DECISION TREE Assignment

SEVENTH EDITION

Operations Management in the Supply Chain

DECISIONS AND CASES

Roger Schroeder | Susan Meyer Goldstein

Operations Management in the Supply Chain Decisions and Cases

The McGraw-Hill Education Series Operations and Decision Sciences

OPERATIONS MANAGEMENT Beckman and Rosenfield Operations Strategy: Competing in the 21st Century First Edition

Benton Purchasing and Supply Chain Management Third Edition

Bowersox, Closs, and Cooper Supply Chain Logistics Management Fifth Edition

Brown and Hyer Managing Projects: A Team-Based Approach Second Edition

Burt, Petcavage, and Pinkerton Supply Management Ninth Edition

Cachon and Terwiesch Operations Management First Edition

Cachon and Terwiesch Matching Supply with Demand: An Introduction to Operations Management Fourth Edition

Finch Interactive Models for Operations and Supply Chain Management First Edition

Fitzsimmons and Fitzsimmons Service Management: Operations, Strategy, Information Technology Eighth Edition

Gehrlein Operations Management Cases First Edition

Harrison and Samson Technology Management First Edition

Hayen SAP R/3 Enterprise Software: An Introduction First Edition

Hill Manufacturing Strategy: Text & Cases Third Edition

Hopp Supply Chain Science First Edition

Hopp and Spearman Factory Physics Third Edition

Jacobs, Berry, Whybark, and Vollmann Manufacturing Planning & Control for Supply Chain Management Sixth Edition

Jacobs and Chase Operations and Supply Chain Management Fourteenth Edition

Jacobs and Chase Operations and Supply Chain Management: The Core Fourth Edition

Jacobs and Whybark Why ERP? First Edition

Johnson, Leenders, and Flynn Purchasing and Supply Management Fifteenth Edition

Larson and Gray Project Management: The Managerial Process Sixth Edition

Schroeder and Goldstein Operations Management in the Supply Chain: Decisions and Cases Seventh Edition

Simchi-Levi, Kaminsky, and Simchi-Levi Designing and Managing the Supply Chain: Concepts, Strategies, Case Studies Third Edition

Sterman Business Dynamics: Systems Thinking and Modeling for a Complex World First Edition

Stevenson Operations Management Twelfth Edition

Swink, Melnyk, Cooper, and Hartley Managing Operations Across the Supply Chain Third Edition

Thomke Managing Product and Service Development: Text and Cases First Edition

Ulrich and Eppinger Product Design and Development Sixth Edition

Zipkin Foundations of Inventory Management First Edition

QUANTITATIVE METHODS AND MANAGEMENT SCIENCE Hillier and Hillier Introduction to Management Science: A Modeling and Case Studies Approach with Spreadsheets Fifth Edition

Stevenson and Ozgur Introduction to Management Science with Spreadsheets First Edition

Operations Management in the Supply Chain Decisions and Cases Seventh Edition

Roger G. Schroeder Susan Meyer Goldstein Carlson School of Management University of Minnesota

OPERATIONS MANAGEMENT IN THE SUPPLY CHAIN: DECISION AND CASES, SEVENTH EDTION

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Library of Congress Cataloging-in-Publication Data

Schroeder, Roger G., author. | Goldstein, Susan Meyer, author. | Operations management in the supply chain : decisions and cases / Roger G. Schroeder, Susan Meyer Goldstein, Carlson School of Management, University of Minnesota. Operations management Seventh edition. | Dubuque : McGraw-Hill Education, 2016. LCCN 2016043564 | ISBN 9780077835439 (alk. paper) | ISBN 0077835433 (alk. paper) LCSH: Production management. | Production management—Case studies. | Decision making. LCC TS155 .S334 2016 | DDC 658.5—dc23 LC record available at https://lccn.loc.gov/2016043564

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

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To our families, whose encouragement and love we appreciate —Roger G. Schroeder

—Susan Meyer Goldstein

About the Authors Roger G. Schroeder is the Frank A. Donaldson Chair in Operations Management Emeritus at the Curtis L. Carlson School of Management, University of Minnesota. He received a B.S. degree in Industrial Engineering with high distinction and a MSIE degree from the University of Minnesota, and a Ph.D. from Northwestern University. He held positions in the Carlson School of Management as Director of the Ph.D. program, Chair of the Operations and Management Science Department, and Co-Director of the Joseph M. Juran Center for Leadership in Quality. Professor Schroeder has obtained research grants from the National Science Foundation, the Ford Foundation, and the American Production and Inventory Control Society. His research is in the areas of quality management, operations strategy, and high-performance manufacturing, and he is among the most widely published and cited researchers in the field of operations management. He has been selected as a member of the University of Minnesota Academy of Distinguished Teachers and is a recipient of the Morse Award for outstanding teaching. Professor Schroeder received the lifetime achievement award in operations management from the Academy of Management, and he is a Fellow of the Decision Sciences Institute and a Fellow of the Production and Opera- tions Management Society. Professor Schroeder has consulted widely with numerous orga- nizations, including 3M, Honeywell, General Mills, Motorola, Golden Valley Foods, and Prudential Life Insurance Company.

Susan Meyer Goldstein is Associate Professor in the Supply Chain and Operations Department at the Curtis L. Carlson School of Management, University of Minnesota. She earned a B.S. degree in Genetics and Cell Biology and an M.B.A. at the University of Minnesota and worked in the health care industry for several years. She later obtained a Ph.D. in operations management from Fisher College of Business at The Ohio State University. She has served on the faculty at the University of Minnesota since 1998 and was a Visiting Professor at the Olin Business School at Washington University in St. Louis for two years. Her current research investigates the link between service process design and process performance, and she is currently working with a Minnesota hospital that has been achieving one of the lowest heart attack mortality rates in the United States. She is also interested in issues related to aging service workers, operations strategy, and service quality. Her research has been pub- lished in Decision Sciences, Journal of Operations Management, and Production and Operations Management, among others. She is Associate Editor at Decision Science Journal, Quality Management Journal, and Service Industries Journal and serves on the editorial boards of many operations and service journals. She is the recipient of several research awards and research grants, and received the 2011 Carlson School of Management Teaching Award.

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Preface FEATURES

Operations management is an exciting and vital field in today’s complex business world. Therefore, students in both MBA and undergraduate courses have an urgent need to under- stand operations—an essential function in every business. This textbook on operations management in the supply chain emphasizes decision mak- ing in operations with a supply chain orientation. The text provides materials of interest to general business students and operations and supply chain management majors. By stress- ing cross-functional decision making, the text provides a unique and current business per- spective for all students. This is the first text to incorporate cross-functional decision making in every chapter. A unique decision framework organizes the material by grouping decisions into five major categories: process, quality, capacity, inventory, and supply chain. This framework is intended to make it easy for students to understand the decision role and responsibilities of operations and supply chain management in relation to functions such as marketing and finance. See the illustration below. The text also provides a balanced treatment of both service and manufacturing firms. We continue to emphasize operations in the supply chain with new chapters on sourcing and logistics. The most current knowledge is incorporated, including global operations, supply chain management, e-operations, service blueprinting, competency-based strategy, Six Sigma, lean systems, 3D printing, sustainability, supply chain risk, and mass customization. Complete coverage is also provided on traditional topics, including process design, service systems, quality management, ERP, inventory control, and scheduling. While covering the concepts of operations and supply chain management in 18 chapters, the book also provides 18 case studies. The cases are intended to strengthen problem for- mulation skills and illustrate the concepts presented in the text. Long and short case studies are included. The cases are not just large problems or examples; rather, they are substantial management case studies, including some from the Northwestern, Sheffield, Cranfield, and The Case Centre collections. The softcover edition with fewer pages than most introductory books covers all the essentials students need to know about operations management in the supply chain, leaving out only superfluous and tangential topics. By limiting the size of the book, we have condensed the material to the basics. The book is also available for the first time in digital formats in Connect and LearnSmart versions.

Decision-making framework for operations in the supply chain. Process

Quality

Capacity

Inventory

Supply Chain

Decisions

Human Resources Finance

Marketing

Accounting Information

Systems

Suppliers Customers

viii Preface

This book is ideal for regular operations management courses and also case courses and modular courses. It is particularly useful for those who desire a cross-functional and decision-making perspective that reaches across the supply chain. Instructors can easily supplement the text with their own cases, readings, or course materials as desired. The Connect Library and Instructor Resources contain 20 Excel templates designed to assist in solving problems at the end of chapters and the case studies. These resources also contain technical chapters on linear programming, simulation, transportation method, and queuing, which can be assigned by the instructor, if desired. The resources have Power- Point slides, solutions manual, the test bank, and web links to companies cited in the Stu- dent Internet Exercises in the text. Access to these web resources can be obtained from your McGraw-Hill sales representative or directly in the Connect Library. A number of pedagogical features are contained in this book.

∙ Operations Leader boxes are included in each chapter to illustrate current practices being implemented by leading firms.

∙ Each chapter contains at least three Student Internet Exercises. These exercises allow for extended learning about concepts discussed in the chapter.

∙ Points of cross-functional emphasis are noted in each chapter by a special symbol—a handshake. This highlights the locations of cross-functional aspects of operations decisions.

∙ Solved problems are included at the end of quantitative chapters to provide addi- tional examples for students.

∙ Excel spreadsheets are keyed to specific problems at the end of chapters.

KEY CHANGES IN THE SEVENTH EDITION This book is known for its decision orientation and case studies. We have strengthened the decision-making framework by addressing new decisions in sourcing, logistics, sustain- ability, and global supply chains. We also added new cases to address these decisions.

1. Supply Chain Management. This edition added a new section on Supply Chain. It contains two new chapters on Sourcing and Global Logistics. The Sourcing chapter contains material on sourcing goals, outsourcing, offshoring, reshoring, supply base optimization, the purchasing cycle, and scorecard weighting. The Global Logis- tics chapter contains material on the role of logistics, transportation modes, distribu- tion centers, logistics networks, location, third-party logistics, and logistics strategy. In addition, the Supply Chain Management chapter was moved to this section and up- dated to add a new section on supply chain risk and another new section on supply chain sustainability. This edition now has the latest and best supply chain material available. 2. Sustainability. More emphasis is given to sustainability. It is now covered in the chapters on The Operations Function, Operations and Supply Chain Strategy, Process Selection, and Supply Chain Management. A new case study is added on Murphy Warehouse: Sustainable Logistics. 3. Global. More material is provided on global operations and supply chains. With the addition of the Sourcing and Global Logistics chapters, global emphasis now moves beyond operations to the entire supply chain. New material on outsourcing, offshoring, and managing global supply chains has been added. New cases on global sourcing, global plant location, and global logistics are added.

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Preface ix

4. Other Additions. We have added materials on lean Six Sigma, 3D Printing, big data, analytics, ethics in sourcing, and disaster logistics. 5. Digital Versions. Digital versions of the text in McGraw-Hill’s Connect and LearnSmart have been developed. The Connect version provides a complete course man- agement system for the instructor and pdf content for students. It can be used to customize the course by selecting learning objectives for course coverage, using the test bank for multiple choice questions, automatic grading for selected quantitative problems, and access to all instructor support materials. The LearnSmart version provides feedback to students via multiple choice probes for each learning objective. The student is directed to return to readings where retention is weak. 6. Cases. Eighteen case studies are provided including cases from The Case Centre, and Northwestern, Sheffield, and Cranfield Universities. Existing cases have been revised to add current information. Ten new cases are added:

Altimus Brands: Managing Procurement Risk; Murphy Warehouse Company: Sustainable Logistics; Polaris Industries Inc.—Global Plant Location; Shelter Box: A Decade of Disaster Relief; The Westerfield Physician Practice: Value Stream Mapping; Journey to Perfect: Mayo Clinic and the Path to Quality; The Evolution to Lean Six Sigma in 3M, Inc.; Sage Hill Above Onion Creek: Focusing on Service Process and Qualilty; Toledo Custom Manufacturing: Quality Control; Best Homes: Forecasting

INSTRUCTOR RESOURCES Instructor Resource Center www.mhhe.com/schroeder7e The Instructor Resource Center provides complete materials for study and review. At this book’s website, instructors have access to teaching support such as electronic files of the ancillary materials: Solutions Manual, Technical Chapters, Excel Spreadsheets, Power- Point Lecture Slides, Digital Image Library, and Test Bank.

Solutions Manual. Prepared by the authors, this manual contains solutions to all the end-of-chapter problems and cases.

Test Bank. The Test Bank includes true/false, multiple-choice, and discussion questions/ problems at varying levels of difficulty.

EZ Test Online. All test bank questions are available in EZ Test Online, a flexible elec- tronic testing program. The answers to all questions are given, along with a rating of the level of difficulty, chapter learning objective met, Bloom’s taxonomy question type, and the AACSB knowledge category.

PowerPoint Lecture Slides. The PowerPoint slides draw on the highlights of each chapter and provide an opportunity for the instructor to emphasize the key concepts in class discussions.

Digital Image Library. All the figures in the book are included for insertion in Power- Point slides or for class discussion.

Excel Spreadsheets. Twenty Excel Spreadsheets are provided for students to solve des- ignated problems at the end of chapters.

Technical Chapters. Four technical chapters are provided for additional technical mate- rial on linear programming, transportation method, simulation and waiting lines.

Operations Management Video Series The operations management video series, free to text adopters, includes professionally de- veloped videos to help students fully understand the content and terminology within Operations and Supply Chain Management. These videos will be both relevant and up-to- date in order to be effectively utilized. Each video will come with a series of questions to assess the students’ knowledge of the material.

TECHNOLOGY McGraw-Hill Connect® Operations Management McGraw-Hill Connect® Operations Management is an online assignment and assessment solution that connects students with the tools and resources they’ll need to achieve success through faster learning, higher retention, and more efficient studying. It provides instructors with tools to quickly pick content and assignments according to the topics they want to emphasize.

Online Assignments. Connect Operations Management helps students learn more efficiently by providing practice material and feedback when they are needed. Connect grades homework automatically and provides feedback on any questions that students may have missed.

LearnSmart. LearnSmart adaptive self-study technology with Connect Operations Management helps students make the best use of their study time. LearnSmart provides a seamless combination of practice, assessment, and remediation for every concept in the textbook. LearnSmart’s intelligent software adapts to students by supplying questions on a new concept when students are ready to learn it. With LearnSmart students will spend less time on topics they understand and instead focus on the topics they need to master.

Simple Assignment Management and Smart Grading. When it comes to studying, time is precious. Connect Operations Management helps students learn more efficiently by providing feedback and practice material when they need it, where they need it. When it comes to teaching, your time also is precious. The grading function enables you to:

∙ Have assignments scored automatically, giving students immediate feedback on their work and side-by-side comparisons with correct answers.

∙ Access and review each response; manually change grades or leave comments for stu- dents to review.

Student Reporting. Connect Operations Management keeps instructors informed about how each student, section, and class is performing, allowing for more productive use of lecture and office hours. The progress-tracking function enables you to:

∙ View scored work immediately (Add Assignment Results Screen) and track individual or group performance with assignment and grade reports.

∙ Access an instant view of student or class performance relative to learning objectives. ∙ Collect data and generate reports required by many accreditation organizations, such

as AACSB.

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Instructor Library. The Connect Operations Management Instructor Library is your repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. The Connect Operations Management Instructor Library includes:

∙ eBook ∙ PowerPoint presentations ∙ Test Bank ∙ Instructor’s Solutions Manual ∙ Digital Image Library ∙ Excel Spreadsheets ∙ Technical Chapters

Integrated Media-Rich eBook. An integrated media-rich eBook allows students to access media in context with each chapter. Students can highlight, take notes, and access shared instructor highlights/notes to learn the course material.

Dynamic Links. Dynamic links between the problems or questions you assign to your students and the location in the eBook where that problem or question is covered.

Tegrity Campus: Lectures 24/7 Tegrity Campus is a service that makes class time available 24/7 by automatically cap- turing every lecture in a searchable format for students to review when they study and complete assignments. With a simple one-click start-and-stop process, you capture all computer screens and corresponding audio. Students can replay any part of any class with easy-to-use browser-based viewing on a PC or Mac. Educators know that the more students can see, hear, and experience class resources, the better they learn. In fact, studies prove it. With Tegrity Campus, students quickly recall key moments by using Tegrity Campus’s unique search feature. This search helps stu- dents efficiently find what they need, when they need it, across an entire semester of class recordings. Help turn all your students’ study time into learning moments immediately supported by your lecture. To learn more about Tegrity, watch a two-minute Flash demo at http://tegritycampus.mhhe.com.

Online Course Management No matter what online course management system you use (WebCT, BlackBoard, or eCollege), we have a course content ePack available for your course. Our new ePacks are specifically designed to make it easy for students to navigate and access content online. For help, our online Digital Learning Consultants are ready to assist you with your online course needs. They pro- vide training and will answer any questions you have throughout the life of your adoption. McGraw-Hill Higher Education and Blackboard have teamed up. What does this mean for you? 1. Single sign-on. Now you and your students can access McGraw-Hill’s Connect and

Create right from within your Blackboard course-all with one single sign-on. 2. Deep integration of content and tools. You get a single sign-on with Connect and Create,

and you also get integration of McGraw-Hill content and content engines right into Black- board. Whether you’re choosing a book for your course or building Connect assignments, all the tools you need are right where you want them-inside of Blackboard.

3. One gradebook. Keeping several gradebooks and manually synchronizing grades into Blackboard is no longer necessary. When a student completes an integrated Connect

Preface xi

assignment, the grade for that assignment automatically (and instantly) feeds your Blackboard grade center.

4. A solution for everyone. Whether your institution is already using Blackboard or you just want to try Blackboard on your own, we have a solution for you. McGraw-Hill and Blackboard can now offer you easy access to industry-leading technology and content, whether your campus hosts it, or we do. Be sure to ask your local McGraw-Hill repre- sentative for details.

ASSURANCE OF LEARNING READY Many educational institutions today are focused on the notion of assurance of learning, an important element of some accreditation standards. Operations Management in the Supply Chain, 7e is designed specifically to support your assurance of learning in initiatives with a simple yet powerful solution. Instructors can use Connect to easily query for learning outcomes/objectives that di- rectly relate to the learning objectives of the course. You can then use the reporting fea- tures of Connect to aggregate student results in similar fashion, making the collection and presentation of assurance of learning data simple and easy.

AACSB STATEMENT McGraw-Hill Global Education is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, the authors of Opera- tions Management in the Supply Chain, 7e have sought to recognize the curricula guide- lines detailed in the AACSB standards for business accreditation. By connecting questions in the test bank and end-of-chapter material to the general knowledge and skill guidelines found in the AACSB standards. It is important to note that the statements contained in Operations Management in the Supply Chain, 7e are provided only as a guide for the users of this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mis- sion of the school, and the faculty. While Operations Management in the Supply Chain, 7e and the teaching package make no claim of any specific AACSB qualification or evalua- tion, we have within Operations Management in the Supply Chain, 7e labeled selected questions according to the general knowledge and skills areas.

MCGRAW-HILL CUSTOMER CARE CONTACT INFORMATION At McGraw-Hill, we understand that getting the most from new technology can be chal- lenging. That’s why our services don’t stop after you purchase our products. You can e-mail our Product Specialists 24 hours a day to get product-training online. Or you can search our knowledge bank of Frequently Asked Questions on our support website. For Customer Support, call 800-331-5094, e-mail [email protected], or visit www. mhhe.com/support. One of our Technical Support Analysts will be able to assist you in a timely fashion.

xii Preface

The authors would also like to thank the staff at McGraw-Hill Education who had a direct hand in the editing and production of the text. We would like to thank our colleagues at the University of Minnesota who listened to our ideas and provided suggestions for book improvement. Additional thanks go to Doug and Letty Chard, who diligently and carefully prepared the index. We would also like to thank Tom Buchner of the University of Minnesota who carefully prepared the test bank ques- tions. Our thanks to Ed Pappanastos of Troy University for constructing the Connect solu- tions to problems. Finally, we thank our families for their patience and perseverance during the many months of writing and editing. Without their support and encouragement this textbook would not have been possible.

Roger G. Schroeder

Susan Meyer Goldstein

Tobias Stapleton University of Massachusetts—Dartmouth

Richard C. Yokeley Forsyth Technical Community College

Ralph James Rich Marian University

Rajkumar Kempaiah College of Mount Saint Vincent

Thomas Buchner University of Minnesota

Chris D. Bellamy Eastern University

Pradip K. Shukla Chapman University

Marvin E. Gonzalez College of Charleston

Gerald T. Pineault Lasell College

Jeffrey William Fahrenwald Rockford University

William M. Penn Belhaven University

Jeryl L. Nelson Wayne State College

Clarke W. Higgins Chapman University

Jay Zortman Eastern University

Deborah L. Piscitiello University of Jamestown

Charles Vincent Nemer Metropolitan State University

Kenneth E. Murphy Chapman University

Kathy Schaefer Southwest Minnesota State University

Nancy Levenburg Grand Valley State University

Tyler M. Moore Marian University

Steven Williams Marian University

Preface xiii

ACKNOWLEDGMENTS The authors would like to acknowledge the many individuals who have assisted with this book. Special thanks go to the reviewers for this edition:

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Brief Table of Contents About the Authors vi Preface vii

PART ONE Introduction 1 1 The Operations Function 2 2 Operations and Supply Chain

Strategy 18 3 Product Design 36

PART TWO Process Design 51 4 Process Selection 52 5 Service Process Design 73 6 Process-Flow Analysis 92 7 Lean Thinking and Lean

Systems 113

PART THREE Quality 137 8 Managing Quality 138 9 Quality Control and

Improvement 159

PART FOUR Capacity and Scheduling 185 10 Forecasting 186

Supplement: Advanced Methods 211

11 Capacity Planning 216

12 Scheduling Operations 246 13 Project Planning and Scheduling 263

PART FIVE Inventory 285 14 Independent Demand Inventory 286

Supplement: Advanced Models 314 15 Materials Requirements Planning

and ERP 317

PART SIX Supply Chain Decisions 341 16 Supply Chain Management 342 17 Sourcing 367 18 Global Logistics 386

PART SEVEN Case Studies 409

APPENDIXES 485

INDEX 487

ACRONYMNS 501 Technical Chapters available in the Instructor’s Resource Library in Connect

Waiting Lines Simulation Transportation Method Linear Programming

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Contents

About the Authors vi Preface vii

PART ONE INTRODUCTION 1

Chapter 1 The Operations Function 2 1.1 Why Study Operations Management? 3 1.2 Definition of Operations Management

and Supply Chains 4 1.3 Decisions at Pizza U.S.A. 7 1.4 Operations Decisions in the Supply

Chain—A Framework 9 1.5 Cross-Functional Decision Making 10 1.6 Operations as a Process 11 1.7 Challenges Facing Operations

and Supply Chain Managers 13 Services 14 Customer-Directed Operations 14 Integration of Decisions Internally and

Externally 14 Environmental Sustainability 14 Globalization of Operations

and the Supply Chain 15 1.8 Key Points and Terms 15

Student Internet Exercises 16 Discussion Questions 17

Chapter 2 Operations and Supply Chain Strategy 18 2.1 Operations Strategy Model 20

Corporate and Business Strategy 21 Operations Mission 22 Operations Objectives 22 Strategic Decisions 22 Distinctive Competence 24

2.2 Competing with Operations Objectives 25

2.3 Cross-Functional Strategic Decisions 26

2.4 Distinctive Competence 28 2.5 Global Operations and

Supply Chains 29 2.6 Supply Chain Strategy 30 2.7 Environment and Sustainable

Operations 32 2.8 Key Points and Terms 33

Student Internet Exercises 34 Discussion Questions 34

Chapter 3 Product Design 36 3.1 Strategies for New-Product

Introduction 37 3.2 New-Product Development Process 38

Concept Development 38 Product Design 39 Pilot Production/Testing 39

3.3 Cross-Functional Product Design 40 3.4 Supply Chain Collaboration 42 3.5 Quality Function Deployment 43

Customer Attributes 44 Engineering Characteristics 45

3.6 Modular Design 47 3.7 Key Points and Terms 48

Student Internet Exercises 49 Discussion Questions 49

PART TWO PROCESS DESIGN 51

Chapter 4 Process Selection 52 4.1 Product-Flow Characteristics 53 4.2 Approaches to Order Fulfillment 58 4.3 Process Selection Decisions 61 4.4 Product-Process Strategy 62 4.5 Focused Operations 64 4.6 Mass Customization 65 4.7 3D Printing and Additive

Manufacturing 67 4.8 Environmental Concerns 68

4.9 Cross-Functional Decision Making 69 4.10 Key Points and Terms 70

Student Internet Exercises 71

Discussion Questions 72

Chapter 5 Service Process Design 73 5.1 Defining Service 74 5.2 Service-Product Bundle 75 5.3 Service Delivery System Matrix 77 5.4 Customer Contact 80 5.5 Service Recovery and Guarantees 82 5.6 Technology and Globalization

of Services 84 5.7 Service Profitability and Employees 87 5.8 Key Points and Terms 89

Student Internet Exercises 90

Discussion Questions 90

Chapter 6 Process-Flow Analysis 92 6.1 Process Thinking 93 6.2 The Process View of Business 94 6.3 Process Flowcharting 95 6.4 Process-Flow Analysis as Asking

Questions 100 6.5 Measuring Process Flows 101 6.6 Measuring Process Flows at Pizza

U.S.A. 103 6.7 Process Redesign 104 6.8 Key Points and Terms 107

Student Internet Exercises 108

Solved Problems 108

Discussion Questions 110

Problems 110

Chapter 7 Lean Thinking and Lean Systems 113 7.1 Evolution of Lean 114 7.2 Lean Tenets 115

Create Value 115 Value Stream 116 Ensure Flow 117 Customer Pull 118 Strive for Perfection 119 Lean Thinking Techniques 119

7.3 Stabilizing the Master Schedule 120

7.4 Controlling Flow with the Kanban System 121

7.5 Reducing Setup Time and Lot Sizes 124 7.6 Changing Layout and Maintaining

Equipment 125 7.7 Cross-Training, Rewarding, and Engaging

Workers 126 7.8 Delivering Quality 127 7.9 Changing Relationships with Suppliers 127 7.10 Implementation of Lean 129 7.11 Key Points and Terms 132

Student Internet Exercises 133

Solved Problems 133

Discussion Questions 134

Problems 135

PART THREE QUALITY 137

Chapter 8 Managing Quality 138 8.1 Quality as Customer Requirements 139 8.2 Product Quality 140 8.3 Service Quality 142 8.4 Quality Planning, Control, and

Improvement 142 8.5 Mistake-Proofing 145 8.6 Ensuring Quality in the Supply Chain 146 8.7 Quality, Cost of Quality, and Financial

Performance 147 8.8 Quality Pioneers 150

W. Edwards Deming 150

Joseph Juran 150

8.9 ISO 9000 Standards 152 8.10 Malcolm Baldrige Award 154 8.11 Why Some Quality Improvement

Efforts Fail 156 8.12 Key Points and Terms 157

Student Internet Exercises 158

Discussion Questions 158

Chapter 9 Quality Control and Improvement 159 9.1 Design of Quality Control Systems 160 9.2 Process Quality Control 163 9.3 Attribute Control Chart 165 9.4 Variables Control Chart 166 9.5 Using Control Charts 167

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9.6 Process Capability 168 9.7 Continuous Improvement 170 9.8 Six Sigma 174 9.9 Lean and Six Sigma 176 9.10 Key Points and Terms 177

Student Internet Exercises 178

Solved Problems 178

Discussion Questions 181

Problems 181

PART FOUR CAPACITY AND SCHEDULING 185

Chapter 10 Forecasting 186 10.1 Forecasting for Decision Making 188 10.2 Qualitative Forecasting Methods 189 10.3 Time-Series Forecasting 191 10.4 Moving Average 192 10.5 Exponential Smoothing 194 10.6 Forecast Accuracy 197 10.7 Advanced Time-Series

Forecasting 199 10.8 Causal Forecasting Methods 200 10.9 Selecting a Forecasting Method 202 10.10 Collaborative Planning, Forecasting, and

Replenishment 203 10.11 Key Points and Terms 205

Student Internet Exercises 206

Solved Problems 206

Discussion Questions 208

Problems 208

Supplement: Advanced Methods 211

Chapter 11 Capacity Planning 216 11.1 Capacity Defined 217 11.2 Facilities Decisions 219

Amount of Capacity 220

Size of Facilities 221

Timing of Facility Decisions 222

Facility Location 222

Types of Facilities 223

11.3 Sales and Operations Planning Definition 224

11.4 Cross-Functional Nature of S&OP 226

11.5 Planning Options 227

11.6 Basic Aggregate Planning Strategies 229

11.7 Aggregate Planning Costs 230 11.8 Aggregate Planning Example 231 11.9 Key Points and Terms 236

Student Internet Exercises 237

Solved Problems 237

Discussion Questions 242

Problems 242

Chapter 12 Scheduling Operations 246 12.1 Batch Scheduling 247 12.2 Gantt Charts 248 12.3 Finite Capacity Scheduling 251 12.4 Theory of Constraints 253 12.5 Priority Dispatching Rules 254 12.6 Planning and Control Systems 256 12.7 Key Points and Terms 258

Student Internet Exercises 259

Solved Problems 259

Discussion Questions 261

Problems 261

Chapter 13 Project Planning and Scheduling 263 13.1 Objectives and Trade-Offs 264 13.2 Planning and Control in Projects 265 13.3 Scheduling Methods 268 13.4 Constant-Time Networks 269 13.5 CPM Method 274 13.6 Use of Project Management

Concepts 277 13.7 Key Points and Terms 278

Student Internet Exercises 279

Solved Problems 279

Discussion Questions 282

Problems 283

PART FIVE INVENTORY 285

Chapter 14 Independent Demand Inventory 286 14.1 Definition of Inventory 287 14.2 Purpose of Inventories 289 14.3 Costs of Inventory 290

Contents xix

14.4 Independent versus Dependent Demand 291

14.5 Economic Order Quantity 292 14.6 Continuous Review System 296 14.7 Periodic Review System 301 14.8 Using P and Q Systems in Practice 304 14.9 Vendor Managed Inventory 306 14.10 ABC Classification of Inventory 306 14.11 Key Points and Terms 308

Student Internet Exercises 309

Solved Problems 309

Discussion Questions 311

Problems 312

Supplement: Advanced Models 314

Chapter 15 Materials Requirements Planning and ERP 317 15.1 The MRP System 318 15.2 MRP versus Order-Point Systems 320 15.3 Parts Explosion: How an MRP

System Works 321 15.4 MRP System Elements 326

Master Scheduling 326

Bill of Materials (BOM) 327

Inventory Records 327

Capacity Planning 328

Purchasing 328

Shop-Floor Control 329

15.5 Operating an MRP System 329 15.6 The Successful MRP System 330 15.7 Enterprise Resource Planning

Systems 331 15.8 Key Points and Terms 334

Student Internet Exercises 335

Solved Problem 335

Discussion Questions 337

Problems 338

PART SIX SUPPLY CHAIN DECISIONS 341

Chapter 16 Supply Chain Management 342 16.1 Supply Chain and Supply Chain

Management 343 16.2 Measuring Supply Chain

Performance 347

16.3 Supply Chain Dynamics—The Bullwhip Effect 349

16.4 Improving Supply Chain Performance 352 16.5 Supply Chain Structural

Improvements 352 16.6 Supply Chain System Improvements 354 16.7 Technology and Supply Chain

Management 356 16.8 Supply Chain Risk and Resilience 358

Analysis of Supply Chain Risk 359

16.9 Sustainability of the Supply Chain 361 16.10 Key Points and Terms 364

Student Internet Exercises 365

Discussion Questions 366

Chapter 17 Sourcing 367 17.1 Importance of Sourcing 368 17.2 Sourcing Goals 369 17.3 Insource or Outsource? 369

Advantages of Outsourcing 370

Disadvantages of Outsourcing 370

Total Cost Analysis 372

17.4 Offshoring 372 The Costs of Offshoring 373

Reshoring 374

17.5 Supply Base Optimization 375 Spend Analysis 375

Total Number of Suppliers 376

Single or Multiple Suppliers 376

17.6 The Purchasing Cycle 377 Internal User-Buyer Interface 378

Sourcing and Make-Buy Decision 378

Find Suppliers 378

Supplier Selection 378

Supplier Relationship

Management 379

17.7 Challenges Facing Purchasing 380 17.8 Key Points and Terms 381

Student Internet Exercises 382

Solved Problems 382

Discussion Questions 384

Problems 384

Chapter 18 Global Logistics 386 18.1 Role of Logistics in Supply Chain

Management 387

xx Contents

18.2 Transportation 389 Transportation Economics 389

Modes of Transportation 390

Selecting the Transportation Mode 392

18.3 Distribution Centers and Warehousing 394

18.4 Logistics Networks 396 Location 397

Number of Warehouses (Distribution

Centers) 399

18.5 Third-Party Logistics Providers 401 18.6 Logistics Strategy 403 18.7 Key Points and Terms 405

Student Internet Exercises 405

Solved Problems 406

Discussion Questions 407

Problems 407

PART SEVEN CASE STUDIES 409 Introduction

Operations Strategy at BYD of China, Electrifying the World’s Automotive Market 410

Early Supplier Integration in the Design of the Skid-Steer Loader 415

Process Design Eastern Gear, Inc.: Job Shop 417 Sage Hill Inn Above Onion Creek: Focusing

on Service Process and Quality 420 U.S. Stroller: Lean 424 The Westerville Physician Practice:

Value-Stream Mapping 430 Quality

Journey to Perfect: Mayo Clinic and the Path to Quality 433

Toledo Custom Manufacturing: Quality Control 439

The Evolution of Lean Six Sigma at 3M, Inc. 441

Capacity and Scheduling Best Homes, Inc.: Forecasting 447 Polaris Industries Inc.: Global Plant

Location 449 Lawn King, Inc.: Sales and

Operations Planning 454 Inventory

Consolidated Electric: Inventory Control 458

Southern Toro Distributor, Inc. 463

ToysPlus, Inc.: MRP 470 Supply Chain

Altimus Brands: Managing Procurement Risk 474

Murphy Warehouse Company: Sustainable Logistics 477

Shelterbox: A Decade of Disaster Relief 481

APPENDIXES A Areas Under the Standard Normal

Probability Distribution 485 B Random Number Table 486

INDEX 487

ACRONYMNS 501 Online Technical Chapters Technical Chapters available in the Instructor’s

Resource Library in Connect

Waiting Lines Simulation Transportation Method Linear Programming

Contents xxi

Introduction

P a

r t i

1. The Operations Function

2. Operations and Supply Chain Strategy

3. Product Design

The introductory part of this text provides an overview of the operations function, operations and supply chain strategy, and product design. After reading this part, students should have an appreciation for the importance to the firm of decisions made in the operations function and its associated supply chain. Also, the need for strategy to guide all decision making is emphasized. New-product design is treated as a cross-functional decision responsibility that precedes the production and delivery of goods or services.

2

LEARNING OBJECTIVES After reading this chapter, you should be able to:

LO1.1 Define operations management.

LO1.2 Describe the five main decisions made by operations and supply chain managers.

LO1.3 Explain the nature of cross-functional decision making with operations.

LO1.4 Define typical inputs and outputs of an operations transformation system.

LO1.5 Identify contemporary challenges facing operations and supply chain managers.

1 c h a p t e r

Operations management, as a field, deals with the production of goods and services. Every day we come in contact with an abundant array of goods or services, all of which are pro- duced under the leadership of operations managers. Nonprofit and government services are also managed by operations managers. Without effective management of operations, a modern industrialized society cannot exist. The operations function is the engine that cre- ates goods and services for the enterprise and underpins the global economy. Operations managers have important positions in every organization. One example is the plant manager who is in charge of a factory. Other managers who work in the factory— including production and inventory control managers, quality managers, and line supervisors—are also operations managers. Collectively, this group of managers is respon- sible for producing the supply of goods in a manufacturing business. We should also include in the group of operations managers all manufacturing managers at the corporate or divi- sional level. These managers might include a corporate vice president of operations (or manufacturing) and a group of corporate staff operations managers concerned with quality, production and inventory control, facilities, and equipment. Operations managers have important responsibilities in service industries as well. In the private sector, operations managers take leadership roles in hotels, restaurants, airlines,

The Operations Function

Chapter 1 The Operations Function 3

banks, and retail stores. In each of these organizations, operations managers are responsible for producing and delivering the supply of services. In government offices, there are operations managers in the post office, police department, and housing department, to name only a few. Anyone who is responsible for producing or delivering the service is an operations manager.

At first glance, it may appear that service operations have little in common with manufacturing operations. However, the unifying feature of these operations is that both can be viewed as transformation processes inside organizations that are themselves embedded within supply chains. In manufacturing, inputs of raw materials, energy, labor, and capital are transformed into finished goods. In service operations, the same types of inputs are transformed into services. Managing the transformation process in an efficient and effective manner is the task of the operations manager in any type of organization.

Most Western economies have shifted dramatically from the production of goods to the production of services. It may come as a surprise that today more than 80 percent of the U.S. workforce is employed in service industries.1 Even though the preponderance of employ- ment is in the service sector, manufacturing remains important to provide the goods needed for export and internal consumption. Because of the importance of both service and manufacturing operations, they are treated on an equal basis in this text.

In the past when the field was related primarily to  manufacturing, operations management was called production management. Later, the name was expanded to “production and operations management,” or,

more simply, “operations management,” to include the service industries as well. The term “operations management” as used in this text refers to both manufacturing and ser- vice industries.

Today, individuals who work in operations and associated supply chains can belong to a number of professional societies. These societies provide opportunities to become certi- fied, network with other professionals, and learn about and share best practices. See the Operations Leader box titled “Professional Societies Affiliated with Operations and Sup- ply Chain Management.” The Operations Leader boxes throughout this book highlight best practices and useful professional knowledge in a variety of industries.

1.1 WHY STUDY OPERATIONS MANAGEMENT?

All businesses want to hire bright people who can make the best decisions for the business as a whole, not the best marketing, finance, or operations decisions. They want employees who can see the big picture of how these functional areas interact. You will severely limit your career if you take a narrow functional perspective.

Operations managers make important decisions in both manufacturing and service organizations. © McGraw-Hill Education/Jill Braaten

1 U.S. Census Bureau, Statistical Abstract of the United States, Washington, DC, 2016 ed.

4 Part One Introduction

Every decision is cross-functional in nature.2 You will be working with operations and need to understand operations no matter what career path you choose. Operations is a major func- tion in every organization, and regardless of the function in which you work, you will interact with the operations function that produces goods or services (or both). The organization in which someone works only with people from his or her own function does not exist. That is why we take a cross-functional perspective in this text so that the content is useful to all majors. As you study operations management, you will find that many of the ideas, techniques, and principles can be applied across the business, not just in operations. For example, all work is accomplished through a process (or sequence of steps). The principles of process thinking found in this text can be applied to all functions. After graduating, many students find that the ideas learned in operations management are among the most useful, regardless of the industry or career they enter. Operations management is an exciting and challenging field of study. The material is both qualitative and quantitative, and both are essential to good management practices. You are embarking on a journey that is interesting and useful no matter what career you choose!

1.2 DEFINITION OF OPERATIONS MANAGEMENT AND SUPPLY CHAINS

All organizations (for-profit and nonprofit) thrive by producing and delivering a good or a service deemed to be of value to customers. Value is the tangible and intangible benefits that customers derive from consuming a good or service at a price they are willing to pay.

LO1.1 Define opera- tions management.

INSTITUTE FOR SUPPLY MANAGEMENT The largest and one of the most respected supply management associations in the world, whose mission is to lead the supply management and sourcing profession through its standards of excellence,

research, promotional activities, and education (see www. ism.ws for more information).

COUNCIL OF SUPPLY CHAIN MANAGEMENT PROFESSIONALS

The preeminent worldwide professional association for supply chain management professionals, whose vision is to lead the evolving supply chain management profes- sion by developing, advancing, and dis-

seminating supply chain knowledge and research (see http://cscmp.org for more information).

Operations Leader Professional Societies Affiliated with Operations and Supply Chain Management

ASSOCIATION FOR OPERATIONS MANAGEMENT

The global leader and premier source of the body of knowledge in operations management, including production, inventory, the supply

chain, materials management, sourcing and logistics (see www.apics.org for more information).

AMERICAN SOCIETY FOR QUALITY The world’s leading organization devoted to advancing learning, quality improvement, and knowledge exchange to improve busi- ness results and create better workplaces and communities worldwide (see www.asq. org for more information).

2 The “hand shake” symbol in the margin identifies a point of cross-functional emphasis and is designed to illustrate that the various functions must work together for an organization to be successful and thrive.

Chapter 1 The Operations Function 5

For example, value in a pair of shoes may be shoes that are good looking and comfortable and will last a long time at a price you can afford. What is of value to one customer (or set of customers) may not be of value to another. Flying in first class may be of value to business travelers, but for leisure travelers flying in first class may not be of value because of the price of first-class seats. Value, thus, is always defined in the eyes of the customer (or set of customers) relative to the price paid. See the Operations Leader box for Dell Computer Inc. for a company that creates value for its customers. Organizations that are successful strive to identify the value inherent in the goods or services being offered to customers. They then deploy this understanding to guide the deci- sions that affect the production and delivery of those goods and services. These decisions have an impact on the design, execution, and performance of operations and should be coordinated with decisions made by managers of the sourcing and the logistics functions. The sourcing function (also called purchasing or procurement) is responsible for finding other organizations to serve as sources and then buying the material and service inputs for the transformation process of the organization. The logistics function, in contrast, is typi- cally responsible for the actual movement of goods and/or services across organizations. Collectively, the operations, sourcing, and logistics functions manage the production of the goods or services that are moved through the production process and delivered to customers. Most organizations exist as part of a larger supply chain. The supply chain is the net- work of manufacturing and service operations (often multiple organizations) that supply one another from raw materials through production to the ultimate customer. The supply chain consists of the physical flow of materials, money, and information along the entire chain of sourcing production, and distribution. For example, the food supply chain reaches

2007, through select retail outlets. Orders for products, once taken, are assembled in one of Dell’s factories and often shipped to customers or retail stores within days, with the factories carrying very little finished goods inventory. In addition to the importance of the operations func- tion at Dell, sourcing and logistics activities are critical. Sourcing managers source the many components required to manufacture Dell products, and logistics managers handle the global movement of components and finished goods to satisfy customer demand. Manag- ing Dell’s fast and rapidly changing supply chain is a chal- lenging task that they perform well. Dell today is pursuing environmentally friendly best practices: Its global headquarters campus is now powered by 100 percent green energy; its desk computer systems have been designed to reduce carbon dioxide emissions; Dell was the first computer manufacturer to offer free computer recycling to customers worldwide; and its “Plant a Tree for Me” and “Plant a Forest for Me” programs have planted over 600,000 trees.

Source: Adapted from www.dell.com, 2015.

Operations Leader Dell Delivers Products and Value

In 1984 Michael Dell founded Dell Computer Corpora- tion with $1000 in start-up capital and a business model to sell custom-configured personal computers directly to

customers while passing along cost sav- ings to customers by cutting out the mid- dlemen. The company offers a range of products beyond personal desktop and mobile computing products; servers, storage, and networking products; print-

ing and imaging products; electronics and accessories; enhanced business and consumer services; and busi- ness solutions. Nearly half of Dell’s revenue comes from outside of the United States. In 2013 Dell was taken private in a stock buyout by Michael Dell and investors. In 2015 Dell bought EDS ser- vices to expand its offerings to services, and the cloud. A key to Dell’s strategy is its customer-driven approach to innovation. This approach signals a com- mitment to delivering new products and services that are valued by customers and that address customer needs. This approach explains how Dell pioneered the direct-selling system to allow customer orders to be placed over the Internet or over the phone and, since

6 Part One Introduction

from the farm to the food processor to the wholesaler and then the retailer. The supply chain links together the work and output of many different organizations. In this book we discuss operations management in the supply chain. This means we deal with operations in the larger context of its supply chain, including external suppliers and customers. Before discussing the larger supply chain implications, we define operations management as follows:

Operations management focuses on decisions for the production and delivery of the firm’s products and services.

There are three aspects of operations management that require elaboration:

1. Decisions. The above definition refers to decision making as an important element of operations management. Since all managers make decisions, it is natural to focus on decision making as a central theme in operations. Within the broader context of supply chain, this decision focus provides a basis for identifying major decision types. In this text, we specify the five major decision responsibilities of operations and supply chain management as process, quality, capacity, inventory, and supply chain. These deci- sions provide the framework for organizing the text and describing what operations and supply chain managers do. We will discuss these decisions in greater detail in subse- quent chapters.

2. Function. Operations is a major function in any organization, along with marketing and finance. In a manufacturing company, the operations function typically is called the manufacturing or production department. In service organizations, the opera- tions function may be called the operations department or some name peculiar to the particular industry (e.g., the policy service department in insurance companies). In general, the generic term “operations” refers to the function that produces and delivers goods or services. While separating operations out in this manner is useful for analyzing decision making and assigning responsibilities, we must also integrate the business by considering the cross-functional nature of decision making in the firm.

3. Process. Operations managers plan and control the transformation process and its in- terfaces in organizations as well as across the supply chain. This process view pro- vides common ground for defining service and manufacturing operations as transformation processes and is a powerful basis for the design and analysis of opera- tions in an organization and across the supply chain. Using the process view, we con- sider operations managers as managers of the conversion process in the firm. But the process view also provides important insights for the management of productive pro- cesses in functional areas outside the operations function. For example, a sales office may be viewed as a production process with inputs, transformation, and outputs. The same is true for an accounts payable office and for a loan office in a bank. In terms of the process view, operations management concepts have applicability beyond the functional area of operations. Toyota, for example, uses lean thinking to improve pro- cesses throughout the firm, including processes in human resources, accounting, fi- nance, information systems, and even the legal department. Process improvement is not restricted to operations.

Since the field of operations and supply chain management can be defined by decisions, function, and processes, we will expand on these three elements in detail in this chapter. But first we provide an example of the decisions that would be made by operations and supply chain management in a typical company that makes and markets pizzas.

Chapter 1 The Operations Function 7

1.3 DECISIONS AT PIZZA U.S.A.

Pizza U.S.A., Inc., produces and markets pizzas on a national basis. The firm consists of 85 company-owned and franchised outlets (each called a store) in the United States. The oper- ations function in this company exists at two levels: the corporate level and the level of the individual store.

The major operations and supply chain decisions made by Pizza U.S.A. can be described as follows:

Process Corporate staff makes some of the process decisions, since uniformity across different stores is desirable. They have developed a standard facility design that is sized to fit a particular location. Each store incorporates a limited menu with equipment that is designed to produce high volumes of pizza. As pizzas are made, customers can watch the process through a glass window; this provides entertainment for both children and adults as they wait for their orders to be filled. Because this is a service facility, special care is taken to make the layout attractive and convenient for the customers.

Within the design parameters established by the corporate operations staff, the store managers seek to improve the process continually over time. This is done both by addi- tional investment in the process and by the use of better methods and procedures, which often are developed by the employees themselves. For example, a store might re-arrange its layout to speed up the process of producing pizzas.

Quality Certain standards for quality that all stores must follow have been set by the corporate staff. The standards include procedures to maintain service quality and ensure the quality and food safety of the pizzas served. While perceptions of service quality may differ by customer, the quality of the pizzas can be specified more exactly by using criteria such as temperature at serving time and the amount of raw materials used in relation to standards, among others. Service-quality measures include courtesy, cleanliness, speed of service, and a friendly atmosphere. Service quality is monitored by store manager observation, comment cards, and occasional random surveys. Each Pizza U.S.A. store manager must

carefully monitor quality internally and with suppliers to make sure that it meets company standards. All employees are responsible for the quality of their work to ensure that service quality and food quality are meet- ing the standards of the company.

Capacity Decisions about capacity determine the maximum level of output of pizzas. The capacity available at any point in time is determined by the availability of equipment and labor inputs for the pizza-making pro- cess at that time. First, when the initial location and process decisions are made, the corporate staff deter- mines the physical capacity of each facility. Individual store managers then plan for annual, monthly, and daily fluctuations in capacity within the available physical facility. During peak periods, they may employ part-time help, and advertising is used in an

LO1.2 Describe the five main decisions made by operations and supply chain managers.

Pizza U.S.A. satisfies its customers by carefully managing the four key decision areas in operations. © Steve Mason/Getty Images

8 Part One Introduction

attempt to raise demand during slack periods. In the short run, individual personnel are scheduled in shifts to meet demand during store hours.

Inventory Each store manager buys the ingredients required to make the recipes provided by corpo- rate staff. The store managers decide how much flour, tomato paste, sausage, and other ingredients to order and when to place orders. Store operators must carefully integrate sourcing and inventory decisions to control the flow of materials in relation to capacity. For example, they do not want to purchase ingredients for more pizzas than they have the capacity to bake. They also do not want to run out of food during peak periods or waste food when demand is low.

Supply Chain The supply chain decisions consist of sourcing and logistics. Sourcing is done by the corpo- rate office. They select the specific suppliers for all inputs, negotiate prices, write contracts, and issue blanket purchase orders that stores use to order individual ingredients and items as

central operations. This individual will participate in the development of strategic implementation plans and related objectives. Candidates must have strong commu- nication skills and acknowledge the important relation- ship with customer members in supporting the credit union’s vision and mission.

CONTINUOUS IMPROVEMENT PLANT LEAD ConAgra Foods seeks a partner to roll out a system establishing a zero-loss manufacturing culture. Coordi- nating with the Plant Manager, this Plant Lead executes plans for sustainability, develops and maintains training and tracking standards, and coaches sites on improve- ment methodologies. This position serves as a key devel- opment role for a future Plant Manager.

MATERIALS SOURCING MANAGER Herbalife, a direct-sales nutrition company, is hiring a senior-level sourcing manager for global spending of $200 million on raw materials. Responsibilities include reducing raw materials costs yearly, analyzing market intelligence for trends in commodity markets, and making strategic recommendations to senior management for each category of raw materials. This job also requires maintaining appropriate inventory levels and developing strategic supplier relationships.

Source: Abstracted from www.monster.com, April 2012.

Operations Leader Careers in Operations and Supply Chain from Monster.com

SUPPLY CHAIN ANALYST PayPal, owned by online shopping site eBay, is hiring a supply chain management professional responsible for end-to-end support for PayPal’s new Here product. The

job requires international travel to manufacturing and distribution sites. Responsibilities include prod-

uct and distribution management, on time and on bud- get; reviewing inventory reports with supply partners; arranging freight shipments globally; and coordinating and collaborating with internal groups within PayPal and eBay. The job description also requests “maniacal atten- tion to detail.”

BUSINESS METRICS/ANALYTICS SUPPLY CHAIN ANALYST Cardinal Health is seeking an analyst to develop, quan- tify, and evaluate the transformation of internal and exter- nal information into business intelligence. Qualified can- didates will demonstrate knowledge of concepts and principles of business metrics and analytical techniques/ tools. The position requires listening to internal/external customers’ needs and proactively providing them a qual- ity experience through effective communication.

VICE PRESIDENT OF OPERATIONS Envista Credit Union is seeking an executive whose responsibilities include organizing, planning, and direct- ing all operations functions associated with branches and

Chapter 1 The Operations Function 9

they need them. The orders are then fulfilled by the suppliers, and a logistics provider ensures the orders are delivered on time. Logistics is handled by a third-party provider who secures transportation and uses its distribution centers to make deliveries to Pizza U.S.A. stores. Because Pizza U.S.A. is only one example of an operation, students often ask: What do operations managers do in more general terms? The Monster.com Operations Leader box provides examples of five typical operations management and supply chain positions and describes the associated decision-making responsibilities. The descriptions have been greatly simplified for purposes of illustration. As the Operations Leader box indicates, there is a great variety of management positions in operations and the supply chain. These range from entry-level supervisory positions to middle- and top-management positions with considerable responsibility. These positions also show the breadth of operations and apply to both manufacturing and service operations. There are many opportunities for international employment in operations management since operations are located around the world. Many operations in other countries are seek- ing to implement world-class best practices, and so what is learned in this course can be applied globally.

1.4 OPERATIONS DECISIONS IN THE SUPPLY CHAIN—A FRAMEWORK

The five decision groupings showcased in the Pizza U.S.A. example provide a framework for understanding the various decisions made by operations and supply chain managers. Although many different frameworks are possible, the primary one used here is a conceptual scheme for grouping decisions according to decision responsibilities. The five key decision areas—pro- cess, quality, capacity, inventory, and supply chain—encompass what operations and supply chain managers do. This novel and useful decision framework is shown in Figure 1.1 and summarized in Table 1.1. In the table, examples are given of key decisions in each area. Careful attention to the five decision areas in the framework is the key to the successful management of operations and the associated supply chain. Indeed, well-managed opera- tions and its supply chain can be defined in terms of this decision framework. If decisions in each of the five groupings support the strategy of the firm, provide value, and are well integrated with the other functions of the organization, the operations function and its asso- ciated supply chain can be considered well managed. Each major section of this text is devoted to one of the five decision categories.3 The framework thus provides an integrating mechanism for the text that covers both the deci- sions faced by operations and supply chain managers as well as the cross-functional issues that must be considered.

FIGURE 1.1 Decision-making framework for operations in the supply chain.

Process

Quality

Capacity

Inventory

Supply Chain

Decisions

Human Resources Finance

Marketing

Accounting Information

Systems

Suppliers Customers

3 Students have called these five categories QPICS, pronounced “Q-PICS.”

10 Part One Introduction

Analytics is the analysis of data to make better decisions. Analytics uses many tech- niques for the analysis including those from operations research, statistics, data sciences, and computer science. The analysis can use either big data from massive databases or small data depending on the application. Analytics can be descriptive, predictive, or prescriptive in nature. A descriptive analysis typically summarizes the present situation from data. The data can be used to go one step further and predict what will happen in the future. Prescrip- tive analytics typically uses mathematical models to find an optimal or best decision. Ana- lytics are used in operations and supply chains for a variety of decisions, including quality control, forecasting, capacity, scheduling, inventory, logistics, and sourcing. Throughout the text, best practices are presented. Additionally, discussion and examples of firms in which the best practice is not the best for their particular situation are included. These contingencies, situations, or conditions that require different solutions offer a more nuanced view of operations decision making. For example, successful implementation of a new method such as lean or Six Sigma is contingent on top management support. Simi- larly, the “best” forecasting tools and concepts depend on the availability of data. If there was a single best practice that works for all firms, then operations would not be the chal- lenging function to manage that it is. Therefore, by offering insight into specific conditions in which best practices may not be best, the text addresses the various contingencies or prerequisites or situaitons that need to be considered.

1.5 CROSS-FUNCTIONAL DECISION MAKING

The operations function is a critical element in every business. No business can survive without good decisions being made by operations managers. The operations function is one of the three primary functions in an organization, along with marketing and finance. In addition, an organization has supporting functions that include human resources, informa- tion systems, and accounting. Some organizations also have separate sourcing and logistics

LO1.3 Explain the nature of cross-functional decision making with operations.

Decisions Examples of Decisions

1. Process • What type of process should be selected? • How should the service delivery system be designed? • How should material and customer flows be managed? • What principles of lean systems should be deployed? • How should environmental and global goals be met?

2. Quality • What should the quality standards be? • How can quality be controlled and improved? • What statistical approaches should be used (e.g., control charts and

Six Sigma)? • How should the suppliers and customers be involved in quality?

3. Capacity • What is the facility strategy for size, location, and timing? • How should Sales and Operations Planning be implemented? • How should variable demand be handled with capacity adjustments? • What priority rule should be used for scheduling?

4. Inventory • How much inventory should be held? • What should the order size and reorder frequency be? • Who should hold the inventory? • How can the inventories of suppliers and customers be coordinated?

5. Supply Chain • What suppliers should be used for products and services? • How should sourcing be conducted and evaluated? • What form of transportation should be used? • How should warehouses be used to allow economic flow of materials?

TABLE 1.1 Operations and Supply Chain Decisions—A Framework

Chapter 1 The Operations Function 11

functions that support operations. In others, the operations, sourc- ing and logistics functions are joined together to become the supply chain function.

Functional areas are concerned with a particular focus of respon- sibility or decision making in an organization. The marketing func- tion is typically responsible for creating demand and generating sales revenue; the operations function is responsible for the produc- tion and distribution of goods or services (generating supply); and finance is responsible for the acquisition and allocation of capital. Within for-profit businesses, functional areas tend to be closely associated with organizational departments because businesses typ- ically are organized on a functional basis. Supporting functions are essential to provide staff support to the three primary functions. Every function must be concerned not only with its own

decision responsibilities but also with integrating decisions with other functions. The five areas of operations and supply chain decisions, for example, cannot be made separately; they must be carefully integrated with one another and, equally important, with decisions made in marketing, finance, and other parts of the organization. In the Pizza U.S.A. exam- ple, if marketing decides to change the price of pizza, this is likely to affect sales and change the capacity needs of operations as well as the amount of ingredients (materials) used. Also, if finance cannot raise the necessary capital, operations may have to redesign the process to require less capital or manage pizza-related inventories more efficiently. This in turn may affect the response time to serve customers, costs, and so on. Decision making is therefore highly interactive and systemic in nature. Unfortunately, functional silos have developed in many organizations and impede cross-functional deci- sion making. As a result, the overall organization suffers due to an emphasis on functional prerogatives. But some companies are different. Texas Instruments, for example, has been a leader in fostering cross-functional integration. They do this by forming cross-functional manage- ment teams for new-product introductions and for day-to-day improvement. Each member of the team is trained in common methodologies, and the team is given responsibility for achieving its own goals. Some of the key cross-functional decision-making relationships are shown in Table 1.2.

1.6 OPERATIONS AS A PROCESS

Operations can be defined as a transformation system (or process) that converts inputs into outputs. Inputs to the system include energy, materials, labor, capital, and information (see Figure 1.2). Process technology is then used to convert inputs into outputs. The pro- cess technology is the methods, procedures, and equipment used to transform materials or inputs into products or services. Viewing operations as a process is very useful in unifying seemingly different opera- tions from different industries. For example, the transformation process in manufacturing is one of material conversion from raw materials into finished products. When an automo- bile is produced, steel, plastics, aluminum, cloth, and many other materials are transformed into parts that are then assembled into the finished automobile. Labor is required to operate and maintain the equipment, and energy and information are also required to produce the finished automobile. In service industries a transformation process is also used to transform inputs into ser- vice outputs. For example, airlines use capital inputs of aircraft and equipment and human

LO1.4 Define typical inputs and outputs of an operations transformation system.

Managerial decision making is cross-functional in nature. © Corbis

12 Part One Introduction

TABLE 1.2 Examples of Cross- Functional Decision Making

Key Decision Area Interface with Operations Decisions

Marketing Market segment and needs Quality design and quality management Market size (volume) Type of process selected (assembly line, batch, or

project) and capacity required Distribution channels Inventory levels and logistics Pricing Quality, capacity, and inventory New-product introduction Cross-functional teams

Finance and Accounting Availability of capital Inventory levels, degree of automation, process type

selected, and capacity Efficiency of conversion process Process type selection, process flows, value-added

determination and sourcing Net present value and cash flow Automation, inventory, and capacity Process costing or job costing Type of process selected Measurement of operations Costing systems used

Human Resources Skill level of employees Process type selected and automation Number of employees and part-time or

full-time employment Capacity and scheduling decisions

Training of employees Quality improvement and skills Job design Process and technology choice Teamwork Cross-functional decisions in operations

Information Systems Determination of user needs Systems should support all users in operations Design of information systems Systems should help streamline operations and support

all analytics and decisions in operations Software development Software is needed for capacity, quality, inventory,

scheduling and supply chain decisions Hardware acquisition Hardware is needed to support automation decisions in

operations and to run software

FIGURE 1.2 An operation as a productive system.

OPERATIONS MANAGEMENT OUTPUTSINPUTS

EXTERNAL BUSINESS ENVIRONMENT

NATURAL ENVIRONMENT

Transformation (conversion)

process

Energy

Materials

Labor

Capital

Information

Goods or services

Feedback information for control of process inputs and process technology

Chapter 1 The Operations Function 13

inputs of pilots, flight attendants, and support personnel to produce safe, reliable, fast, and efficient transportation. Transformations of many different types occur in all industries, as indicated in Table 1.3. By studying these different types of transformation processes, you can learn a great deal about how to analyze and manage any operation. Operations as a process provides a basis for seeing an entire business as a system of interconnected processes. This makes it possible to analyze an organization and improve it from a process point of view. All work, whether in finance, marketing, accounting, or other functions, is accomplished by processes. For example, financial analysis of a stock, closing the books at the end of the year, or conducting market research are each conducted by car- rying out an appropriate process. Thus, process principles and tools can be applied in every function in a business. All of these processes and systems interact with their internal and external environ- ments. We have indicated the nature of internal interaction through cross-functional decision making. Interaction with the external environment occurs through the economic, physical, social, and political environment of operations. Examples include economic changes such as rising labor costs, social changes such as customer preference for “green” products, and polit- ical changes such as regulations. Each of these can mean that the operations function and associated supply chain will have to change the way it was producing products and services. Operations is surrounded by both internal and external environments and constantly interacts with them. The interactive nature of these relationships makes it necessary to constantly monitor the environment and make decisions related to corresponding changes in operations and the supply chain when needed. In the fast-changing world of today’s global business, constant change has become essential as a means of survival. Viewing operations as a process or a constantly updating transformation system helps us understand how operations and the supply chain cannot be insulated from changes in the environment but rather must adapt to them.

1.7 CHALLENGES FACING OPERATIONS AND SUPPLY CHAIN MANAGERS

Several challenges are important for operations and supply chain managers today and will be addressed repeatedly throughout this text. These challenges make operations and supply chain management an exciting and interesting place for aspiring managers and those who want the challenge of leadership in a fast-moving career.

LO1.5 Identify contemporary challenges facing operations and supply chain managers.

Operation Inputs Outputs

Bank Tellers, staff, computer equipment, facilities, and energy

Financial services (loans, deposits, safekeeping, etc.)

Restaurant Cooks, waiters, food, equipment, facilities, and energy

Meals, entertainment, and satisfied customers

Hospital Doctors, nurses, staff, equipment, facilities, and energy

Health services and healthy patients

University Faculty, staff, equipment, facilities, energy, and knowledge

Educated students, research, and public service

Manufacturing plant Equipment, facilities, labor, energy, and raw materials

Finished goods

Airline Planes, facilities, pilots, flight atten- dants, maintenance people, labor, and energy

Transportation from one location to another

TABLE 1.3 Examples of Productive Systems

14 Part One Introduction

Operations concepts and ideas have been applied in service operations for years. Yet, service operations lag behind manufacturing in applying the latest ideas in supply chain management, lean operations, and quality improvement. This represents a challenge and tremendous oppor- tunity to apply what is learned in this course. Also, service-specific ideas such as service recovery, web-enabled service and globalization of service still represent implementation challenges. Nevertheless, some leading service businesses do excel in operations including Walmart, Nordstrom, Starbucks, Amazon.com, FedEx, and Delta Airlines, to name only a few. They excel by applying many of the operations concepts that are presented in this text.

Every operation should be externally directed to meet customer requirements based on the “voice of the customer.” This concept is often taught in marketing courses and is being integrated into operations and supply chain courses as well. A key point is that operations efficiency need not be sacrificed in the pursuit of meeting customer needs. Rather, the customer can be a powerful driver for reducing waste and improving the efficiency of all processes as firms reduce or eliminate activities that customers do not value. This is an ongoing challenge for operations and supply chain managers to put the customer first, and we provide tools and concepts for doing so.

One of the most difficult challenges facing all managers is cross-functional integration within the organization. Some organizations are managing functions as separate depart- ments with little integration across them. The best operations are now seeking increased integration through the use of cross-functional teams, information systems, management coordination, rotation of employees and other methods of integration. Most of the imple- mentation problems of new systems or new approaches can be traced to lack of cross-func- tional internal cooperation. The same thing can be said about interorganizational change in supply chains. Even when companies partner with their suppliers or customers the partner- ships are often not successful. Adequate information systems may also be lacking for supply chain integration.

The focus on sustainability of the natural environment has been heightened in recent years with concerns over global warming, water contamination, air pollution, and so on. Organiza- tions are increasingly being asked to produce and deliver products or services while minimiz- ing the negative impact on the global ecosystem and not endangering the ability to meet the needs of future generations. See the Operations Leader box titled “Sustainability in Interface Inc.’s Operations Transformation Process” for an example of one firm’s success in facing these issues. Operations and supply chain partners have made tremendous strides in reducing pollution of the envi- ronment from air to ground to water, but there is still a long way to go. Operations and their supply chains are finding they can reduce pollution, conserve resources, recycle products and be socially responsible to provide a sustainable world for future generations. Sustainabil- ity is a challenge that progres- sive operations and supply chain organizations are accepting.

Services

Customer- Directed Operations

Integration of Decisions Internally and Externally

Environmental Sustainability

Coke is produced and sold globally. Here, workers unload bottles of Coca Cola from a truck in Caracas, Venezuela. © Ronaldo Schemidt/AFP/Getty Images

Chapter 1 The Operations Function 15

Finally, the globalization of operations and supply chains is a pervasive theme in business today. One can hardly avoid information on the accelerating nature of global business. Strategies for operations and its supply chain partners should be formulated with global effects in mind and not only consider narrow national interests. Even many small busi- nesses compete globally, sourcing or selling goods and services in markets with global competitors. Facility location must be considered in view of its global implications. Tech- nology can be transferred rapidly across national borders. All decisions in operations and its associated supply chains are affected by the global nature of business.

1.8 KEY POINTS AND TERMS

This text provides a broad overview of the challenging and dynamic field of operations management and the supply chain. It stresses decision making in operations, its associated supply chain, and the relationship of these decisions to other functions. The five major decision categories—process, quality, capacity, inventory and supply chain are the organiz- ing framework for the text.

Globalization of Operations and the Supply Chain

post-consumer waste (used car- pet) as raw material input to their production system. It is not a perfect system, as it still requires some newly extracted raw mate- rials, but they believe they are moving in the right direction for achieving sustainability.

With production on four conti- nents and offices in more than 100 countries, Interface Inc. is the global leader in the design, pro- duction, and sales of modular car- pet squares. Since undertaking the goal of sustainability, Inter- face Inc. reports more than 133 million pounds of post- consumer waste has been diverted from landfills to serve as raw materials for new carpet squares. They have achieved a series of major milestones at the European man- ufacturing facility in The Nether-

lands. As of 2015, the plant is operating with 100 percent renewable energy, using virtually zero water in manufactur- ing processes and has attained zero waste to landfill.

Source: Adapted from Dave Gustashaw and Robert W. Hall, “From Lean to Green: Interface, Inc.”. Target 24, no. 5 (2008), pp. 6–14 and interfaceglobal.com 2015.

Operations Leader Sustainability in Interface Inc.’s Operations Transformation Process

Interest in sustainability contin- ues to grow, and the operations function of most organizations is deeply involved in such efforts. The philosophy of sustainability is “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” Over the past 15 years, carpet manu- facturer Interface Inc. has shifted its operations toward this phi- losophy and three bottom-line impacts: social, environmental, and financial. Or, in their words: People, Planet, and Profit. A typical operations transfor- mation process requires a con- tinuous supply of new raw mate- rial input. “In most instances, extraction of raw material [from  the natural environment] exceeds its natural rate of regen- eration.” Following production, customers use and then dispose of products. Interface Inc. set out to change this typical supply chain with its environmental costs at both ends. They found that the most benign materials to use in manufacturing new products are their own used products. Creating a closed-loop supply chain, they use their own

© Arcaid Images/Alamy Stock Photo

16 Part One Introduction

Key points emphasized in the chapter are these:

∙ Operations and its associated supply chain produces and delivers goods or services deemed to be of value to customers in a global economy. The operations function is es- sential for both for-profit and nonprofit organizations.

∙ Operations management focuses on decisions for the production and delivery of the firm’s products and services. These decisions are intended to maximize the value inher- ent in goods or services delivered to customers throughout the entire supply chain.

∙ The supply chain is the network of manufacturing and service operations that supply each other from raw materials through manufacturing to the ultimate customer. The supply chain consists of the physical flow of materials, money, and information along the entire chain of sourcing production, and distribution. The supply chain connects many different organizations.

∙ There are five key groupings of decisions in operations: process, quality, capacity, inventory, and supply chain. These decisions need to utilize analytics when appropriate and account for contingencies, or special situations, because a best practice may not be best in all circumstances.

∙ Operations decisions are often cross-functional in nature. Decisions may impact or be impacted by activities in other functions such as marketing and finance. Often, cross- functional teams are formed to undertake complex decisions.

∙ We identify several challenges facing operations and supply chain managers that are emerging and will be important in the future. These challenges are services, customer- directed operations, integration of decisions internally and externally, environmental sustainability, and globalization of operations and the supply chain.

Key Terms Value 4 Sourcing function 5 Logistics function 5 Supply chain 5 Operations management 6 Decision making 6 Process 6

Transformation system 11

Internal and external environments 13

Voice of the customer 14 Sustainability 14 Globalization 15

Quality 6 Capacity 6 Inventory 6 Process view 6 Analytics 10 Cross-functional

decision making 11

STUDENT INTERNET EXERCISES

1. Search the Internet for “Wikipedia Operations Management.” Read about the Wiki definition of Operations Management and prepare a short synopsis of the History of Operations Management.

2. Search the Internet for “How everyday things are made.” Find a site (e.g., manufacturing.stanford.edu) that shows everything from motorcycles to jelly beans to denim. Create a presentation that explains the five operations and supply chain decisions relevant to the sourcing, production and delivery of a product of your choosing.

3. Monster.com www.monster.com Check the monster.com website for positions and career opportunities in operations man- agement. Come to class prepared to discuss one or two jobs in operations that you found interesting (not necessarily an entry-level job).

Discussion Questions 1. Why study operations management in the supply chain? 2. What is the difference between the terms “production

management” and “operations management”? 3. What is the difference between operations management

and supply chain management? 4. What are the key decisions made by sourcing and logis-

tics managers? 5. How does the work of an operations manager differ

from the work of a marketing manager or a finance manager? How are these functions similar?

6. How is the operations management function related to activities in human resources, information systems, and accounting?

7. Describe the nature of operations management in the following organizations. In doing this, first identify the outputs of the organization and then use the five deci- sion types to identify important operations decisions and responsibilities.

a. A college library b. A hotel c. A small manufacturing firm

8. For the organizations listed in question 7, describe the inputs, transformation process, and outputs of the production system.

9. Describe the decision-making view and the view of operations as a process. Why are both views useful in studying the field of operations management?

10. Write a short paper on some of the challenges facing operations management in the future. Use newspapers, business magazines, or the Internet as your sources.

11. Review job postings from various sources for management positions that are available for operations management graduates. Summarize the responsibilities of these positions.

12. Describe how the view of operations as a process can be applied to the following types of work:

a. Acquisition of another company. b. Closing the books at the end of the year. c. Marketing research for a new product. d. Design of an information system. e. Hiring a new employee.

Chapter 1 The Operations Function 17

18

LEARNING OBJECTIVES After reading this chapter, you should be able to:

LO2.1 Define operations strategy.

LO2.2 Describe the elements of operations strategy and alignment with business and other functional strategies.

LO2.3 Differentiate the ways to compete with operations objectives.

LO2.4 Compare product imitator and innovator strategies.

LO2.5 Provide examples of a distinctive competence for operations.

LO2.6 Explain the nature of global operations and supply chains.

LO2.7 Describe two types of supply chain strategies.

LO2.8 Illustrate how operations can become more environmentally sustainable.

2 c h a p t e r

There is an increasing awareness that operations and the supply chain contribute to the global competitive position of a business and are not merely making a firm’s products or services. This can be done by contributing distinctive capability (or competence) to the business and continually improving the products, services, and processes. The Operations Leader box on Insignia Athletics discusses the way it competes through a strategy of flexible manufacturing and just-in-time delivery for both customized and standard products. Operations should be fully connected to the business strategy. Operations strategies and decisions should fulfill the needs of the business and add competitive advantage to the firm.

LO2.1 Define opera- tions strategy.

Operations and Supply Chain Strategy

Chapter 2 Operations and Supply Chain Strategy 19

Operations Leader Insignia Athletics: American-Made for America’s Pastime

inventory to sell off when styles change. Material costs, mostly leather, make up 55 percent of manufacturing costs. The com- pany developed an automated cutting system to get higher yields from irregularly shaped raw materials and the system can be very quickly updated for new styles.

While U.S. labor costs are high, Insignia competes with effi- cient manufacturing, material sav- ings, speed to market, quick response to retailers, and the ability to customize for the con- sumer. Firms use their operations strategy to compete in a variety of ways.

Source: “Worcester Manufacturer Dons a Rally Cap,” www.wbjournal.com, 2012, www.insigniaathletics.com, 2016.

Insignia Athletics in Worcester, Massachusetts, is manufactur- ing  baseball gloves in the United  States, where wages are much higher than  those paid by other companies for imported gloves. Insignia balances the cost of labor with other product charac- teristics that customers value, like fast delivery, unique designs, prod- uct quality, and customer prefer- ences. Their $150–300 gloves are sold through retailers and online. Gloves can be customized with your choice of colors and your embroidered name, and delivered in ten days. Operations strategy helps this firm compete. Insignia uses the advantages of a flexible just- in-time manufacturing process to quickly make, ship, and sell what customers want, without old

The operations function is a key value creator for the firm. Value can be created only by operations and supply chains that are more productive than competitors’ in relation to the company’s chosen markets. All functions of the firm must be well coordinated for value to be created and competitive advantage to occur. The cross-functional coordination of deci- sion making is facilitated by an operations strategy that is developed by a team of managers from across the entire business. The following definition of operations strategy is a starting point for our discussion:

Operations strategy is a consistent pattern of decisions for operations and the associated supply chain that are linked to the business strategy and other functional strategies, leading to a competitive advantage for the firm.

This definition will be expanded throughout this chapter as a basis for guiding all deci- sions that occur in operations and its supply chain with decisions in other functions. We will use McDonald’s as an example in the next several sections to illustrate the ele- ments of an operations strategy. In 1955, Ray Kroc opened his first restaurant in Des Plaines, Illinois, patterned after the McDonald brother’s hamburger stand in California. The McDonald’s service system was designed on the idea of a very limited menu and fast produc- tion of standardized food and service with convenience and a low price. Never before had customers been served food so fast in a clean and courteous environment. Using a standard design for equipment, facilities, and employee training, the McDonald’s system was replicated in many locations and rapidly expanded throughout the United States and then the world. The McDonald’s system is a standardized service system designed to meet stringent spec- ifications. Every detail of the system is designed to provide fast and efficient food and service.

© Purestock/SuperStock

20 Part One Introduction

McDonald’s has continuously adapted its service system and supply chain over the years. For example, the menu has been expanded to offer many more food and beverage items, but always within the capability of the existing restaurants. They have updated their information systems in operations, and responded to environmental challenges by replac- ing, for example, the foam boxes previously used for sandwiches with biodegradable paper wrappers. In response to healthy food trends, they added salads, apple slices, and grilled chicken. Nevertheless, McDonald’s still has its critics and sometimes is blamed for the obesity of Americans and for having an adverse environmental impact. McDonald’s is a global service firm. The operations strategy for global expansion has been to replicate the service system design and supply chain in each country with minimum modifications to the menu or processes. However, a few local international options are pro- vided. For example, McDonald’s serves beer in Germany, McRice in Indonesia, soup in Por- tugal, and salmon burgers in Norway. They have also extended their supply chain forward by developing a franchise system that maintains strong control over the product and service. Today, McDonald’s is the global leader in food service with more than 35,000 restau- rants in 120 countries serving an average of 68 million customers each day. Now we will describe the elements of operations strategy in detail. We will use McDonald’s to illustrate how the elements of operations strategy support overall business strategy.

2.1 OPERATIONS STRATEGY MODEL

Operations strategy is a functional strategy along with a firm’s other functional strategies such as those of marketing, engineering, information systems, and human resources. Since operations strategy is a functional strategy, it should be guided by the business and corpo- rate strategies shown in Figure 2.1. The four elements inside the dashed box—mission, objectives, strategic decisions, and distinctive competence—are the heart of operations strategy. The other elements in the figure are inputs or outputs from the process of develop- ing operations strategy. The outcome of using the operations strategy is a consistent pattern of operations decisions that are well connected with the other functions in the business.

LO2.2 Describe the ele ments of operations strategy and alignment with business and other functional strategies.

McDonald’s is a leading global service firm. © McGraw-Hill Education/ Christopher Kerrigan

Chapter 2 Operations and Supply Chain Strategy 21

Corporate strategy and business strategy are at the top of Figure 2.1. The corporate strat- egy defines the business that the company is pursuing. For example, Walt Disney Corpora- tion considers itself in the business of “making people happy.” Disney Corporation includes not only theme parks but the production of cartoons, movie production, merchandizing, and a variety of entertainment-related businesses around the world. Business strategy follows from the corporate strategy and defines how each particular business will compete. Most large corporations have several different businesses, each competing in different market segments. Michael Porter (1980) describes three generic business strategies: differentiation, low cost, and focus. Differentiation is associated with a unique and frequently innovative product or service, while low cost is pursued in commod- ity markets where the products or services are imitative. Focus refers to the geographical or product portfolio being narrow or broad in nature. Focus can be combined with either a differentiation or a low-cost strategy.

Corporate and Business Strategy

FIGURE 2.1 Operations strategy process.

Operations strategy Functional strategies in

marketing, finance,

engineering,

human resources, and

information systems

Strategic decisions (process, quality system, capacity, inventory, and

supply chain)

Mission

Distinctive competence

Objectives (cost, quality, flexibility,

and delivery)

Business strategy

Corporate strategy

Internal analysis

External analysis

Results

Consistent pattern of decisions

22 Part One Introduction

Every operation should have a mission that is connected to the business strategy and is coordinated with the other functional strate- gies. For example, if the business strategy is differentiation through innovative products, the operations mission should emphasize new-product introduction and flexibility to adapt products to changing market needs. Other business strategies lead to other oper- ations missions, such as low cost or fast de- livery. The operations mission is thus derived from the particular business strat- egy selected by the business unit. At McDonald’s, the operations mission is to provide food and service quickly to cus- tomers with consistent quality and low cost in a clean and friendly environment. See the Medtronic Operations Leader box for another example of a mission-driven firm.

Operations objectives, sometimes called competitive priorities, are the second ele- ment of operations strategy. The four com- mon objectives of operations are cost, quality, delivery, and flexibility. In certain situations, other objectives may be added, such as innovation, safety, and sustainable operations. The objectives should be derived from the operations mission, and they constitute a restatement of the mission in quantitative and measurable terms. The objectives should be long-range-oriented (5 to 10 years) to be stra- tegic in nature and should be treated as goals. Definitions of the four common operations objectives follow:

∙ Cost is a measure of the resources used by operations, typically the unit cost of pro- duction or the cost of goods or services sold.

∙ Quality is the conformance of the product or service to the customers’ requirements. ∙ Delivery is providing the product or service quickly and on time. ∙ Flexibility is the ability to rapidly change operations.

Table 2.1 shows some common measures of objectives that can be used to quantify long-range operations performance. The objectives for five years into the future are com- pared to the current year and also to a current world-class competitor. The comparison to a world-class competitor is for benchmarking purposes and may indicate that operations is behind or ahead of the competition. However, the objectives should be suited to the particular business, which will not necessarily exceed the competition in every category. At McDonald’s, each restaurant has specific objectives with respect to cost, quality, and service times. These objectives are pursued using extensive standards and are frequently measured for compliance. McDonald’s tracks the performance of each restaurant and com- pares the results with those of competitors.

Strategic decisions constitute the third element of operations strategy. These decisions determine how the operations objectives will be achieved. A consistent pattern of strategic decisions should be made for each of the major operations decision categories (process, quality, capacity, inventory, and supply chain). These decisions must be well integrated

Operations Mission

Operations Objectives

Strategic Decisions

THE MAGIC KINGDOM. Disney Corporation is in the business of “making people happy.” © Phelan M. Ebenhack/AP Images

Chapter 2 Operations and Supply Chain Strategy 23

TABLE 2.1 Typical Operations Objectives

Current Year

Objective: 5 Years

in the Future

Current: World-Class Competitor

Cost

Manufacturing cost as a percentage of sales Inventory turnover

55% 4.1

52% 5.2

50% 5.0

Quality

Customer satisfaction (percentage satisfied with products) Percentage of scrap and rework Warranty cost as a percentage of sales

85% 3% 1%

99% 1%

0.5%

95% 1% 1%

Delivery

Percentage of orders filled from stock Lead time to fill stock

90% 3 wk

95% 1 wk

95% 3 wk

Flexibility

Number of months to introduce new products Number of months to change capacity by ±20%

10 mo 3 mo

6 mo 3 mo

8 mo 3 mo

with other functional decisions. This coordination and consistency is one of the most dif- ficult things to achieve in business. Table 2.2 indicates some important strategic decisions for operations. Note that these decisions may require trade-offs or choices. For example, in the capacity area there is a

or stock options—to immediate results that increase shareholder value will indeed motivate the top people in the organization, at least in the short term. This is well established and documented. Unfortunately, the top peo- ple represent only a small fraction of the people doing the work of the organization. . . . The purpose of a company boils down to one thing: serving the customers. If it is superior (in serving its cus- tomers) to everyone else in the field, and can sustain this advantage over the long term, that company will create ultimate shareholder value. . . . In the end, motivating employees with a mission and a clear sense of purpose is the only way I know of to deliver innovative products, superior service, and unsurpassed quality to customers over an extended period of time. Over time, an innovative idea for a product or a service will be copied by your competitors. Creating an organization of highly motivated people is extremely hard to duplicate.

Source: William George, “Address Given to the Academy of Management,” Academy of Management Executive 15, no. 4 (November 2001), pp. 39–47, and medtronic.com, 2016.

Operations Leader How Mission-Driven Companies Create Long-Term Shareholder Value: Medtronic’s Former CEO Bill George

. . . I have developed a deep conviction that the widely accepted philosophy, that the primary mission of a for-profit corporation is to maximize shareholder value, is flawed at its core. While that philosophy may result in short-term increases in shareholder value, it is simply not sustainable over the long term. Over time, shareholder value will stag- nate and eventually decline for companies that drive their strategy simply from financial considerations. . . . The best path to long-term growth in shareholder value comes from having a well-articulated mission

that  employ- ees are willing to commit to, a consistently

practiced set of values, and a clear business strategy that is adaptable to changing business conditions. Compa- nies that pursue their mission in a consistent and unre- lenting manner in the end will create shareholder value far beyond what anyone believes is possible. . . . Tying financial incentives of the management team— be they bonuses, incentive compensation, stock grants,

24 Part One Introduction

choice between one large facility and several smaller ones. While the large facility may require less total investment due to economies of scale, the smaller facilities can be located in their markets and provide better customer service. Thus, the strategic decision depends on what objectives are being pursued in operations, the availability of capital, marketing objectives, and so forth. McDonald’s illustrates how a consistent pattern of strategic decisions is made in the five operations decisions areas:

Process: Specialized equipment and work flows ensure meals are delivered to cus- tomers quickly. For example, the special French fry scoop puts the right amount of fries in each serving with little effort. Also, servers use information technology to instantly communicate orders to food preparers. Quality: More than 2,000 quality, food safety, and inspections monitor food as it moves from farms to suppliers to restaurants. McDonald’s requires that 72 safety and quality protocols be conducted at each restaurant every day. Managers are trained at “Hamburger U” in the McDonald’s system to ensure standards for service, speed, food quality, cleanliness, and courtesy are met. Capacity: Restaurant capacity is carefully designed to control customer waiting times. Employees are scheduled to meet the fluctuating demand during the day. Inventory: Just-in-time replenishment ensures food and packaging are available when needed. Food and packaging are highly standardized across restaurants. Supply Chain: Each restaurant is connected to its supply chain for fast replenish- ment. The supply chain is designed for frequent deliveries and to avoid stockouts.

All operations should have a distinctive competence (or operations capability) that differ- entiates it from the competitors. The distinctive competence is something that operations does better than anyone else. It may be based on unique resources (human or capital) that are difficult to imitate. Distinctive competence can also be based on proprietary or pat- ented technology or any innovation in operations that cannot be copied easily.

The distinctive competence should match the mission of operations. For example, it is a mismatch to have a distinctive competence of superior inventory management systems when the operations mission is to excel at new-product introduction. Likewise, the distinc- tive competence must be coordinated with marketing, finance, and the other functions so that it is supported across the entire business as a basis for competitive advantage.

Distinctive Competence

TABLE 2.2 Examples of Important Strategic Decisions in Operations

Strategic Decision Decision Type Strategic Choice

Process Span of process Automation

Make or buy Handmade or machine-made

Process flow Job specialization

Project, batch, line, or continuous High or low specialization

Quality Approach Training Suppliers

Prevention or inspection Technical or managerial training Selected on quality or cost

Capacity Facility size Location Investment

One large or several small facilities Near markets, low cost, or foreign Permanent or temporary

Inventory Amount Distribution Control systems

High or low levels of inventory Centralized or decentralized warehouse Control in greater or less detail

Supply Chain Sourcing Logistics

Insource or outsource products National or global distribution

Chapter 2 Operations and Supply Chain Strategy 25

Distinctive competence may be used to define a particular business strategy in an ongoing business. The business strategy does not always emanate from the market; it may be built instead on matching operations’ dis- tinctive competence (current or projected) with a current or potential new market. Both a viable market segment and a unique capa- bility to deliver the product or service offered must be present for the firm to compete.

Walmart has a mission to be the low-cost retailer. To achieve this mission it has developed a distinctive competence in cross-docking aimed at lowering the costs of shipping. Using cross-docking, goods from suppliers’ trucks are transferred across the loading dock to waiting Walmart trucks and delivered to the stores without entering the warehouse. Walmart also has a sophisticated inventory control system and more purchasing power than its competitors and therefore can minimize inventories and related costs. These distinctive competencies help Walmart compete on the basis of low cost.

McDonald’s early distinctive competence was its unique service and supply chain that it designed. Since other firms have copied this system over time, the distinctive competence has shifted to continuous improvement of the transformation system along with the brand. McDonald’s system and its brand are now its distinctive competence.

2.2 COMPETING WITH OPERATIONS OBJECTIVES

We will now use the four operations objectives discussed above to describe different ways to compete through operations. Most firms choose one or a few objectives to focus on, so that the strategic decisions made in operations can be aligned with and support these focused objectives. Suppose we start with the idea of competing through a quality objective. Delivering quality means satisfying customer requirements. This assumes that marketing has identi- fied a particular target market, and that operations understands these customers’ specific requirements. Operations processes must be capable of meeting those requirements. If competing through quality is the objective, strategic decisions related to product or service design, operations, and the supply chain must support customers’ expectations for quality. For example, expectations for customer service in a moderately priced hotel differ from those for a high-end luxury hotel. Workers must be trained to provide the expected level of service, and supply chain decisions—for instance, which softness of sheets to purchase for the hotel—must satisfy customer requirements. Now, suppose we decide to pursue a low-cost objective. Perhaps the best way to achieve low cost is to focus on conforming to customer requirements (quality) in product/service design and operations processes by eliminating rework, scrap, inspection, and other non- value-added activities. By preventing errors through continuous improvement, costs can be lowered. A low-cost objective may require more than just an emphasis on conformance qual- ity. Investment in automation and information systems may also be needed to reduce costs. If we select a delivery objective, strategic decisions should support fast or on-time deliv- ery, depending on the expectations of customers. Industrial (business) customers often want on-time delivery because they schedule loading docks at warehouses or retail stores and do not want several trucks delivering at the same time. Fast delivery may be desirable for con- sumers ordering products online (they will order from the company that can deliver the product soonest). For services, fast delivery could take the form of the shortest wait for a fast food meal during the lunch rush. In manufacturing, when quality improvement efforts

LO2.3 Differentiate the ways to com- pete with operations objectives.

Walmart has distinctive competencies to support its low-cost strategy. © Mcgraw-Hill Education/ John Flournoy

26 Part One Introduction

reduce non-value-added steps, the time to produce and deliver the product is indirectly reduced. Time can also be directly reduced by improving process changeover times, simpli- fying complex operations, and redesigning the product or service for fast production. Finally, we could choose to emphasize a flexibility objective. If we reduce delivery time, flexibility will automatically improve. For example, if it originally took 16 weeks to make a product and we reduce production time to 2 weeks, then it is possible to change the schedule within a 2-week time frame rather than 16 weeks, making operations more flexi- ble to changes in customer requirements. Other types of flexibility can be directly improved by adding capacity, buying more flexible equipment, training workers to perform a wider variety of tasks, or redesigning the product or service for high variety. We can see that operations objectives are connected. If we stress a quality objective, we also naturally get some cost reduction, time improvement, and more flexibility. Quality is often a good p