobile, with many peripheral services. Such services might include the sales process, customized leasing, insurance, warranty programs, loaner cars when a major service or repair is needed, free car washes at the dealership, opportunities to attend a manufacturer’s driving school, monthly newsletters sent by e-mail, and Web-based scheduling of oil changes and other service requirements. Such bundling is described by the customer benefit package framework.

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Today, we are seeing more digital content being bundled with both goods and services. For example, General Electric manufactures locomotives, jet engines, and appliances, yet their future is intelligent machines that make smart operating decisions and monitor themselves for maintenance and repair. Netflix sells digital content in the form of movies, and television shows and series. iTunes sells music.

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Chapter 3 Operations Strategy

Chapter Introduction

3-1 Gaining Competitive Advantage

3-2 Understanding Customer Wants and Needs

3-3 Evaluating Goods and Services

3-4 Competitive Priorities 3-4a Cost

3-4b Quality

3-4c Time

3-4d Flexibility

3-4e Innovation

3-5 Om and Strategic Planning 3-5a Operations Strategy

3-5b Sustainability and Operations Strategy

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3-1

3-2

3-3

3-4

3-5

3-6

Chapter Introduction

Any change in strategic direction typically has significant consequences for the entire value chain and for operations.

Learning Objectives

After studying this chapter, you should be able to:

Explain how organizations seek to gain competitive advantage.

Explain approaches for understanding customer wants and needs.

Describe how customers evaluate goods and services.

Explain the five key competitive priorities.

Explain the role of OM, sustainability, and operations in strategic planning.

Describe Hill’s framework for operations strategy.

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Over the past two decades, the transformation to a digital society has caused many companies to redefine their strategy. Some have had to completely reinvent themselves. For example, the demise of film cameras caused Kodak to change to digital cameras. However, with stiff competition from Sony, Samsung, and others, Kodak ended up filing for Chapter 11 bankruptcy protection and has changed its strategy to focus on large commercial inkjet printers, digital printing presses, workflow software, and package printing. Likewise, Xerox, long known for its paper copy machines, has reinvented itself and branched out into new but risky business services, including commercial information technology, document outsourcing, finance, human resources (HR), transportation, and health care.

Changing a corporate strategy has many implications for operations and the entire value chain. Facilities may have to be reconfigured or new ones built; new technology may have to be acquired; new processes and jobs must be designed; and so on. Looking back at Exhibit 1.7, we also see that all aspects of preproduction services, production processes, and postproduction services will be affected.

What Do You Think?

How do you see the digital society affecting education? For example, what implications are emerging technologies, such as e-books and distance learning, having? Can you think of others?

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Chapter 3: Operations Strategy: 3-1 Gaining Competitive Advantage Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

3-1 Gaining Competitive Advantage Competitive advantage (denotes a firm’s ability to achieve market and financial superiority over its competitors.) denotes a firm’s ability to achieve market and financial superiority over its competitors. In the long run, a sustainable competitive advantage provides above- average performance and is essential to the survival of the business. Creating a competitive advantage requires a fundamental understanding of two things. First, management must understand customer needs and expectations—and how the value chain can best meet these through the design and delivery of attractive customer benefit packages. Second, management must build and leverage operational capabilities to support desired competitive priorities.

Every organization has a myriad of choices in deciding where to focus its efforts—for example, on low cost, high quality, quick response, or flexibility and customization—and in designing its operations to support its chosen strategy. The opening scenario suggests that organizations have many strategic choices in designing and operating their domestic and global value chains. These choices should be driven by current and emerging customer needs and expectations. In particular, what happens in operations—on the front lines and on the factory floor—must support the strategic direction the firm has chosen.

Any change in a firm’s customer benefit package, targeted markets, or strategic direction typically has significant consequences for the entire value chain and for operations.

Although it may be difficult to change the structure of the value chain, operations managers have considerable freedom in determining what components of the value chain to emphasize, in selecting technology and processes, in making human resource policy choices, and in making other relevant decisions to support the firm’s strategic emphasis.

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Chapter 3: Operations Strategy: 3-2 Understanding Customer Wants and Needs Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

3-2 Understanding Customer Wants and Needs Because the fundamental purpose of an organization is to provide goods and services of value to customers, it is important to first understand customer desires and also to understand how customers evaluate goods and services. However, a company usually cannot satisfy all customers with the same goods and services. Often, customers must be segmented into several natural groups, each with unique wants and needs. These segments might be based on buying behavior, geography, demographics, sales volume, profitability, or expected levels of service. By understanding differences among such segments, a company can design the most appropriate customer benefit packages, competitive strategies, and processes to create the goods and services to meet the unique needs of each segment.

To correctly identify what customers expect requires being “close to the customer.” There are many ways to do this, such as having employees visit and talk to customers, having managers talk to customers, and doing formal marketing research. Marriott Corporation, for example, requires top managers to annually work a full day or more in the hotels as bellhops, waiters, bartenders, front-desk service providers, and so on, to gain a true understanding of customer wants and needs, and the types of issues that their hotel service providers must face in serving the customer. Good marketing research includes such techniques as focus groups, salesperson and employee feedback, complaint analysis, on- the-spot interviews with customers, videotaped service encounters, mystery shoppers, telephone hotlines, Internet monitoring, and customer surveys.

Basic customer expectations are generally considered the minimum performance level required to stay in business and are often called order qualifiers (Basic customer expectations are generally considered the minimum performance level required to stay in business.) . For example, a radio and driver-side air bag are generally expected by all customers for an automobile. In the highly competitive pizza business, efficient delivery would be considered an order qualifier. However, the unexpected features that surprise, entertain, and delight customers by going beyond the expected often make the difference in closing a sale; these are called order winners. Order winners (are goods and service features and performance characteristics that differentiate one customer benefit package from another and win the customer’s business.) are goods and service features and performance characteristics that differentiate one customer benefit package from another and win the customer’s business. Collision avoidance systems or a voice-activated music system in an automobile, for example, Papa John’s Pizza focused on “better ingredients, better pizza” as the order winner to differentiate the business from the competitors. Over time, however, order winners eventually become order qualifiers as customers begin to

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expect them. Thus, to stay competitive, companies must continually innovate and improve their customer benefit packages.

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Chapter 3: Operations Strategy: 3-3 Evaluating Goods and Services Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

3-3 Evaluating Goods and Services Research suggests that customers use three types of attributes in evaluating the quality of goods and services: search, experience, and credence. Search attributes (are those that a customer can determine prior to purchasing the goods and/or services.) are those that a customer can determine prior to purchasing the goods and/or services. These attributes include things like color, price, freshness, style, fit, feel, hardness, and smell. Experience attributes (are those that can be discerned only after purchase or during consumption or use.) are those that can be discerned only after purchase or during consumption or use. Examples of these attributes are friendliness, taste, wearability, safety, fun, and customer satisfaction. Credence attributes (are any aspects of a good or service that the customer must believe in but cannot personally evaluate even after purchase and consumption.) are any aspects of a good or service that the customer must believe in but cannot personally evaluate even after purchase and consumption. Examples include the expertise of a surgeon or mechanic, the knowledge of a tax advisor, or the accuracy of tax preparation software.

This classification has several important implications for operations. For example, the most important search and experience attributes should be evaluated during design, measured during manufacturing, and drive key operational controls to ensure that they are built into the good with high quality. Credence attributes stem from the nature of services, the design of the service system, and the training and expertise of the service providers.

These three evaluation criteria form an evaluation continuum from easy to difficult, as shown in Exhibit 3.1. This model suggests that goods are easier to evaluate than services and that goods are high in search qualities, whereas services are high in experience and credence attributes. Of course, goods and services are usually combined and configured in unique ways, making for an even more complex customer evaluation process. Customers evaluate services in ways that are often different from goods. A few ways are summarized below along with significant issues that affect operations.

Customers seek and rely more on information from personal sources than from non- personal sources when evaluating services prior to purchase. Operations must ensure that accurate information is available and that experiences with prior services and service providers result in positive experiences and customer satisfaction.

Customers perceive greater risks when buying services than when buying goods. Because services are intangible, customers cannot look at or touch them prior to the purchase decision. They experience the service only when they actually go through the process. This is why many are hesitant to use online banking or bill paying.

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Exhibit 3.1

How Customers Evaluate Goods and Services

Source: Adapted from V. A. Zeithamel, “How Consumer Evaluation Processes Differ Between Goods and Services,” in J. H. Donnelly and W. R. George, eds., Marketing in Services, published by the American Marketing Association, Chicago, 1981, pp. 186–199. Reprinted with permission from the American Marketing Association.

Listen to Your Customers—Creatively!

At IDEO, one of the world’s leading design firms (it designed Apple’s first mouse and stand-up toothpaste tubes as just two examples), design doesn’t begin with a far-out concept or a cool drawing. It begins with a deep understanding of the people who might use whatever product or service eventually emerges from its work, drawing from anthropology, psychology, biomechanics, and other disciplines. When former Disney executive Paul Pressler assumed the CEO position at Gap, he met with each of Gap’s top 50 executives, asking them such standard questions as “What about Gap do you want to preserve and why?,” “What about Gap do you want to change and why?,” and so on. But he also added one of his own: “What is your most important tool for figuring out what the consumer wants?” Some companies

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General Electric discovered that design determines 75 percent of its manufacturing costs.

use unconventional and innovative approaches to understand customers. Texas Instruments created a simulated classroom to understand how mathematics teachers use calculators; and a manager at Levi Strauss used to talk with teens who were lined up to buy rock concert tickets. The president of Chick-fil-A spends at least one day each year behind the counter, as do all of the company’s employees, and has camped out overnight with customers at store openings. At Whirlpool, when customers rate a competitor’s product higher in satisfaction surveys, engineers take it apart to find out why. The company also has hundreds of consumers fiddle with computer-simulated products while engineers record the users’ reactions on videotape.

Dissatisfaction with services is often the result of customers’ inability to properly perform or coproduce their part of the service. A wrong order placed on the Internet can be the result of customer error despite all efforts on the part of the company to provide clear instructions. The design of services must be sensitive to the need to educate customers on their role in the service process.

These insights help to explain why it is more difficult to design services and service processes than goods and manufacturing operations.

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3-4 Competitive Priorities Every organization is concerned with building and sustaining a competitive advantage in its markets. A strong competitive advantage is driven by customer needs and aligns the organization’s resources with its business opportunities. A strong competitive advantage is difficult to copy, often because of a firm’s culture, habits, or sunk costs. Competitive advantage can be achieved in different ways such as outperforming competitors on price or quality, responding quickly to changing customer needs in designing goods and services, or providing rapid design or delivery.

Competitive priorities (represent the strategic emphasis that a firm places on certain performance measures and operational capabilities within a value chain.) represent the strategic emphasis that a firm places on certain performance measures and operational capabilities within a value chain. Understanding competitive priorities and their relationships with customer benefit packages provides a basis for designing the value and supply chains that create and deliver goods and services. In general, organizations can compete on five key competitive priorities:

1. Cost.

2. Quality.

3. Time.

4. Flexibility.

5. Innovation.

All of these competitive priorities are vital to success. For example, no firm today can sacrifice quality simply to reduce costs, or emphasize flexibility to the extent that it would make its goods and services unaffordable. However, organizations generally make trade- offs among these competitive priorities and focus their efforts along one or two key dimensions. For example, Amazon competes primarily on time, cost, and flexibility. Apple, on the other hand, competes on quality and innovation.

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3-4a Cost

Many firms, such as Walmart, gain competitive advantage by establishing themselves as the low-cost leader in an industry. These firms achieve their competitive advantage through low prices. They do this through high volumes and the efficient design and operation of their supply chain. Although prices are generally set outside the realm of operations, low prices cannot be achieved without strict attention to cost and the design and management of operations.

General Electric, for example, discovered that design determines 75 percent of its manufacturing costs. Costs accumulate through the value chain, and include the costs of raw materials and purchased parts, direct manufacturing cost, distribution, post-sale services, and all supporting processes. Through good design and by chipping away at costs, operations managers help to support a firm’s strategy to be a low-price leader. They emphasize achieving economies of scale and finding cost advantages from all sources in the value chain.

Low cost can result from high productivity and high-capacity utilization. More important, improvements in quality lead to improvements in productivity, which in turn lead to lower costs. Thus, a strategy of continuous improvement is essential to achieve a low-cost competitive advantage.

Southwest Airlines: Competing with Low Cost

The only major U.S. airline that has been continuously profitable over the last several decades is Southwest Airlines. Other airlines have had to collectively reduce

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costs by $18.6 billion, or 29 percent of their total operating expenses, to operate at the same level (cost per mile) as Southwest. The high-cost airlines such as United and American face enormous pressure from low-fare carriers such as Southwest Airlines. A long-time industry consultant, stated “The industry really is at a point where survival is in question.” In recent years, airlines have reduced capacity, cut routes, and increased fees for peripheral services like baggage and food. We have also seen mergers, such as between Delta and Northwest and between United and Continental, to reduce system-wide costs.

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3-4b Quality

The role of quality in achieving competitive advantage was demonstrated by several research studies. Researchers have found that:

Businesses offering premium-quality goods usually have large market shares and were early entrants into their markets.

Quality is positively and significantly related to a higher return on investment for almost all kinds of market situations.

A strategy of quality improvement usually leads to increased market share, but at a cost in terms of reduced short-run profitability.

Producers of high-quality goods can usually charge premium prices.

Exhibit 3.2 summarizes the impact of quality on profitability. The value of a good or service in the marketplace is influenced by the quality of its design. Improvements in performance, features, and reliability will differentiate the good or service from its competitors, improve a firm’s quality reputation, and improve the perceived value of the customer benefit package. This allows the company to command higher prices and achieve an increased market share. This, in turn, leads to increased revenues that offset the added costs of improved design. Improved conformance in production leads to lower manufacturing and service costs through savings in rework, scrap, and warranty expenses. The net effect of improved quality of design and conformance is increased profits.

Exhibit 3.2

Interlinking Model of Quality and Profitability

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Time reductions often drive simultaneous improvements in quality, cost, and productivity.

In many industries, strategies often lead to trade-offs between quality and cost; some company strategies sacrifice quality in order to develop a low-cost advantage. Such has been the case with new automobile start-ups, especially with Hyundai Motor Co. However, goods quality has evolved over the years and now is generally considered to be an order qualifier. Operations managers deal with quality issues on a daily basis; these include ensuring that goods are produced defect-free or that service is delivered flaw lessly. In the long run, it is the design of goods and service processes that ultimately defines the quality of outputs and outcomes.

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3-4c Time

In today’s society, time is perhaps the most important source of competitive advantage. Customers demand quick response, short waiting times, and consistency in performance. Many firms, such as CNN, FedEx, and Walmart, know how to use time as a competitive weapon to create and deliver superior goods and services.

Speeding up processes in supply chains improves customer response. Deliveries can be made faster, and more often on time. However, time reductions can only be accomplished by streamlining and simplifying processes to eliminate non-value-added steps such as rework and waiting time. This forces improvements in quality by reducing the opportunity for mistakes and errors. By reducing non-value-added steps, costs are reduced as well. Thus, time reductions often drive simultaneous improvements in quality, cost, and productivity. Designing processes and using technology efficiently to improve speed and time reliability are some of the most important activities for operations managers.

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3-4d Flexibility

Success in globally competitive markets requires both design and demand flexibility. In the automobile industry, for example, new models are constantly being developed. Companies that can exploit flexibility by building several different vehicles on the same assembly line at one time, enabling them to switch output as demand shifts, will be able to sell profitably at lower volumes.

Flexibility is manifest in mass-customization strategies that are becoming increasingly prevalent today. Mass customization (is being able to make whatever goods and services the customer wants, at any volume, at any time for anybody, and for a global organization, from any place in the world) is being able to make whatever goods and services the customer wants, at any volume, at any time for anybody, and for a global organization, from any place in the world. Some examples include Sign-tic company signs that are uniquely designed for each customer from a standard base sign structure; business consulting; Levi’s jeans that are cut to exact measurements; personal Web pages; estate planning; Motorola pagers customized in different colors, sizes, and shapes; personal weight-training programs; and modular furniture that customers can configure to their unique needs and tastes. Customer involvement might occur at the design (as in the case of custom signs), fabrication (Levi’s jeans), assembly (Motorola pagers), or postproduction (customer-assembled modular furniture) stages of the value chain. Mass customization requires companies to align their activities around differentiated customer segments and design goods, services, and operations around flexibility.

Trade-Offs Among Competitive Priorities

As fast-food menus get more complex and complaints about inaccurate orders increase, the amount of time customers spend waiting in line for their food is increasing. The average amount of time the typical consumer spends waiting in a drive-thru line jumped nearly 40 seconds in one year—to 219.97 seconds in 2014 from 180.83 seconds in 2013. While speed has been a competitive priority, the trend toward healthier items such as Cantina bowls at Taco Bell or fruit smoothies at McDonald’s, require extra time to make and inspect. At the same time, fast-food chains are working harder to keep high levels of order accuracy.

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3-4e Innovation

Innovation (is the discovery and practical application or commercialization of a device, method, or idea that differs from existing norms) is the discovery and practical application or commercialization of a device, method, or idea that differs from existing norms. Over the years, innovations in goods (such as telephones, automobiles, computers, optical fiber, satellites, and cell phones) and services (self-service, all-suite hotels, health maintenance organizations, and Internet banking) have improved the overall quality of life. Within business organizations, innovations in manufacturing equipment (computer-aided design, robots and automation, and smart tags) and management practices (customer satisfaction surveys, quantitative decision models, and the Malcolm Baldrige criteria) have allowed organizations to become more efficient and better meet customers’ needs.

Many firms, such as Apple, focus on research and development for innovation as a core component of their strategy. Such firms are on the leading edge of product technology, and their ability to innovate and introduce new products is a critical success factor. Product performance, not price, is the major selling feature. When competition enters the market and profit margins fall, these companies often drop out of the market while continuing to introduce innovative new products. These companies focus on outstanding product research, design, and development; high product quality; and the ability to modify production facilities to produce new products frequently.

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3-5 Om and Strategic Planning The direction an organization takes and the competitive priorities it chooses are driven by its strategy. The concept of strategy has different meanings to different people. Strategy (is a pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole.) is a pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. Basically, a strategy is the approach by which an organization seeks to develop the capabilities required for achieving its competitive advantage. Effective strategies develop around a few key competitive priorities such as low cost or fast service time, which provide a focus for the entire organization and exploit an organization’s core competencies (are the strengths that are unique to an organization.) , Which are the strengths that are unique to that organization. Such strengths might be a particularly skilled or creative workforce, customer relationship management, clever bundling of goods and services, strong supply chain networks, extraordinary service, green goods and services, marketing expertise, or the ability to rapidly develop new products or change production output rates.

Strategic planning is the process of determining long-term goals, policies, and plans for an organization. The objective of strategic planning is to build a position that is so strong in selected ways that the organization can achieve its goals despite unforeseeable external forces that may arise. Strategy is the result of a series of hierarchical decisions about goals, directions, and resources; thus, most large organizations have three levels of strategy: corporate, business, and functional. At the top level, corporate strategy is necessary to define the businesses in which the corporation will participate and develop plans for the acquisition and allocation of resources among those businesses. The businesses in which the firm will participate are often called strategic business units (SBUs) and are usually defined as families of goods or services having similar characteristics or methods of creation. For small organizations, the corporate and business strategies frequently are the same.

The second level of strategy is generally called business strategy and defines the focus for SBUs. The major decisions involve which markets to pursue and how best to compete in those markets—that is, which competitive priorities the firm should pursue.

Solved Problem 3.1

Define the customer benefit package (CBP) for a health club, recreation center, or gymnasium you frequent. (Check out the website of your favorite club, center, or gym for more information.) Use this information to help describe the organization’s strategic mission, strategy, competitive priorities, and how it wins customers.

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One example is depicted below.

Mission: The mission of our health club is to offer many pathways to a healthy living style and body.

Strategy: We strive to provide our customers with superior:

ways to improve and maintain the health and well-being of the body and mind

friendly, professional staff that care about them

clean facilities, equipment, uniforms, parking lot, food service, and the like

customer convenience (location, food, communication, schedules, etc.)

Competitive #1 Priority: many pathways to healthy living and a healthy body (design flexibility); #2 Priority: friendly, professional staff and service encounters (service quality); #3 Priority: super clean (goods, facility, and environmental quality); #4 Priority: customer convenience in all respects (time); and #5 Priority: price (cost).

How to win customers? Providing a full-service health club with superior service, staff, and facilities. (Although you would not see this in company literature, this health club provides premium service at premium prices.)

Remember that each primary or peripheral good or service in the customer benefit package requires a process to create and deliver it to customers, and therefore OM skills are needed.

Finally, the third level of strategy is functional strategy, the means by which business strategies are accomplished. A functional strategy is the set of decisions that each functional area (marketing, finance, operations, research and development, engineering, etc.) develops to support its particular business strategy.

Our particular focus will be on operations strategy—how an organization’s processes are designed and organized to produce the type of goods and services to support the corporate and business strategies.

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3-5a Operations Strategy

An operations strategy (is the set of decisions across the value chain that supports the implementation of higher-level business strategies.) An operations strategy is the set of decisions across the value chain that supports the implementation of higher-level business strategies. It defines how an organization will execute its chosen business strategies. Developing an operations strategy involves translating competitive priorities into operational capabilities by making a variety of choices and trade-offs for design and operating decisions. That is, operating decisions must be aligned with achieving the desired competitive priorities. For example, Progressive automobile insurance has developed a competitive advantage around superior customer service. To accomplish this, its operating decisions have included on-the-spot claims processing at accident sites; “Total Loss Concierge” service to help customers with unrepairable vehicles get a replacement vehicle; and the industry’s first Web 2.0 site, with easier navigation, customization, and video content.

To illustrate how operations strategy can support competitive priorities, consider two types of business strategies for a manufacturer:

1. Produce a well-defined set of products in a fairly stable market environment as a low- cost leader.

2. Provide high product variety and customization in a turbulent market that requires innovative designs to meet customer-specific requirements.

In the first situation, the firm would be best served by emphasizing quality and cost reduction in their make-to-stock strategy. This would require a well-balanced, synchronized supply chain approach with strong supplier involvement, efficient assembly line final assembly processes, and high work standardization. Some equipment and processes might be dedicated to a particular product line or family of products. In this case, a highly efficient manufacturing system is needed.

In the second situation, the firm would need to be able to operate at different levels of production volume while also achieving high quality and flexibility. An operations strategy based on mass customization would be appropriate.

Product design would require constant innovation and shorter development cycles. Operations would need to be highly flexible in a make-to-order environment, producing batches of unique, customer-specified orders in low to moderate volumes, and using employees with high skill levels and diverse capabilities.

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Operations and supply-chain strategy for service businesses is somewhat similar to manufacturers but differs in seven unique ways, as described in Chapter 1. In Section 3.6a, we discuss how operations strategy is reflected at McDonald’s to achieve its competitive priorities.

How operations are designed and implemented can have a dramatic effect on business performance and achievement of the strategy. Therefore, operations require close coordination with functional strategies in other areas of the firm such as marketing and finance.

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Sustainability is an organizational strategy—it is broader than a competitive priority.

Chapter 3: Operations Strategy: 3-5b Sustainability and Operations Strategy Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

3-5b Sustainability and Operations Strategy

Sustainability is defined in previous chapters using three dimensions— environmental, social, and economic sustainability. Stakeholders such as the community, green advocacy groups, and the government drive environmental sustainability. Social sustainability is driven by ethics and human ideals of protecting the planet and its people for the well-being of future generations. Economic sustainability is driven by shareholders such as pension funds and insurance companies. Therefore, sustainability is an organizational strategy—it is broader than a competitive priority. Sustainability requires major changes in the culture of the organization (see box on General Electric ).

General Electric: Green Starts at the Top

Jeffrey Immelt, the CEO of General Electric, proposed a green business strategy and plan to his 35 top executives in 2004, and they voted against it. Immelt refused to take no for an answer and overruled his executives. The result of his efforts is now defined in GE’s highly successful Ecomagination initiative. Ecomagination (http://ge.ecomagination.com) is a business strategy designed to drive innovation and the growth of profitable environmental solutions while engaging stakeholders. GE invests in innovation through its R&D efforts and outside venture capital investments. The resulting goods and services enable GE and its customers to reduce emissions while generating revenue from their sale. Combining profits and energy savings, GE continues to invest in environmental solutions, perpetuating the cycle. Specific green and measurable targets have been established by year. For

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example, GE’s greenhouse gas (GHG) target set in 2008 has been exceeded by 30 percent.

Companies such as Apple, Kaiser Permanente, and Nike view sustainability as a corporate strategy. A majority of global consumers believe that it is their responsibility to contribute to a better environment and would pay more for brands that support this aim. Likewise, retailers and manufacturers are demanding greener products and supply chains. In 2007, Walmart Stores Inc. announced that it would transition toward selling only concentrated laundry detergents, which use much less water and therefore require less packaging and space for transport and storage. Every major supplier in the detergent industry was involved. Government actions are also driving these initiatives. The 2009 U.S. stimulus package earmarked $70 billion for the development of renewable and efficient energy technologies and manufacturing. The European Union has set targets for reducing emissions to 20 percent of 1990 levels by 2020.

Companies that have embraced sustainability pursue this strategy throughout their operations. For example, computer maker Dell Inc. has announced that it is committed to becoming “the greenest technology company on the planet.” Such a strategy often requires considerable innovation in value chains, operations design, and day-to-day management. For example, Dell launched a program called Design for the Environment that seeks to minimize adverse impacts on the environment by controlling raw material acquisition, manufacturing processes, and distribution programs while linking green policies with consumer use and disposal. This framework encourages Dell’s product designers to consider the full product life cycle, and it provides them with a platform for collaborating with suppliers, supply chain experts, and external recycling experts and other downstream partners to help them fully understand the environmental implications of their design decisions.

Companies are also paying closer attention to ethical issues of outsourcing, particularly the human resource practices of off-shore suppliers, which may include unreasonable work hours or unsafe working conditions. Such issues are more difficult to monitor when control is relinquished to an off-shore manufacturer.

New Strategies for Environmental Sustainability

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Many durable products such as cell phones, televisions, and refrigerators contain hazardous materials and cannot be easily reused or recycled. As a result, organizations need to rethink strategically the environmental challenges that result from obsolete durable goods. Cell phones, for example, become obsolete quickly as a result of manufacturers making rapid improvements in design, and service providers offering new incentives. Some new strategies that have been suggested include:

Creating better designs that focus on ease of disassembly and lower costs for refurbishing and recycling. This might include modular designs that make it easier to reuse parts than to recycle them, or to recover valuable materials more easily.

Incorporating refurbishing and recycling activities into manufacturers’ value chains. As many as 130 million phones are retired each year, with significant waste and environmental implications.

Creating more secondary markets for refurbished phones. This can increase profits by enticing users of voice-only phones to upgrade to data plans if the price of the phones can be reduced.

Developing new processes to collect and refurbish old phones. For example, ReCellular Inc. has partnered with Verizon, Motorola, Walmart, and others, but still it only captures 5 percent of retired phones, suggesting that the cell phone value chain has not matured.

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1-0 Operations Management and Value Chains
1-0a Chapter Introduction
1-1 Operations Management
1-2 OM in the Workplace
1-3 Understanding Goods and Services
1-4 The Concept of Value
1-5 Customer Benefit Packages
3-0 Operations Strategy
3-0a Chapter Introduction
3-1 Gaining Competitive Advantage
3-2 Understanding Customer Wants and Needs
3-3 Evaluating Goods and Services
3-4 Competitive Priorities
3-4a Cost
3-4b Quality
3-4c Time
3-4d Flexibility
3-4e Innovation
3-5 Om and Strategic Planning
3-5a Operations Strategy
3-5b Sustainability and Operations Strategy