Week 3,4 Discussion 1 & 2

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Chapter 2: Measuring Performance in Operations and Value Chains Chapter Contents Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

Chapter 2 Measuring Performance in Operations and Value Chains

Chapter Introduction

2-3 Designing Measurement Systems in Operations

© 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 2: Measuring Performance in Operations 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

Learning Objectives

Objectives After studying this chapter, you should be able to:

Describe the types of measures used for decision making.

Explain the use of analytics in OM and how internal and external measures are related.

Explain how to design a good performance measurement system.

Describe four models of organizational performance.

Baptist Hospital, Inc. (BHI) is a subsidiary of Baptist Health Care with about 2,252 employees and includes two hospitals and an ambulatory care complex that delivers an array of outpatient and diagnostic services. Continuous improvement is an important aspect of BHI’s culture, driven by peer, employee, physician, and patient surveys, as well as using

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the Malcolm Baldrige National Quality Award performance framework to gather information and identify opportunities for improvement.

BHI uses a variety of listening and learning approaches to determine customer needs, including surveys and Customer Value Analysis to determine patient loyalty attributes. Information gathered from the listening and learning activities is collected and analyzed using a customer relationship management database to identify the key requirements for each customer group and as input into strategic planning, service design and FOCUSPDCA (a performance improvement process). BHI’s information and knowledge management systems enable it to collect and integrate data from clinical systems, employees, patients, financial systems, decision support systems, and physicians for tracking overall organizational performance and for identifying opportunities for improvement. Reports are generated to support organizational performance and learning, financial performance, clinical outcomes (quality) improvement, customer satisfaction, team activities, and continuous improvement results.

What Do You Think?

What measures do you think a company should use to evaluate its goods or services? Provide some examples.

Measurement (is the act of quantifying the performance of organizational units, goods and services, processes, people, and other business activities.) is the act of quantifying the performance of organizational units, goods and services, processes, people, and other business activities. Measurement provides an objective basis for making decisions. By measuring and analyzing organizational performance, Baptist Hospital, Inc. (BHI) is able to better manage all of its stakeholders (patients, third-party payers, employees, and suppliers), leading to more successful outcomes.

Good measures provide a “scorecard” of performance, help identify performance gaps, and make accomplishments visible to the workforce, the stock market, and other stakeholders. For example, the ground-operations area of American Airlines is concerned primarily with the service passengers receive at airports. The ground-operations area routinely measures several factors that customers have noted are important, such as waiting time at the ticket counter, time to opening the cabin door after gate arrival, bag-delivery time, and cabin cleanliness. The popular phrase “How you are measured is how you perform” can lead to improvements. For example, doctors at one hospital tended to rush through colonoscopies, to the detriment of the patients. After an administrator began to measure the length of the procedures and assign a quality rating, doctors’ behavior changed and quality improved. However, the wrong kind of performance measure can be dangerous. In one

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company, engineers were measured on how quickly they could design new products. Unfortunately, those products were not what customers wanted, and revenues and profits quickly fell.

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Chapter 2: Measuring Performance in Operations and Value Chains: 2-3 Designing Measurement Systems in Operations Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

2-3 Designing Measurement Systems in Operations What makes a good performance measurement system for operations? Many organizations define specific criteria for selecting and deleting performance measures from the organization’s information system. IBM Rochester, for example, asks the following questions:

Does the measurement support our mission?

Will the measurement be used to manage change?

Is it important to our customers?

Is it effective in measuring performance?

Is it effective in forecasting results?

Is it easy to understand/simple?

Are the data easy/cost-efficient to collect?

Does the measurement have validity, integrity, and timeliness?

Does the measurement have an owner?

Analytics for Managing Sports Teams

Professional and amateur sports are just beginning to take advantage of today’s analytical methods and software capabilities in order to evaluate performance and return on investment. In basketball, for example, the “box score” documents traditional performance metrics such as points, field goal percentage, fouls, blocked shots, assists, steals, turnovers, minutes played, and offensive and defensive rebounds. Analytics in the form of shot charts, rebound charts, play-by-play data, and motion-capture video and analysis is used to supplement traditional data. Today, the critical question is how to effectively analyze such data in order to maximize performance and owners’ returns for minimal cost.

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The popular book and film Moneyball demonstrated the use of analytics in sports management to the average sports fan. The book, published in 2003, before analytics became a buzzword in business, profiles how the Oakland Athletics baseball team used analytics to build a competitive team even with a limited budget, and compete with better-funded teams such as the New York Yankees, which spent nearly three times as much on player personnel. To promote the use of analytics in sports management, the Massachusetts Institute of Technology hosts the annual MIT Sloan Sports Analytics Conference that has been attended by students from over 150 different schools and representatives from over 50 professional sports teams.

Solved Problem 2.3

What is the value of a loyal customer (VLC) in the small contractor target market segment who buys an electric drill on average every four years (or every 0.25 year) for $100, when the gross margin on the drill averages 50 percent, and the customer retention rate is 60 percent? What if the customer retention rate increases to 80 percent? What is a 1 percent change in market share worth to the manufacturer if it represents 100,000 customers? What do you conclude?

Solution:

If customer retention rate is 60 percent, the average customer defection . Thus, the customer

defection rate is 40 percent, or 0.4. The average buyer’s life cycle is

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. The repurchase frequency is every four years, or 0.25 (1/4) year. Therefore, using Equation (2.2):

The value of a 1 percent change in market share

If the customer retention rate is 80 percent, the average customer defection rate is 0.2, and the average buyer’s life cycle is . Then,

Thus, the value of a 1 percent change in market share

The economics are clear. If customer retention can be increased from 60 to 80 percent through better value chain performance, the economic payoff is doubled.

Good performance measures are actionable. Actionable measures (provide the basis for decisions at the level at which they are applied.) provide the basis for decisions at the level at which they are applied—the value chain, organization, process, department, workstation, job, and service encounter. They should be meaningful to the user, timely, and reflect how the organization generates value to customers. Performance measures should support, not conflict with, customer requirements. For example, customers expect a timely response when calling a customer support number. A common operational measure is the number of rings until the call is picked up. If a company performs well on this measure, but puts the customer on hold or in a never-ending menu, then a conflict clearly exists.

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Chapter 4: Technology and Operations Management Chapter Contents Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

Chapter 4 Technology and Operations Management

Chapter Introduction

4-1 Understanding Technology in Operations 4-1a Manufacturing Technology

4-1b Computer-Integrated Manufacturing Systems (CIMSs)

4-1c Advances in Manufacturing Technology

4-1d Service Technology

4-2 Technology in Value Chains

4-3 Benefits and Challenges of Technology

4-4 Technology Decisions and Implementation

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Chapter 4: Technology and Operations Management Chapter Introduction Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

Chapter Introduction

Learning Objectives

After studying this chapter, you will be able to:

Describe different types of technology and their roles in manufacturing and service operations.

Explain how manufacturing and service technology and analytics strengthen the value chain.

Explain the benefits and challenges of using technology.

Describe key technology decisions.

You may have heard a newer buzzword—the “Internet of Things (IoT).” This refers to physical products with embedded sensors that are connected to the Internet, such as smart watches and fitness devices, thermostats, lighting, security, and refrigerators, to name just a

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few. IoT sensors on commercial appliances can delight customers. A leaky refrigerator hose will immediately trigger a text message to your phone, encouraging you to get the problem fixed before the house floods. IoT sensors will monitor your grocery supplies, and send a resupply list as soon as you run short.

The IoT is changing operations management. Bar code scanners and RFID chips have been in use for years to track products in the supply chain and improve customer response. Electronic screwdrivers with embedded sensors help workers screw in fasteners with the right torque. Part bins have built-in scales that can alert workers if they grab the wrong part. Sensors in manufacturing equipment can automatically adjust ingredients, temperature, and pressure in chemical processes, thus improving product quality. They can be used to adjust the position of physical objects as they move down an assembly line so that they are positioned correctly and accurately for processing. Services will also be affected; tech experts make over 4 million house calls each year to help customers install connected devices. Companies that sell IoT products and have the expertise to support them will have an advantage over their competitors such as Amazon and Walmart. The IoT will require companies to overhaul their information technology (IT), supply-chain, and logistics systems.

What Do You Think?

In what ways has technology benefited your life and work as a student?

Technology—both physical and information—has dramatically changed how work is accomplished in every industry, from mining to manufacturing, to education, to health care. Technology is the enabler that makes today’s service and manufacturing systems operate productively and meet customer needs better than ever. Most of you probably cannot imagine living in a world without personal computers, the Internet, or wireless communications. However, new technology such as the electric car requires a rethinking of the customer benefit package, supply chain, and operations. With a limited range, the practicality of electric vehicles requires the ability to quickly charge batteries during longer trips. Tesla is building a nationwide network of 30-minute charging stations that will allow individuals to drive across the entire United States. It is also developing battery-swapping stations that can change the batteries faster than a typical gasoline fill-up. Tesla refuses to sell through independent dealers; it operates all its own showrooms and service centers to avoid the middleman price inflation and to build and maintain customer relationships. Its manufacturing plant has a high level of automation to manufacture body panels, and it uses an army of industrial robots to assist workers in the assembly process and to transport the vehicle through the plant. Robots even insert seats and glue and set windshields. (Search YouTube for “How the Tesla Model S Is Made” for a behind-the-scenes tour.)

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Technological innovation in goods, services, manufacturing, and service delivery is a competitive necessity. In the early days of the Internet, Jack Welch, retired CEO of General Electric, for example, pushed GE to become a leader among traditional, old-economy companies in embracing the Internet after noticing his wife Christmas shopping on the Web. “I realized that if I didn’t watch it, I would retire as a Neanderthal,” he was reported as saying, “So I just started reading everything I could about it.” He began by pairing 1,000 Web-savvy mentors with senior people to get his top teams up to Internet speed quickly.

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Chapter 4: Technology and Operations Management: 4-1 Understanding Technology in Operations Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

4-1 Understanding Technology in Operations We may categorize technology into two basic groups. Hard technology (refers to equipment and devices that perform a variety of tasks in the creation and delivery of goods and services.) refers to equipment and devices that perform a variety of tasks in the creation and delivery of goods and services. Some examples of hard technology are computers, microprocessors, optical switches, satellites, sensors, robots, automated machines, bar- code scanners, and radio-frequency identification (RFID) tags.

RFID tags are the modern successor to bar codes. RFID tags are tiny computer chips that can be placed on shipping containers, individual products, credit cards, prescription medicines, passports, livestock, and even people. They transmit radio signals to identify locations and track movements throughout the supply chain. They have many applications in both manufacturing and service industries. Retail, defense, transportation, and health care have begun requiring their suppliers to implement this technology. RFID can bring visibility and enhanced security to the handling and transportation of materials, baggage, and other cargo. RFID can help identify genuine products from counterfeit knock-offs, thus helping to lower overall product and operational costs. They have also been used to monitor residents in assisted living buildings and track the movements of doctors, nurses, and equipment in hospital emergency rooms.

RFID tags such as this one are attached to objects and used to track and manage inventory and assets.

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Soft technology (refers to the application of the Internet, computer software, and information systems to provide data, information, and analysis and to facilitate the creation and delivery of goods and services.) refers to the application of the Internet, computer software, and information systems to provide data, information, and analysis and to facilitate the creation and delivery of goods and services. Some examples are database systems, artificial intelligence programs, and voice-recognition software. Both types are essential to modern organizations (see the box about Amazon.com later in this chapter). As described in the introduction to this chapter, the hybrid and ultimately the electric vehicle are good examples of integrating hard and soft technology.

Information technology (IT) provides the ability to integrate all parts of the value chain through better management of data and information. This leads to more effective strategic and operational decisions to design better customer benefit packages that support customers’ wants and needs, achieve competitive priorities, and improve the design and operation of all processes in the value chain.

Increasingly, both hard and soft technology are being integrated across the organization, allowing managers to make better decisions and share information across the value chain. Such systems, often called integrated operating systems (IOSs), include computer- integrated manufacturing systems (CIMs), enterprise resource planning (ERP) systems, and customer relationship management (CRM) systems, all of which use technology to create better and more customized goods and services and deliver them faster at lower prices. We will discuss these systems in the following sections.

Chapter 4: Technology and Operations Management: 4-1 Understanding Technology in Operations Book Title: Operations and Supply Chain Management

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Chapter 4: Technology and Operations Management: 4-1a Manufacturing Technology Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

4-1a Manufacturing Technology

Although high-tech, automated manufacturing processes receive a lot of media attention, much of the technology used in small- and medium-sized manufacturing enterprises around the world is still quite basic. The box on making jigsaw puzzles illustrates simple, low-tech, manufacturing technology. Producing automobiles, jet engines, and other sophisticated products requires far more advanced methods. However, from an operations management standpoint, all organizations face common issues regarding technology:

The right technology must be selected for the goods that are produced.

Process resources, such as machines and employees, must be set up and configured in a logical fashion to support production efficiency.

Labor must be trained to operate the equipment.

Process performance must be continually improved.

Work must be scheduled to meet shipping commitments/customer promise dates.

Quality must be ensured.

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Chapter 4: Technology and Operations Management: 4-1b Computer-Integrated Manufacturing Systems (CIMSs) Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

4-1b Computer-Integrated Manufacturing Systems (CIMSs)

Much of the technology used in manufacturing today is automated and linked with information technology. Computer-integrated manufacturing systems (CIMSs) (represent the union of hardware, software, database management, and communications to automate and control production activities, from planning and design to manufacturing and distribution.) represent the union of hardware, software, database management, and communications to automate and control production activities, from planning and design to manufacturing and distribution. CIMSs include many hard and soft technologies with a wide variety of acronyms, vendors, and applications and are essential to productivity and efficiency in modern manufacturing.

Drescher Paper Box: Making Jigsaw Puzzles

Drescher Paper Box in Buffalo, New York, formed in 1867, manufactures high- quality, laminated, cardboard jigsaw puzzles and board games and assembles them for retail stores. Drescher also produces cotton-filled jewelry boxes, candy boxes, business card boxes, and custom-made industrial boxes. Manufacturing jigsaw puzzles consists of three major steps: making the puzzle pieces, making the puzzle boxes, and final assembly. A printed picture is cut to size and laminated on a thick puzzle-board backing. Large presses are used to cut the puzzle into pieces, which are then bagged. The box-making process begins with blank cardboard. Boxes are

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scored and cut, then laminated with printed graphics. In the final assembly process, the puzzles are boxed and shrink-wrapped for shipment.

The roots of CIMSs began with numerical control (NC) (machine tools enable the machinist’s skills to be duplicated by a programmable device (originally punched paper tape) that controls the movements of a tool used to make complex shapes.) machine tools, which enable the machinist’s skills to be duplicated by a programmable device (originally punched paper tape) that controls the movements of a tool used to make complex shapes. Computer numerical control (CNC) (machines are NC machines whose operations are driven by a computer.) machines are NC machines whose operations are driven by a computer.

Industrial robots were the next major advance in manufacturing automation. A robot (is a programmable machine designed to handle materials or tools in the performance of a variety of tasks.) is a programmable machine designed to handle materials or tools in the performance of a variety of tasks. Robots can be “taught” a large number of sequences of motions and operations and even to make certain logical decisions. Other typical applications are spray painting, machining, inspection, and material handling. Robots are especially useful for working with hazardous materials or heavy objects; for instance, in nuclear power plants robots are used to do work in highly radioactive areas. In services, robots help doctors complete intricate brain surgery by drilling very precise holes into the skull.

Integrated manufacturing systems began to emerge with computer-aided design/computer- aided engineering (CAD/CAE) and computer-aided manufacturing (CAM) systems. CAD/CAE (enables engineers to design, analyze, test, simulate, and “manufacture” products before they physically exist, thus ensuring that a product can be manufactured to specifications when it is released to the shop floor.) enables engineers to design, analyze,

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test, simulate, and “manufacture” products before they physically exist, thus ensuring that a product can be manufactured to specifications when it is released to the shop floor. For example, Nissan is cutting in half the time needed to take new cars from design to showroom, using computer-aided design software. The Nissan Note subcompact was rolled out to the Japanese market just 10.5 months after its design was finalized, in contrast to the 20.75 months that the process used to take. CAM (involves computer control of the manufacturing process, such as determining tool movements and cutting speeds.) involves computer control of the manufacturing process, such as determining tool movements and cutting speeds.

Kroger: Leveraging Two Seconds of Savings

Bar code scanners have been used in grocery stores for many years, requiring associates to scan items manually in the checkout lanes. Using a patented technology, the national grocery chain Kroger has been testing a new innovation called Advantage Checkout, designed to save customers time as well as to save the company operating costs and labor. Customers place items on a quick-moving conveyor belt. The items enter a tunnel lined with high-powered cameras to capture images of the products and scan the bar codes, then leave the tunnel on another conveyor to be bagged. The scanner can perform the function of several traditional or self-checkout lanes, takes up less floor space, and requires fewer workers. For a process that is done thousands of times in 2,400 stores, Kroger’s CFO noted, “You can really leverage two seconds of savings that way.”

Flexible manufacturing systems (FMSs) (consist of two or more computer-controlled machines or robots linked by automated handling devices such as transfer machines, conveyors, and transport systems. Computers direct the overall sequence of operations and route the work to the appropriate machine, select and load the proper tools, and control the operations performed by the machine.) consist of two or more computer-controlled machines or robots linked by automated handling devices such as transfer machines, conveyors, and transport systems. Computers direct the overall sequence of operations and route the work to the appropriate machine, select and load the proper tools, and control the operations performed by the machine. More than one item can be machined or assembled simultaneously, and many different items can be processed in random order. Honda has been a pioneer in using FMSs and robotic technology. Its competitive priorities are moving toward design and demand flexibility so it is changing operating systems and technology to support these priorities. Honda assembly plants use flexible manufacturing cells where the robots can be reprogrammed to build different models of cars. Today, many companies have achieved complete integration of CAD/CAE, CAM, and FMSs into what we now call computer-integrated manufacturing systems (CIMSs).

Chapter 4: Technology and Operations Management: 4-1b Computer-Integrated Manufacturing Systems (CIMSs) Book Title: Operations and Supply Chain Management

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Chapter 4: Technology and Operations Management: 4-1c Advances in Manufacturing Technology Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

4-1c Advances in Manufacturing Technology

Innovations in technology have changed manufacturing in many industries. You have undoubtedly heard of 3-D printing, technically called additive manufacturing. This is the process of producing a three-dimensional solid object from a digital model file. “Additive” means that successive layers of material such as plastics, ceramics, or glass are built up rather than attained by traditional machining processes such as milling or drilling, which remove materials.

3-D printing technology has numerous applications. For example, industrial designers can quickly produce a physical model from a digital computer-aided design drawing; this is often called rapid prototyping and is used extensively in architecture, industrial design, and automotive, aerospace, and other manufacturing industries. It is used in the dental and medical industries for implants and prosthetics, and even in the fashion industry a recent contestant on the TV show “Project Runway” used it to create wearable fashion accessories! The technology is expanding the customer benefit package, allowing consumers to create custom products. For instance, Nokia introduced 3-D printing to make custom cases for mobile phones.

3-D printers can be used to create both prototypes and working products.

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Alcoa: 3-D Printing for Jet Engine Parts

Alcoa makes parts for gas turbines used in commercial jets that have to handle temperatures of up to and the stresses of aviation. Between tooling, development, and casting, it used to take Alcoa upward of a year to manufacture one of the nickel-alloy parts that go into an engine. With additive manufacturing, Alcoa has managed to cut in half the time required to develop the process and manufacture the part and cut the cost of the process by about 25 percent. Alcoa pairs computer-aided design, or CAD, with 3-D printing to construct the die from a computer file, layer by layer. A process that once took half a year could be completed in two to eight weeks, allowing the company to dramatically increase its output.

New types of industrial robots are being developed. Baxter developed one that can be trained like a human being and costs about half as much as the least expensive industrial robots currently on the market. With no coding whatsoever, the robot can be taught, and afterwards it will use common sense—if it drops something, it will pick it up. Robots like Baxter let smaller manufacturers work more efficiently, allowing real workers to put in work where it’s actually needed instead of spending time on menial sorting tasks.

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Nanotechnology involves the manipulation of matter on atomic, molecular, and supramolecular scales, thus bringing with it super-precision manufacturing. Currently applied mostly in space technology and biotechnology, it is going to play an indispensable role in every manufacturing industry in the future. In many ways, it has already changed the world. Examples of application in nanotechnology include:

Faster computer processing.

Superconductive materials based on carbon nanotubes lifting magnetic cars and trains.

Smaller memory cards that have more memory space.

Clothes that last longer and keep the wearer cool in the summer.

Bandages that heal wounds faster.

All of these advances—and more that are on the horizon—will continue to make OM a challenging and exciting field.

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Chapter 4: Technology and Operations Management: 4-1d Service Technology Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

4-1d Service Technology

You have undoubtedly encountered quite a bit of service technology in your own daily life. Technology is used in many services, including downloading music, banking, automated car washes, voice recognition in telephone menus, medical procedures, hotel and airline kiosks, and entertainment such as the robots used in Disney World’s Hall of Presidents and Country Bear Jamboree attractions. One innovation that is being used by Stop & Shop, a grocery chain serving New England, is a portable device called EasyShop. EasyShop is a handheld terminal that allows loyalty card shoppers to scan items as they shop and receive targeted offers. Shoppers can also place an order at the deli department, for example, and then be alerted when the order is ready.

Other service technologies are used behind the scenes in hotels, airlines, hospitals, and retail stores to facilitate service experiences. To speed order entry for pizza delivery, for instance, many firms use a touch-sensitive computer screen that is linked to a customer database. When a repeat customer calls, the employee need only ask for the customer’s phone number to bring up the customer’s name, address, and delivery directions (for a new customer, the information need only be entered once). The employee is able to address the customer immediately by name, enhancing the perception of service quality, and then enter the order quickly on the touch-sensitive screen to print for the kitchen, eliminating errors due to misreading of handwritten orders.

CIMS Facts

According to the National Research Council, companies with computer-integrated manufacturing system experience have been able to:

decrease engineering design costs by up to 30 percent;

increase productivity by 40 to 70 percent;

increase equipment utilization by a factor of 2 to 3;

reduce work-in-process and lead times by 30 to 60 percent; and

improve quality by a factor of 3 to 4.

Perhaps the most common service technology in use today involves the Internet. E-service (refers to using the Internet and technology to provide services that create and deliver time,

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place, information, entertainment, and exchange value to customers and/or support the sale of goods.) refers to using the Internet and technology to provide services that create and deliver time, place, information, entertainment, and exchange value to customers and/or support the sale of goods. Many individuals use airline, hotel, and rental car websites or “one-stop” e-services like Microsoft Expedia in planning a vacation. The Internet of Things, digital personal assistants, and virtual reality offer new experiences for customers.

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Technology, especially the Internet and e-communications, is changing the operation, speed, and efficiency

Chapter 4: Technology and Operations Management: 4-2 Technology in Value Chains Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

4-2 Technology in Value Chains Technology, especially the Internet and e-communications, is changing the operation, speed, and efficiency of the value chain and presents many new challenges to operations managers. In many situations, electronic transaction capability allows all parts of the value chain to immediately recognize and react to changes in demand and supply. This requires tighter integration of many of the components of the value chain. In some cases, technology provides the capability to eliminate parts of the traditional value chain structure and streamline operations.

Business analytics plays a critical role in managing value chains, particularly for integrating and analyzing data throughout the value chain within an information systems framework. Netflix, for example, uses analytics everywhere, from marketing to operations to customer service. Netflix collects extensive data using surveys, website user testing, brand- awareness studies, and segmentation research. It uses analytics to help decide what price to pay for the rights to distribute new DVDs. Using data on customer preferences, film ratings, and comparisons with people who have similar viewing and preference histories, Netflix predicts movies that a customer is likely to enjoy and creates personalized recommendations. This information also helps manage its film inventory by recommending older movies to balance demand for newer releases.

Customer relationship management (CRM) (is a business strategy designed to learn more about customers’ wants, needs, and behaviors in order to build customer relationships and loyalty, and ultimately enhance revenues and profits.) is a business strategy designed to learn more about customers’ wants, needs, and behaviors in order to build customer relationships and loyalty, and ultimately enhance revenues and profits. CRM exploits the vast amount of data that can be collected from consumers. For example, using a cell phone to make a voice call leaves behind data on whom you called, how long you talked, what time you called, whether your call was successful or it was dropped, your location, the promotion you may be responding to, and purchase histories. Similarly, supermarkets, drugstores, and retail stores use “loyalty cards” that leave behind a digital trail of data about purchasing patterns. By better understanding these patterns and hidden relationships in data, stores can customize advertisements, promotions, coupons, and so on down to each individual customer and send targeted text messages and e-mail offers.

A typical CRM system includes market segmentation and analysis, customer service and relationship building, effective complaint resolution, cross- selling of goods and services, and pre-

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of the value chain and presents many new challenges to operations managers.

and postproduction processes such as preproduction order processing and postproduction field service. Of course, the value chain must be capable of delivering what the customer wants, and that is where sound operational analysis is required.

CRM helps firms gain and maintain competitive advantage by:

segmenting markets based on demographic and behavioral characteristics;

tracking sales trends and advertising effectiveness by customer and market segment;

identifying which customers should be the focus of targeted marketing initiatives with predicted high customer response rates;

forecasting customer retention (and defection) rates and providing feedback as to why customers leave the company;

identifying which transactions are likely to be fraudulent;

studying which goods and services are purchased together, and what might be good ways to bundle them (i.e., the customer benefit package);

studying and predicting what Web characteristics are most attractive to customers and how the website might be improved; and

linking the previous information to competitive priorities by market segment and process and value chain performance.

In recent years, cloud computing has improved the efficiency, productivity, and cost for organizations using information technology and CRM. Many now outsource CRM and other IT services; for instance, Netflix outsourced most of its Web technology work to Amazon.

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Chapter 4: Technology and Operations Management: 4-3 Benefits and Challenges of Technology Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

4-3 Benefits and Challenges of Technology Technology provides many benefits but at the same time poses some key challenges. A summary of the benefits and challenges of technology is given in Exhibit 4.1. Can you think of others?

Exhibit 4.1

Example Benefits and Challenges of Adopting Technology

Benefits Challenges

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Benefits Challenges

Creates new industries and job opportunities

Restructures old and less productive industries

Integrates supply and value chain players

Increases marketplace competitiveness and maintains the survival of the firm

Provides the capability to focus on smaller target market segments through mass customization

Improves/increases productivity, quality, customer satisfaction, speed, safety, and flexibility/customization— does more with less

Lowers cost

Raises world’s standard of living

Monitors the environment and health of the planet

Higher employee skill levels required, such as information technology and service management skills

Integration of old (legacy) and new technology and systems

Job shift and displacement

Less opportunity for employee creativity and empowerment

Protecting the employee’s and customer’s privacy and security

Fewer human service providers, resulting in customer ownership not being assigned, nonhuman service encounters, and inability of the customer to change decisions and return goods easily

Information overload

Global outsourcing and impact on domestic job opportunities

Enforcement of regulations and laws to support sustainability goals

One major benefit of technology has been its impact on sustainability. In Florida, for example, Card Sound Golf Club in Key Largo had an underground sensor system installed that allowed the club to cut in half the amount of fresh water it used to flush salt out of water used to irrigate the golf course. Many other golf courses are using this advanced sensor

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technology to reduce water consumption and keep their golf courses green—and not just in color.

Intel suggests that the microprocessor is the “ultimate invention for achieving sustainability.” Microprocessor-based information and communication technology (ICT) provides

sustainable economic, environmental, and social benefits on a national and global basis, often contributing to substantial economic gains through better productivity. These gains have significantly offset carbon usage, enabling more productivity, fewer miles traveled, and greater operational and material efficiencies. ICT is responsible for a phenomenon known as dematerialization, by which the same or an increased quality and quantity of goods and/or services are created using fewer natural resources. ICT has also enabled flexible work options such as telecommuting, which not only yields environmental benefits but social benefits as well.

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Although technology has proven quite useful in eliminating monotony and hazardous work, and can help people develop new skills and talents, it can also rob them of empowerment and creativity.

Chapter 4: Technology and Operations Management: 4-4 Technology Decisions and Implementation Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

4-4 Technology Decisions and Implementation Managers must make good decisions about introducing and using new technology. They must understand the relative advantages and disadvantages of using technologies and their impact on the workforce. Although technology has proven quite useful in eliminating monotony and hazardous work, and can help people develop new skills and talents, it can also rob them of empowerment and creativity. The goal of the operations manager is to provide the best synthesis of technology, people, and processes; this interaction is often called the sociotechnical system. Designing the sociotechnical system includes making decisions about job specialization versus enlargement, employee empowerment, training, decision support systems, teams and work groups, job design, recognition and reward, career advancement, and facility and equipment layout.

A key factor that affects technology decisions is scalability. Scalability (is a measure of the contribution margin (revenue minus variable costs) required to deliver a good or service as the business grows and volumes increase.) is a measure of the contribution margin (revenue minus variable costs) required to deliver a good or service as the business grows and volumes increase. Scalability is a key issue in e- commerce. High scalability (is the capability to serve additional customers at zero or extremely low incremental costs.) is the capability to serve additional customers at zero or extremely low incremental costs. For example, Monster.com is an online job posting and placement service that is largely information intensive. Customers can post their resumes on the Monster.com website and print out job advertisements and opportunities from their office or home computers at their expense. This service is highly scalable because its fixed costs are approximately 80 to 85 percent of total costs.

Process Innovations in Restaurants

Letting customers order food, pay their bills, and provide feedback through tableside tablets is a quickly evolving trend in large chain restaurants such as Chili’s, Applebee’s, Olive Garden, Panera, and Pizzeria Uno. This technology is improving efficiency and customer satisfaction, and helps the organizations to better hear the

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voice of their customers. Each of the restaurant chains reported more efficient operations and more dollars spent per order. Tablets reduced the average time customers spent at tables by 10 minutes. Receipts printed at tables or sent via e- mail significantly reduce the time servers spend bouncing among tables. The faster a restaurant can turn its tables—move customers in and out—the higher its profits. In addition to the time factor, Panera’s table-side tablets resulted in fewer order errors, and customer orders were $5 higher than average. The tablets are providing restaurants with customer feedback, ordering patterns, and other data that can be used to streamline service operations.

The incremental cost to serve an additional customer is very small, yet the revenue obtained from this customer remains high. If an organization establishes a business where the incremental cost (or variable cost) to serve more customers is zero, then the firm is said to be infinitely scalable. Online newspapers, magazines, and encyclopedias; e-banking services; and other information-intensive businesses have the potential to be infinitely scalable.

On the other hand, low scalability (implies that serving additional customers requires high incremental variable costs.) implies that serving additional customers requires high incremental variable costs. Many of the dot.com companies that failed around the year 2000 had low scalability and unsustainable demand (volumes) created by extraordinary advertising expenses and artificially low prices.

Solved Problem 4.1

Maling Manufacturing needs to purchase a new piece of machining equipment. The two choices are a conventional (labor-intensive) machine and an automated (computer-controlled) machine. Profitability will depend on a future unknown event

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—the demand volume. The following table presents an estimate of the net present value of profit over the next three years.

Demand Volume

Decision Low High

Conventional machine ($10,000) $110,000

Automated machine ($50,000) $145,000

Given the uncertainty associated with the demand volume, and no other information to work with, how would you make a decision?

Solution:

Supplementary Chapter (SC) E describes decision criteria for addressing this situation, and Exhibit 4.2 shows the Decision Analysis Excel template from MindTap. An aggressive, risk-taking manager would use a “maximax” criterion that would choose the decision that maximizes the maximum profit among all events (cell G9) —in this case, the automated machine. A conservative, risk-averse manager would use a “maximin” criterion that would choose the decision that will maximize the minimum possible profit among all events (cell H8)—in this case, the conventional machine. A third criterion is “minimax regret,” which chooses the decision that minimizes the maximum opportunity loss (cell G17). There is no optimal decision; the decision involves determining how much risk one is willing to take.

Exhibit 4.2

Portion of Excel Decision Analysis Template

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Many companies do not really understand how to implement technology effectively. The risk of a technology adoption failure is high. For instance, one major candy company installed three software packages just as retailers placed orders for Halloween candy. The software was incompatible with other systems, and candy piled up in warehouses because of missed or delayed deliveries. Such experiences are reminiscent of comparable failures of automated manufacturing technology encountered by the automobile and other industries during the 1970s. Reasons include rushing to the wrong technology, buying too much and not implementing it properly, and underestimating the time needed to make it work.

2.0 Measuring Performance in Operations and Value Chains
2-0a Chapter Introduction
2-3 Designing Measurement Systems in Operations
4-0 Technology and Operations Management
4-0a Chapter Introduction
4-1 Understanding Technology in Operations
4-1a Manufacturing Technology
4-1b Computer-Integrated Manufacturing Systems (CIMSs)
4-1c Advances in Manufacturing Technology
4-1d Service Technology
4-2 Technology in Value Chains
4-3 Benefits and Challenges of Technology
4-4 Technology Decisions and Implementation