ORG MAN FINAL PAPER

Learning Objectives

After completing this chapter, you should be able to:

• Discuss the role of operations in an organization.

• Describe the differences and similarities between producers of services and pro- ducers of goods.

• Explain why the approach to designing, planning, and managing operations should grow from an organization’s goals.

• Discuss the impact of global competition upon organizations and their operations.

• Understand key ethical issues that impact organizations and operations.

• Define the systems approach to operations and discuss the relationships between operations and the other functional areas within an organization.

1 .Peter Cade/Getty Images

Introduction to Operations Management in a Global Environment

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CHAPTER 1Section 1.1 Defining Operations Management

1.1 Defining Operations Management

People who study business are often overwhelmed by details and terminologies such as the amount of the advertising or the definition of income statement. They seldom consider the purpose of organizations and why they exist. Organizations exist to meet the demands of society in a way that people working alone cannot. With the coordi- nation mechanisms and the concentration of resources that organizations provide, they can produce the vast array of services and goods in the large quantities that are consumed each day. Automobiles, flat screen televisions, banking, health care, online shopping, fire protection, police protection, and housing are just a few of the goods and services that organizations provide. Individuals working alone could not produce these services and products because individuals do not have the skills or access to the equipment and tech- nology necessary to complete so many distinct jobs quickly and efficiently.

Operations plays a critical role in organizations because they provide the means through which organizations produce thousands of commercial air- craft, millions of software pro- grams, billions of bank transac- tions, and all other services and goods consumed in the global economy. Operations for a hos- pital involves determining the size of the facility, deciding the type and quantity of equipment to purchase, arranging the facil- ity and equipment for efficiency, determining staffing levels and schedules to provide quality care, and managing invento- ries of medicines and bedding. Operations, therefore, refers to the processes within organiza- tions that acquire inputs and transform them into outputs that the public can consume, as shown in Figure 1.1. Inputs include people, capital, materials, and energy, and outputs are services or goods. Operations employs labor and management (people) and uses facilities and equipment (capital) to change materials (steel and plastics) into finished goods (die- sel locomotives) or to provide services (health care). Long-term success requires that the outputs of the operation be worth more to the consumer than the total cost of the inputs. In this way, organizations create wealth for society.

©Jupiterimages/Thinkstock

Organizations exist to provide utilities, health care, financial services and numerous other goods and services because individuals alone lack the necessary skills and resources to provide goods and services on a large scale.

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CHAPTER 1Section 1.1 Defining Operations Management

Figure 1.1: Operations

Operations is part of both private-sector and public-sector organizations. Services are intangible products, and goods are tangible products. According to classifications used by the U.S. Department of Commerce, the service sector includes transportation, utilities, lodging, entertainment, health care, legal services, education, communications, wholesale and retail trade, banking and finance, public administration, insurance, and real estate. Goods are defined as articles of trade, merchandise, or wares. Manufacturing is a spe- cific term referring to the production of goods. Throughout the text, the term product is used to refer to either services or goods. Table 1.1 lists many services and goods produced by private and public-sector organizations. Service operations currently represent about 88% of the U.S. economy, and this percentage is growing (U.S. Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov/newsreleases/industry/gdpindustry/ gdpindnewsrelease.htm). The service sector is also an important and growing segment of the global economy.

Table 1.1: Examples of goods and services produced by organizations

Goods Services

Profit Not-for-Profit Profit Not-for-Profit

Starter motors Gasoline Air conditioners Appliances Hair dryers Furniture

Highways Dams Flood control projects Fabrication and assembly completed in workshops for the handicapped

Banking Health care Stock brokerage Telephone services Education Retailing

Police protection Health care Public welfare Parks and recreation Fire protection Education

Operations is part of the total organization, which may also include specialties such as accounting, finance, marketing, information systems, engineering, and human resource management. When relationships between operations, marketing, and engineering are strong, it is possible to design high-quality products that are well liked by customers and

Transformation Process Products

Inputs

People Capital Material Energy

Outputs

Services Goods

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CHAPTER 1Section 1.1 Defining Operations Management

are cheaper and easier to produce. These capabilities enhance the competitiveness of orga- nizations. Understanding the links among functions in an organization is critical to an employee’s advancement beyond an entry-level position because middle and upper-level managers have broad responsibilities and interact with many business functions.

Operations management refers to decision-making processes for the design, planning, and management of the many factors that affect operations. Decisions can include which products to produce, how large a facility to build, how many people to hire, and what methods to use to improve quality and efficiency. Operations managers apply ideas and knowledge to:

• Decrease production time. • Increase the speed of bringing new services and goods to market. • Improve flexibility to meet rapidly changing customer needs. • Enhance product quality. • Improve customer service. • Increase productivity. • Reduce costs.

An organization that can achieve these benefits through operations will have an advan- tage over its competitors.

Much has been written regarding the relative importance of the service sector versus the manufacturing sector. Trying to isolate the impact of the service sector from the manufac- turing sector is not productive because one depends upon the other in so many ways. For example, in transportation, a trucking company purchases goods—tractors and trailers— from manufacturers that, in turn, buy services from consultants. Trucking companies run their tractors and trailers on public roads built by construction companies. Trucks carry goods; therefore, without a strong manufacturing sector, trucking companies and other forms of transportation would be severely hurt. The value chain of services and goods that brings products to customers is tightly linked.

In keeping with the close relationship between services and goods, most of the topics cov- ered in this book can be applied equally to service operations and manufacturing opera- tions. Examples from both service and manufacturing operations will be used to illus- trate key points. When there are important differences between the service sector and the manufacturing sector, these differences are clearly explained.

Similarities in Service Providers and Goods Producers The distinction between services and goods is not necessarily as clear as the U.S. Depart- ment of Commerce list indicates. Some operations classified as “services” actually pro- vide both services and goods. For example, automotive repair facilities sell and install replacement parts, so customers are purchasing something tangible as well as the labor to install them. Additionally, the person installing a muffler on an automobile is classified as

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CHAPTER 1Section 1.1 Defining Operations Management

Real World Scenarios: Lima Fire Department and Trane Air Conditioner Manufacturing

Service-producing organizations and goods-producing organizations have many similarities. Consider the Lima Fire Department, which provides fire protection, and Trane, which produces air condition- ing units and other items for the home. Both are concerned with product improvements. For a fire department, product improvements are measured by response time, the quality of its fire-prevention program, and the dependability of the service. For Trane, improvements are measured by the air conditioning unit’s cooling power, energy efficiency, and special features.

Managers at the Lima Fire Department address many questions directly related to operations. What is the maximum time that should elapse between a fire signal and the arrival of the fire equipment? How many fire stations are required? Where should these stations be located to maximize effec- tiveness? What type and quantity of equipment should be purchased? How many firefighters are required at each station? What qualifications are necessary, and how will they be trained? The answers to these questions shape the services provided and determine the capital required to build facilities, purchase equipment, and train personnel. Operating decisions also determine the costs of providing the service. (continued)

a service worker. The person who installed the original equipment muffler at the automo- tive assembly plant is classified as a manufacturing worker. Is there a difference?

At a restaurant, customers pur- chase not only the food they order, but also the preparation of that food. It is difficult to identify a substantial difference between installing a muffler and putting together a pizza in terms of goods versus services. In both cases, the ingredients or parts should be easily avail- able for the worker, proper tools should be provided to make the job fast and easy, training should be given, and a sequence of steps to achieve a final output should be established.

When goods are purchased, ser- vices are part of the transaction; when services are purchased, goods are often involved, either directly or indirectly. When a consumer buys a dishwasher,

the purchase price includes payments for retail services and audits of the manufacturer’s books. When consumers pay for a taxicab or bus ride, a portion of the money is used to pay for the purchase of vehicles. A thriving economy and an increasing standard of living depend upon strong and efficient service providers and manufacturers.

©Stockbyte/Thinkstock

In addition to providing installation and repair services, automotive repair centers sell tangible items in the form of replacement components.

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CHAPTER 1Section 1.1 Defining Operations Management

Differences Between Service Providers and Goods Producers Although operating decisions for services and goods have many similarities, one impor- tant difference must be noted: A good is tangible, and a service is not. This difference has two important consequences. First, a service business cannot account for inventory of fin- ished products because a service is intangible and is performed on demand. Most service organizations, however, do have supporting inventory in the form of supplies. Hospitals have linens, drugs, and food; banks have forms and paper; cellular telephone providers have equipment and spare parts. Second, because a good is tangible, the product designer must deal with physical characteristics (height, strength, durability, etc.). This requires engineering talent to ensure the finished good is the right shape, has enough power, and is strong enough to perform its intended function. For an intangible service, such as health care, other skills are needed, including knowledge of anatomy, physiology, and chemistry.

Managing Service Operations Without Finished Goods Inventory

Not having inventory might appear to be an advantage because inventory is expensive to maintain and time consuming to manage. However, the inability of service organizations to maintain an inventory of finished goods can be a disadvantage as well. Service orga- nizations cannot separate production from consumption. A customer can purchase a car on Saturday even though the assembly plant is closed because a dealer can sell a vehicle from inventory. This is not how services such as banking and telephone communications are performed, however. The telephone company cannot provide services in anticipation of demand because it has no finished goods inventory. Banks cannot perform transactions before a request is made. Customers of service organizations must do without the service or wait until it can be performed.

Banks have installed automated teller machines (ATMs) to provide consumers with access to funds, and now provide online banking services for account access 24/7. These actions extend service hours and relieve pressure on bank branches. Supermarkets may offer dis- counts to senior citizens who shop on slow business days, and movie theaters offer dis- counts to pictures shown on weekdays in the afternoon. In contrast, Trane can build air conditioners Monday through Friday, a typical production schedule, but the dealers can install them in customer’s homes anytime, including weekends and holidays because the air conditioners can be held in inventory. In addition, Trane can build the units in the slow winter months to offset demand in the spring and summer.

Real World Scenarios: Lima Fire Department and Trane Air Conditioner Manufacturing (continued)

Managers at Trane must answer a similar set of questions. How are its products designed? How do the products perform? What special features—thermostat control, multiple-speed blower, and others—are available? How many air conditioners should be produced each year? How can energy consumption be reduced? What type and quantity of equipment is needed for efficient production? How many employees are required? What type of training will they receive? How many facilities are needed, and where will they be located? Answers to these questions have a significant impact on the company’s ability to compete within the marketplace.

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CHAPTER 1Section 1.1 Defining Operations Management

Clearly, then, the planning impli- cations for businesses without finished goods inventory can be significant. For example, during the morning rush, if 70 people want to ride a public hybrid bus that has only a capacity of 50, then 20 must wait for the next pickup or be turned away. The possible solution of add- ing another bus may not be cost effective because the extra bus will not be heavily used. Turn- ing customers away can result in the short-term loss of revenue and, potentially, long-term loss of customers because of dissat- isfaction with the service.

Many bus lines try to relieve the capacity problem by shifting demand to off-peak periods. Discounts are often given to riders during late-morning and early-afternoon hours. The use of public transportation by high school students is sched- uled so it will not conflict with the morning or afternoon demand peaks. Thus, when man- agers of service operations consider capacity, they should focus on maximum demand and variability in demand, not average demand. Managers cannot use inventory to allevi- ate peak demand—including those peaks that occur from hour to hour.

To further complicate these challenges, some organizations that are classified as service providers act more like manufacturers. For example, restaurants sell a service, food prepa- ration, and a good—the food itself. A restaurant has raw materials, work in progress, and finished goods. In many retail and wholesale operations, investments in inventory are substantial, and inventory management is a critical success factor. Restaurants, retail stores, and wholesale operations are classified by the U.S. Departments of Commerce and Labor as service operations, but have many points in common with producers of goods. These points are discussed in the chapters on capacity, material and resource planning, and inventory management.

Designing Products for Goods and Services

Designing goods requires consideration of physical properties because goods are tangible and services are not. Usually, designing goods requires training in engineering because strength, durability, and performance are important. A high-speed color laser printer should consistently produce high-quality documents with limited maintenance and few, if any, breakdowns. The size and shape of products often influence the customers’ percep- tion of style and beauty. For example, a laser printer’s size or the style of an automobile may influence the purchase decision.

©iStockphoto/Thinkstock

Banks provide ATMs and online banking services to increase customer satisfaction, provide additional service locations, and make it easier for consumers to manage their funds.

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CHAPTER 1Section 1.2 Understanding Operations

When a service involves selling a good, such as food sold by a restaurant, the physi- cal dimensions of the good are still present. Designing a hamburger may not require an engineer, and, obviously, a hamburger need not be strong or durable. However, size and shape, as well as other physical elements, are still important.

When a service, such as selling life insurance, does not provide a tangible good, the other elements of design become important. The amount of the insurance payout compared with the premiums paid for the policy is based upon statistical analysis of mortality rates and the age of the person when the policy is purchased. In some cases, lifestyle, such as smoking or career choice, is also considered. These decisions are evaluated by an actuary rather than by an engineer. Lawyers frame the policy as a contract so it is legally valid.

The design of a medical procedure may require the medical doctors, equipment design- ers, pharmacist, and other medical professionals to work together to ensure that any new treatment or procedure is both safe and effective. The development of a surgical proce- dure to place stents in coronary arteries is a good example. Medical researchers and doc- tors worked closely with equipment manufacturers to design equipment and a process to insert the stent by passing it through the artery and placing it at the point of the blockage.

1.2 Understanding Operations

If an organization can produce and deliver high-quality, low-cost products that meet customer needs in a timely manner, its probability of success is greatly increased. Operations employees and managers play an important role in achieving these objec- tives because their effectiveness in designing, planning, and managing operations shapes the firm’s competitiveness. What factors influence the buying decision for most consum- ers? For most services and goods, price, quality, product features and performance, prod- uct variety, and availability of the product are important. All these factors are substan- tially influenced by actions taken in operations. When productivity increases, product costs decline and product price can be reduced or profit margins increased. For example, productivity improvements in the production of televisions have helped lower costs. As improved methods are developed for manufacturing the product, quality and variety may increase.

Linking operations and operating strategy with an organization’s overall strategy (includ- ing financial, marketing, human resource management, and information system strate- gies) can result in synergy between departments. Operations becomes a positive factor when facilities, equipment, and employee training are viewed as a means of achieving organizational rather than narrowly defined departmental objectives. In the past, the pri- mary criterion for judging operations was cost control, which is a narrowly defined oper- ating objective. Controlling cost is still important, but now organizations are including other performance measures, such as product performance and variety, product quality, delivery time, and customer service. When flexibility is inherent in operations, an organi- zation is able to respond rapidly and inexpensively to changing customer needs.

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CHAPTER 1Section 1.2 Understanding Operations

To understand operations and how it can contribute to the success of an organization, it is important to understand:

• The value-added nature of operations. • The impact that technology can have upon performance. • The importance of teamwork in achieving operating and organizational

objectives.

Operations Add Value The effects of well-run operations add value when consumers are willing to pay more for the finished good or service than the total cost of the inputs required to make the good or service. In the private sector, the difference between the price a consumer pays for a good or service and the cost to produce it is profit that can be reinvested to build new and better products, thus creating wealth for society.

Without profits, a company cannot raise capital to continue its operations and will even- tually become a casualty of competition. With profits, technology-based companies, such as Google and Facebook, and more traditional companies, such as Citibank and Toyota, are able to invest in new technology and new facilities, which lead to improved operations and lower prices. More efficient production of services and goods allows resources (people, capital, and materials) to be used for new product development and

innovation—which makes an organization stronger and more competitive.

In not-for-profit organizations, the value added to products represents improved wealth to soci- ety. For example, fire protection saves more money in damages than the cost of the service. The wealth created or preserved by value-added operations contributes to economic growth and makes more resources available for other wealth- creating activities. This ultimately improves the living standard because more wealth is created than consumed.

Microsoft creates the software that drives the majority of computers in the world. Microsoft’s global presence is the result of designing and developing software that dramatically increases the user’s productivity. The people and compa- nies using Microsoft’s software see value in the software and are willing to pay more for it than the cost of its development. In total, both sides of the producer or user transaction gain. Micro- soft, its founders, managers, employees, and stockholders gain through earnings and stock appreciation; software users gain by becoming more productive, which can lead to better job performance and more leisure time.

©Associated Press/AP Images

Countless organizations utilize Microsoft software because it can drastically increase user productivity and improve job performance.

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CHAPTER 1Section 1.2 Understanding Operations

Technology Technology is the application of knowledge, usually in the form of recently developed tools, processes, and procedures, to solve problems. Advances in technology make it pos- sible to design and build better products using fewer resources.

Product design is the determination of the characteristics, features, and performance of the product. Product technology is the application of knowledge to improve the product. The change from compact disks to digital online music is an example of using product technology to improve product design and enhance product performance. New products like digital video recorder (DVR) units are changing the way people enjoy television while Netflix streaming services are changing the way people view videos and movies. In the future, these technologies will be replaced by new product technology that will provide better sound quality, more features, and a lower price, as has already occurred when cas- sette players replaced record players, CD players replaced cassette players, and iPods replaced CD players. There are many other examples of product design improvements that can make life better, as shown in Table 1.2.

Table 1.2: Product design and technology

New Product Technology Outcome

Antilock brakes Microprocessor Safer automobiles

Lasik eye surgery Laser Faster recovery Fewer complications

Online banking services Smart devices, Internet, and telecommunications

Convenient, 24-hour service from anywhere

Nationwide reservation system Large-scale database, for hotels, airlines, etc.

Make reservations from the Internet anywhere in the world

Plastic bottles versus glass bottles

Injection molding containers Cheaper, lighter cost less to ship

Another major area to which technology can be applied is process. A process describes how to accomplish a task. Process design describes how a product is made. Process tech- nology is the application of knowledge to improve a process. Process technology affects how a product is produced but may have little, if any, impact on the product’s features and function. Frying is one process for cooking a hamburger, and grilling over an open flame is another. Both processes yield a cooked piece of ground beef. By contrast, a change in product design would directly affect the way a product functions. Adding a second patty of ground beef, substituting ground turkey for ground beef, or adding bacon would involve a different product design. There are many examples of process improvements that are making life better (see Table 1.3). In each case the product is the same, but the way the product is produced is different.

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CHAPTER 1Section 1.2 Understanding Operations

Table 1.3: Process design and technology

New Process Technology Outcome

Writing using Microsoft Word

Computer Easy to change text and tables; Many fonts; Easy storage and retrieval of documents

Punching a hole in a steel plate versus drilling a hole

Punch press Takes less time

Using PowerPoint software for presentations versus an overhead projector

Computer and video graphics Ability to deliver information with words and pictures; Inexpensive to update and distribute

Product design and process design are not always independent. A product design deci- sion may dictate the process that should be used. For example, when a bride gives a wed- ding planner a menu that specifies broiled cod and boiled potatoes, then the processes for cooking the fish and the potato are determined. In many industries, managers prefer that product design and process design be completed simultaneously by the same group of people working in close collaboration. This approach, sometimes called concurrent engi- neering, has become more and more popular as organizations attempt to develop new high-quality designs quickly.

Technology can be important when developing new ideas and successfully implementing them. For example, eBay took an old process, the auction, and married it to new technol- ogy, the Internet, to create a new business model that is highly successful. An auction cre- ates a market by bringing together buyers and sellers. Internet technology provides easy access to millions, and eventually billions, of people around the world. It allows sellers to provide detailed descriptions and pictures of the products to be sold. A wide variety of goods and services, as well as collectibles, are available for auction on eBay. With eBay’s approach, large amounts of information are easily and inexpensively available, transac- tion costs are low, and buyers and sellers can easily and quickly close a transaction.

Teamwork In the late-19th and early-20th centuries, labor and management groups in the United States treated one another as adversaries. Management and labor believed that a gain by one group meant a loss to the other. More recently, a new era of cooperation between labor and management has been established. The need for cooperation was accelerated by efforts to expand global trade through free-trade agreements, which created world- wide competition for labor. As a result, management and labor are working together to solve quality and productivity problems with each group contributing to the solution. Labor forces once opposed productivity improvements because they believed productiv- ity increases would result in fewer jobs. Now labor often supports and encourages higher

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CHAPTER 1Section 1.2 Understanding Operations

productivity because it provides job security due to the global nature of the labor market. Managers who were once reluctant to accept suggestions from employees (labor) are now more likely to listen and learn from personnel. Well-managed, teamwork-oriented opera- tions provide services and goods of high quality at prices that consumers can afford. This is good for the organization, labor, consumers, and management in the following ways:

• For the organization, the ability to meet the increasing demand for high-quality, low-cost products can lead to greater success in competitive world markets.

• For labor, well-managed operations provide continuing job opportunities. An inefficient operation drives prices up and makes services or goods subject to competitive pressure from efficient producers, both foreign and domestic. Increases in efficiency allow non-inflationary increases in wages, which leads to growth in purchasing power.

• For consumers, a lower price means that more people will be able to buy the product. In addition, consumers will have more money remaining for other purchases. This provides the opportunity to design, produce, and sell new goods and services.

• For management, lower production costs can lead to increased sales and higher profit.

There may be no better exam- ple of teamwork between labor and management than South- west Airlines. Many traditional airlines have lost money and gone out of business (Eastern Air Lines), have sought merg- ers (Delta and Northwest), or acquired bankruptcy protection (United, which recently merged with US Airways). Many people regard Southwest as the most successful airline in the United States—and possibly the world. Southwest focuses on the basics of air travel, and has an effective strategy and planning process. Its success is due to the quality with which its employees work. Employees do the extras that help passengers enjoy a nicer trip. They work in ways that make company processes faster and more efficient. Planes are on time, baggage is rarely lost, and passengers appreciate low fares and no cost for the first checked bag. Southwest employees own a part of the company, which drives employ- ees and, in turn, is one reason for the company’s success.

©Associated Press/AP Images

Southwest Airlines is, arguably, one of the most successful airlines in the world because of positive employee- management relationships and commitment to continuous improvement.

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CHAPTER 1Section 1.3 Global Trade and Competition

1.3 Global Trade and Competition

It is impossible to ignore the impact of the global marketplace and free trade on orga-nizations and their operations. The North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT) were designed to reduce or eliminate tariffs and other trade restrictions. Since these have been enacted, several others have been approved, including recent agreements between the United States and Korea, Colombia, and Panama. These agreements increase the opportunities for countries to focus on areas of trade and commerce in which they have a relative advantage. Free trade can lead to mergers and acquisitions that bridge relations between nations and continents.

Relative Advantage A country that wants to enhance the living standard of its people will engage in global trade. The country imports goods and services that are not available locally, or cost more to make at home than their foreign-made counterparts. When a country is the most efficient pro- ducer of all goods and services, it would be beneficial for that country to engage in global trade because the relative advantage in one product—for example, pitchforks—is greater than its relative advantage in another product—for example, furniture. Relative advantage is defined as the difference between the lowest cost producer and the next-lowest cost pro- ducer. The country with the pitchfork production advantage should produce pitchforks for the global market and may import to meet some or all of its furniture needs.

As barriers to trade (such as import quotas and tariffs) decline and countries better under- stand the benefits of international trade, trade between nations will continue to increase. Recently, global trade in goods and services reported by governments outpaced growth in the world’s total production (U.S. Department of Commerce, Bureau of Economic Analy- sis, http://www.bea.gov/international/index.htm). When growth in global trade out- paces world production, the percentage of world production moving between nations must be increasing.

Creating Global Markets Markets for many items, such as those produced by the electronics, steel, automotive, textile, and photographic equipment industries, are world markets dominated by multi- national firms. In order for firms to compete, they must be among the best in the world, not simply the best in their nation. These firms must compete with firms from other coun- tries where the labor costs, material costs, material availability, culture, and sociopolitical environment are substantially different. These differences can make a manager’s job more challenging.

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CHAPTER 1Section 1.4 Systems Approach to Operations

Real World Scenarios: Ford Motor Company’s Rebound

After World War II and until the late 1970s, when Ford Motor Company’s primary competitors were General Motors and Chrysler, Ford had the same workforce and labor cost per hour, nearly the same material costs, and the same set of government regulations as its competitors. In many cases, execu- tives from one firm had also worked at the other firms; therefore, each company had similar ideas and approaches to management. More recently, Ford has faced global competitors that have sub- stantially different cost factors and management styles. Organizations that are successful in the 21st century will develop an understanding of global marketing, distribution systems, financial and capital markets, accounting, and operations, rather than national strategies. Global competition has had, and will continue to have, a tremendous impact upon operations and operations managers. Prod- uct performance, product quality, efficiency, and delivery lead time are all elements of competition affected by operations. Ford has risen to the challenge by designing and building new products that are high quality and cost competitive. These products have been designed using resources and ideas from around the world. Ford has and will continue to build vehicles in China, India, and other coun- tries to sell in global markets.

Job markets are also becoming global. Before NAFTA and GATT, it was common to see blue-collar jobs move from one country to another as firms moved production facilities in search of low-cost labor. Today, engineering, information technology, and manage- ment jobs are becoming global. Companies are outsourcing product design and informa- tion systems development activities to India and China to achieve lower costs or greater work capacity. As the cost of the workforce in India and China has increased, some of the jobs that were once outsourced are returning to the United States, and others are mov- ing to other low-cost countries (MSNBC News Report, http://video.msnbc.msn.com/ rock-center/46198559#46198559).

1.4 Systems Approach to Operations

Substantial interdependencies exist between functional areas within organizations, between organizations that must cooperate to create and deliver innovative products to customers, and between organizations and government agencies. Within organiza- tions, functional barriers to integration are eliminated as managers create cross-functional teams to tackle difficult problems such as product design, productivity improvement, and facility design. To encourage cooperation between organizations, managers are building strategic alliances with suppliers that increase the exchange of information and ideas for the benefit of both. Organizations are responding to concerns by government agencies regarding employee rights, environmental impact, and product safety. These social, legis- lative, ethical, and legal issues are growing in importance.

How do operations fit into this systems view of the organization and its environment? Operations management is only one part of the organization, which, in turn, is a part of the larger economic and governmental system. A system is a group of items, events, or actions in which no item, event, or action occurs independently. Thus, no item studied in isolation will act in the same way as it would within the system. For example, a study

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CHAPTER 1Section 1.4 Systems Approach to Operations

that focuses on minimizing transportation costs might suggest that materials be ordered in larger quantities to reduce the number of trips and save transportation costs. However, larger shipments will require more storage capacity, and the increase in storage costs could be greater than the decrease in transportation costs. When making decisions, a manager should examine each issue as it impacts system-wide and organizational level outcomes.

A system can be divided into a series of parts or subsystems, and any system may be a component of a larger system. Understanding the relationships among the various sub- systems is an integral part of the study of operations management.

Figure 1.2 illustrates that an organization is part of the global economic and government system. In turn, the organization is composed of several subsystems, one of which is operations. Operations managers work with managers in marketing, finance, accounting, engineering, and other departments to reach the goals set by top management. Because of the many functions it encompasses, the operations subsystem is divided into yet another series of subsystems. When studying the operations management subsystem, it is impor- tant to keep in mind the entire operation, the organization, and the external environment.

Figure 1.2 A systems view of operations, the organization, and the organization’s environment

etc. Quality

management Inventory control

Production planning

etc.FinanceMarketingOperations

etc.Sony Federal Express

Google

etc.MexicoChina United States

Global Economic and Government Systems

Organizations

Organization Subsystem

Operations Subsystem

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CHAPTER 1Section 1.5 The Organization as Part of the Economic and Government System

In order to design, plan, and manage operations effectively, managers should be aware that:

• An organization is part of the global economic and government system. • Operations are an integral part of the organization. • Operations are composed of a series of related subsystems.

1.5 The Organization as Part of the Economic and Government System

Organizations operate in an environment that includes several interest groups: stockhold- ers, management, labor, consumers, and the general public. These groups are often called stakeholders because they are affected by (or have a stake in) decisions made by the orga- nization. Business leaders have realized that to achieve long-term success and to be good corporate neighbors, an organization should serve all of these interests. Thus, leaders should be responsive to issues involving wage rates, working conditions, pollution, prod- uct safety, and global competition—as well as the stockholders’ return on their invest- ment. All of these factors are part of the larger economic and government system within which organizations operate. This larger economic and government system is broadly defined to include the legal, political, social, and educational subsystems.

The importance of these broader subsystems and the factors that impact their operating systems are discussed in more detail in Table 1.4.

Table 1.4: Factors, interest groups and the impact of operating decisions

Factor Decisions Interest Group Impact of Operating Decisions

Wage rates and working conditions

Labor and middle management Good working conditions and fair wages can be positive factors in employee performance.

Pollution General public Well-managed operations should not cause pollution.

Product safety Consumers When products are well designed, consumers are safer and more satisfied.

Global competition Stockholders, labor, middle management

When operations are well managed, costs are not excessive. If this is coupled with high quality, the organization becomes competitive.

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CHAPTER 1Section 1.5 The Organization as Part of the Economic and Government System

Legal, Environmental, and Ethical Issues Today, managers and organizations are facing a staggering array of problems that their predecessors largely ignored. The managers of the past often viewed labor relations and worker safety, environmental pollution, and product safety as outside their area of concern. They often made decisions that were in the best interest of the organization’s stockholders but detrimental to labor, to the environment, and even to the customer. For example, organizations have designed and built unsafe products and have avoided taking corrective action when problems with the products were apparent.

As a result of this neglect, organizations face labor unions, environmental advocates, and consumer groups that have been successful in passing legislation to define labor manage- ment relations, regulate the safety of the workplace, shape environmental and sustainabil- ity programs, and protect consumers. In addition, the threat of a consumer boycott and the negative publicity associated with poor corporate citizenry are causing many compa- nies to act responsibly. Government, therefore, now plays a significant role in regulating organizations and their operations. Companies operating globally must understand the legislative and ethical requirements for competing in each country.

Each of these areas of concern is directly related to operations. Normally, operations has the highest number of workers in order to build the products that consumers purchase and is often the focus of union activity. Operations is the most likely place where workers can be injured and has the greatest potential for creating environmental pollution.

It is necessary for organizations to develop a set of standards for ethical behavior that meets the expectations of the community. It is also reasonable to expect those standards to increase as the standard of living increases. Product safety issues are more prominent, better understood, and better managed in a developed country with more resources than in an undeveloped or underdeveloped country.

Today, managers need to search for solutions where all of the stakeholders—stockholders, management, labor, consumers, and the general public—can benefit. Fortunately, the new generation of managers has recognized the need to develop these approaches, and some impressive strides have been made.

Labor Relations As late as the 1930s in the United States, many businesses required their production employees to work long hours for relatively low pay. Working six days each week was considered normal, and up to this time, labor unions only had limited bargaining abili- ties. These businesses wanted to keep costs low and increase their return on investment. In addition, many manufacturing plants had poor or unsafe working conditions. In many cases, workers rebelled against management. They fought hard and often engaged in battles with management for better pay, better working conditions, and the right to form unions. Eventually, labor was able to unionize because the federal government passed laws in the late 1930s that permitted and protected unions. From these conflicts, labor unions and businesses developed an adversarial relationship that still exists today in some organizations. It has taken almost 80 years to reduce the adversarial relationship between management and labor in the United States to allow all stakeholders to work together and make a firm more competitive in global markets.

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CHAPTER 1Section 1.5 The Organization as Part of the Economic and Government System

Both groups are learning that their security lies in cooperative efforts, primarily in the effort to make better quality products with better per- formance at a lower unit cost. Such quality and productivity improvements will help secure jobs in the United States and make its prod- ucts competitive in world markets. Organiza- tions are responding by working with labor to develop employee involvement teams. These teams, which include both management and labor personnel, are often led by labor. The group’s goals are established by the entire group and are not vehicles through which managers can control the labor force, or set the direction for the group. These teams appear to work best when labor feels free to express ideas, suggest changes, and maintain a leadership role in pro- cess implementation.

Environment and Sustainability In the 1920s and 1930s, many business leaders did not consider pollution a problem, nor did they see the value of recycling materials. At that time, waste from operations was something to dispose of at the least cost possible. Sustain- ability was not a factor to consider because eas- ily accessible resources were inexpensive and seemingly endless. When pollution problems began to arise in the 1950s and 1960s, some

businesses were reluctant to change. Businesses in the United States now operate under some of the most restrictive environmental pollution laws and reporting procedures in the world.

Since the 1960s, concern for the environment has grown substantially in the United States and other developed countries. Today, many organizations take proactive steps to reduce emissions from facilities and move their operations toward sustainability by reducing the consumption of materials and energy, reusing materials whenever possible, and recycling materials.

Companies are discovering “win-win” opportunities in which an organization can cut costs and increase profits by recapturing pollutants and reducing solid waste. In other cases, organizations have begun to recognize that a polished corporate image has increased sales. Fast-food restaurants have begun recycle and reuse programs, including joining efforts to transform cooking oil into biodiesel fuel, and many have changed packaging materials in response to concern from consumers. Being a good corporate citizen and pro- tecting a company’s renewable resources can be mutually beneficial. For example, most large forest product companies have major efforts underway to replant trees that have been cut for lumber and paper.

©K.J. Historical/Corbis

Due to low wages, unsafe working conditions, and long hours, employees rallied together in the 1930s to establish labor unions. Although they can be adversaries, management and labor forces can work together within unions to stay competitive in the global market.

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CHAPTER 1Section 1.5 The Organization as Part of the Economic and Government System

Product Safety Because product design and production are part of operations, operations management decisions play a significant role in determining product safety. Companies such as Black & Decker and Procter & Gamble owe their excellent reputations partly to their concern for product safety. These companies realize that high quality and safety are compatible with high profits and long-term success.

If global and domestic competition is not sufficient to keep out unsafe products, then con- sumer groups and legislative action will. The power of consumer advocates and efforts to protect consumer interest, evaluate products, and educate the consumer has risen over the past 40 years. Consumer groups have challenged organizations in the courts as they seek to force companies to remove dangerous products from the market.

Toyota’s sudden accelera- tion problem, silicone breast implants, and asbestos are just three examples of consumer vic- tories over unsafe products. Toy- ota’s sudden acceleration prob- lem is a classic case. Evidence was discovered that engineers at Toyota understood the sudden acceleration problem as much as 18–24 months before the problem was addressed. It is unclear why Toyota took so long to respond to the problem; it’s likely that bureaucratic incompetence was a larger factor than callous dis- regard for safety. Toyota suffered

©Design Pics/Thinkstock

When Toyota failed to address the sudden acceleration problem, the company incurred lost sales and decreased market share. Concerned consumers eventually won when Toyota recalled the faulty vehicles.

Highlight: Making Pollution Prevention Pay

Making Pollution Prevention Pay (Huisingh & Bailey, 1983) has benefited many organizations. These firms understand that environmental protection and economic progress can go hand-in-hand. Sauder Woodworking Co. is left with about 300 tons of sawdust each day after workers craft ready-to-assemble furniture. For years, the bulk of the sawdust was sent to a landfill at a cost to Sauder of $55 to $60 per ton. Today, Sauder operates a $15 million co-generation plant using that sawdust to produce enough power for 3,878 homes. The co-generation plant idea was established after Sauder and Toledo Edison Company agreed that the furniture company could supply power to the utility’s grid.

Companies all around the world are discovering that recycling and recapturing byproducts, scrap, and even heat can be profitable. Companies are also finding that better results are achieved when envi- ronmental factors are considered during the initial design of a facility. Retrofitting facilities with pol- lution control equipment can be an expensive alternative to thoughtful analysis and careful design.

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CHAPTER 1Section 1.5 The Organization as Part of the Economic and Government System

lost sales and market share as a result, and Toyota (and other companies) learned that prod- uct safety is a key competitive element for producing and selling cars and trucks.

Asbestos litigation has forced many companies into bankruptcy, including Owens Corn- ing, maker of pink fiberglass insulation. In this case, the company was unaware of the consequences of producing asbestos. Owens Corning stopped producing asbestos more than 40 years ago, but law suits running into billions of dollars forced it into bankruptcy. A substantial part of Owens Corning’s liability was acquired when it purchased another firm that made asbestos. In fact, during bankruptcy, Owens Corning had record earnings, which were dwarfed by the size of the resulting settlement.

Organizations must understand the implications of actions that are detrimental to the con- sumer and respond by demonstrating an honest concern for the customer. This approach creates a sense of trust between the consumer and the company, which can have substan- tial economic value.

Ethical Behavior Ethics are a sense of what is right and wrong that guide behavior. This set of standards is often more stringent than legal standards. For example, if a representative of a company claims that a service or good is capable of something and it is not, the customer may have criminal or civil legal recourse. If an individual is unaware of the true value of something, and has set an asking price that is only a small percent of its value, the buyer faces an ethi- cal dilemma.

Managers must use judgment to decide how far a company should go to ensure product safety. Should a Jet Ski™ contain a warning that all riders should wear life vests? Should a lawn tractor have a shut–off device that disables the mower if the rider weighs less than 100 pounds? Should microwave ovens have a label that states operators should not try to dry their cat in the oven? In product safety, what is sensible and what is silly? These are difficult questions for which no right answer exists. Managers must continue to grapple with these issues as they develop a set of standards with which they feel comfortable when making decisions.

Ethical behavior is a corporate issue that affects the company’s bottom line. The answer is complex, but it can be partially understood by reviewing earlier points on labor rela- tions, the environment, and the customer. Some organizations have attempted to maxi- mize short-term earnings per share to the stockholder by cutting corners on plant safety or environmental compliance. Usually, these actions have separated management from labor, the consumer, and the general public.

In the longer term, such actions alienated these interest groups and forced them to take action. The actions, often legal or legislative, helped to create an adversarial environment that has forced an increase on costs and made some industries vulnerable to global com- petition. For many years, the steel industry did not respond adequately to environmental and safety concerns. This diverted management time and company resources away from important decisions and key investments in new technology. Over time, competitiveness

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CHAPTER 1Section 1.6 Operations as Part of the Organization

declined, and companies suffered a decline in sales and market share. Today, the steel industry has responded to these important issues in a timely manner. Global competition has not negatively affected industries such as paper and oil because these industries have had a more balanced view for many years, and have focused on both long-term objectives and short-term performance. Companies in these industries have made significant efforts to deal with labor, environmental, and product safety concerns as part of their initial plan- ning process rather than as problems arise.

1.6 Operations as Part of the Organization While an organization is part of the larger economic and government system, it is also a system containing subsystems such as marketing, finance, accounting, personnel, and engineering, in addition to operations. These subsystems, often called functional areas or disciplines, should be linked together by common organizational goals and a means of communicating these goals. These common goals are part of an organization’s strategy. Strategy consists of the organizational goals and the methods for implementing the goals, called key policies. Strategy defines how the organization chooses to compete within the framework dictated by the external environment. Communicating and deciding how to

implement a strategy typically occurs during the budgeting and planning process, which most organizations do annually.

Selecting a strategy and key policies leads to the creation of key business (organizational) pro- cesses that a firm uses to satisfy customer needs. A business process is a set of work activities with a preferred order, an identifiable begin ning and end, inputs, and clearly defined outputs that add value to the customer. A business process is cross- functional and leads to outcomes the customer desires, such as delivering quality products that meet specific customer needs in a timely manner.

Strategy Operations should be linked to the rest of the orga- nization by developing strategies consistent with the organization’s overall strategy. Links between operations and the rest of the organization can be built into the planning process. A plan is a list of actions that management expects to take. A plan is the method for allocating the organiza- tion’s resources in relation to opportunities and problems present in the environment. Resources allocated by operations managers should help the organization achieve its goals.

©Stockbyte/Thinkstock

Links between operations and the rest of the organization should be built into the planning process by developing consistent operations strategies.

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CHAPTER 1Section 1.6 Operations as Part of the Organization

The links between strategy and operations can be illustrated by comparing a fast-food restaurant with a four-star restaurant. Customers expect fast-food restaurants to deliver good-quality food at a low price, with a wait of only a few minutes. This implies a lim- ited menu, some advance preparation, and a service operation with a smooth and simple means of communicating orders and delivering food. The training of counter workers and cooks should emphasize speed, efficient movement, and uniform performance of duties.

Compare these requirements with those of a four-star restaurant with a heavy tourist trade. Here, customers expect food of exceptional quality and variety, higher prices, and a leisurely dinner. These expectations imply a wide selection on the menu, comfortable and pleasant surroundings, entertainment, and little or no advance food preparation. All oper- ations, from training cooks to food procurement, are different from those in a fast-food restaurant. Four-star restaurants do not have counter help. The emphasis is on service to the individual customer rather than on uniformity and quick response. This comparison illustrates two different approaches to successfully operating a restaurant. Success in a fast-food restaurant is based on providing quality products at low prices and maintaining high customer volume. Success in a four-star restaurant is based on providing entertain- ment and atmosphere, as well as quality food. The allocation of resources in the design and planning of these restaurants should reflect the differences.

Organizational Structure The development of strategy leads to the question of organizational structure. Organiza- tional structure is the infrastructure of formal relationships among different functions or subsystems, such as marketing, finance, and operations. Organizational structure defines the lines of communication. Many organizations have substantially reduced their admin- istrative staffs and altered their lines of communication. IBM, Ford, Bank of America, and other organizations have cut hundreds of thousands of white-collar workers. In a few cases, the objective is simply to cut costs. In most cases, organizations are seeking a leaner, more competitive structure that will enable them to make better decisions and to respond more quickly to opportunities in the environment.

Decentralizing decision making can result in fewer levels of hierarchy with more cross- functional teams. Eliminating the functional silos that traditional organizations often have enables teams to share knowledge and understand the organization-wide implications of a decision. Decisions are made based upon corporate interests rather than narrow func- tional interests, and they are made with more knowledge and understanding of the broad effects rather than in isolation. In this environment, organizations not only make better decisions, but they can also make them more quickly because problems are uncovered early and resolved expediently. All managers, including managers of operations, must be able to work on the critical cross-functional decisions that organizations face.

Operations and Marketing Interface One of the most important cross-functional relations in an organization is between opera- tions and marketing. The marketing function is responsible for investigating and creating

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CHAPTER 1Section 1.6 Operations as Part of the Organization

demand for services and goods. The operations function is responsible for producing these services and goods and managing the supply chain that provides the incoming resources. The operations manager’s role is essential because without products, the organization has no means of achieving its purpose.

Figure 1.3 illustrates the operations and marketing interface. The interaction begins with market research, which is an effort to measure customers’ needs and preferences. Mar- ket research must identify and determine new markets for existing products and to dis- cover demand for new products. Market research leads to product designs that can satisfy consumers’ needs at a reasonable cost and a high level of quality. As a product is being designed, the process for making that product should also be designed. After the pro- cess has been designed, it is necessary to acquire resources—material, trained people, and equipment. The production of the product includes concern for quality, cost, and on-time completion. It also involves identifying suppliers and working with those suppliers pro- viding goods and services to meet the needs of the organization. Lastly, marketing and distribution of the product take place. At this point, the customer’s reaction to the prod- uct is measured, and another round of market research should occur in order to monitor changing customer needs.

Figure 1.3: The operations and marketing interface

The operations subsystem works in a cycle. Market research informs product and process design, which leads to resource acquisition and production. Then, the product is marketed and distributed to the customer. Finally, more market research is conducted to improve the product for future releases.

Figure 1.4 illustrates how decisions within operations can affect marketing. Product cost must be covered by the market price with enough left over to pay for overhead, adminis- trative, and selling expenses and to provide the organization’s profit. Effective scheduling helps the organization deliver products on time. Flexibility permits operations to deliver specially designed products at a low cost, making marketing’s job easier. High-quality products pay dividends in repeat sales and new customers.

Market research

Customer

Product and process design

Resource acquisition

Production

Operations Subsystem

Marketing and

distribution

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CHAPTER 1Section 1.6 Operations as Part of the Organization

Figure 1.4: Marketing and operations are important subsystems in an organization

The role of operations is to produce goods and services, while the role of marketing is to investigate product demand and establish distribution chains. Links between operations and marketing include cost or price, schedule and delivery promise, flexibility and customer satisfaction, and high quality and repeat sales.

Processes Versus Functions Currently, a revolution is taking place in the business sector. Businesses are shifting from organizing by business functions, such as operations, marketing, finance, and informa- tion systems, to organizing by business process, such as strategy formulation, product development, and order fulfillment. Business processes span many functional areas. For example, product development requires inputs from marketing, engineering, finance, operations, and others.

Organization’s top management

Operations

Role: Produce goods and services

Marketing

Links

Costs

Schedule

Flexibility

Price

Delivery promise

Number of models

(customer satisfaction)

High quality Repeat sales

Role: Investigate demand and establish distribution chain

Marketing

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CHAPTER 1Section 1.6 Operations as Part of the Organization

Advocates of the business process approach argue that organizing by functions is inap- propriate for today’s fast-paced and fast-changing environment. Decision making is very slow as complicated decisions wind through the maze of groups that exist in the func- tional organization. As a result, companies that are organized by function can be inef- ficient and slow to respond. Organizing by process tends to focus attention on activities that customers value and allows the organization to make decisions quickly.

Customers are not concerned about discipline or function-related issues such as how accounting values inventory, how financial managers analyze investments in facilities, or whether an operation has the lowest transportation costs. Customers are concerned about how the outputs of the organization meet their needs. The customer requirements shown in Figure 1.5 include meeting specific needs for product performance and features, price, and service after the sale. The organization should develop competitive capabilities to meet these customer requirements. The capabilities of the organization are the result of processes such as strategy development, product development, design of systems to pro- duce services or goods, and order fulfillment. Order fulfillment ranges from order entry through production to delivery and after-the-sale service. The processes listed here are illustrative and not exhaustive.

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CHAPTER 1Section 1.6 Operations as Part of the Organization

Figure 1.5: Relationship between functions, processes, and outcomes

Employees from functional areas such as accounting, marketing, and engineering complete various business processes such as product development and order fulfillment. These processes form the company’s competitive capabilities, which serve customer requirements, including quick responses, pricing, and service.

Customer Requirements

Competitive Capabilities

1. Meeting specific customer needs 2. Quick response 3. Product performance and features 4. Product quality (fitness for use) 5. Price 6. Service

Functional Areas

Strategy development X X X X X X X

Product development X X X X X X X

Develop systems to produce services and goods

X X X X X X X

Order fulfillment X X X X X X X

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CHAPTER 1Section 1.6 Operations as Part of the Organization

As illustrated in Figure 1.5, business processes work across functions to create competitive capabilities. People trained in the disciplines work on teams to design, implement, and operate processes that produce the outcomes that customers want.

Customers don’t care whether a company is organized by function or discipline. They care about value. For example, an organization that is the industry leader in sales and profit may have the highest distribution costs in the industry because it provides the shortest time from order to delivery. If that fast delivery adds value to the customer, then the cus- tomer may be willing to pay more for the product or to buy more of the product. A process that reduces distribution costs and increases the time from order to delivery reduces value to the customer.

Related Subsystems Within Operations Early sections describe the relationships between the organization and its environment. These sections also describe the organization as a series of related subsystems with opera- tions as one subsystem. As illustrated earlier, in Figure 1.2, operations can be divided into different parts or subsystems, including quality management, inventory, and scheduling.

To facilitate understanding of the subsystems, and to make the relationships between these parts clear, an overview of operations is provided in Figure 1.6. Looking forward, here is an overview regarding how this book is organized:

1. Building Capabilities to Compete Globally 2. Designing the System to Produce Services and Goods 3. Planning and Managing Operations

The section on building capabilities covers how firms use operations to gain a competi- tive advantage, including the strategic importance of operations and the applications of computers and technology. This discussion also describes the importance of flexibility, time, productivity, quality, and supply chain management as critical dimensions of com- petition, and explains how these capabilities can be obtained. These topics are discussed in Chapter 2.

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CHAPTER 1Section 1.6 Operations as Part of the Organization

Figure 1.6: Overview of the systems approach to operations

Later chapters on designing the system to produce services and goods discuss the ways that organizations can build effective operations to increase productivity, improve quality, and integrate actions within an organization and its supply chains. They describe ways to forecast demand, to select the process for producing the services and goods, to locate and arrange facilities, and to set capacity requirements. These decisions are interrelated because the type of product that an organization chooses to produce will impact how and how many of a product will be made. These topics are covered in Chapters 3–8.

Planning and managing operations describes how an organization expects to use its facili- ties, people, and materials to meet demand. It includes developing and executing produc- tion plans and coping with different planning horizons. The key areas of material require- ments, planning, inventory management, and just-in-time scheduling are explained. These topics are covered in Chapters 9–12.

Planning and

managing

Building capabilites

Designing the system

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CHAPTER 1Case Studies

Chapter Summary

• Operations is the processes through which people, capital, and material are combined to produce the services and goods consumed by the public. Products should be value-added; that is, the services and goods should be worth more to the customer than the cost of the inputs.

• Operations can be designed and used in a manner to gain competitive advantage. • Service operations have many similarities with and some differences from manu-

facturing operations. • Global competition will strengthen organizations and increase living standards

worldwide. • Ethical issues are important business issues. • A system is a group of items, events, or actions in which no item, event, or action

occurs independently. The systems approach is a central theme within this text. • The organization must compete within the constraints presented by its external

environment. These constraints include competitors, economic conditions, and government regulations.

• Successful operations management requires teamwork among operations and other functional areas (subsystems) within an organization. These areas include marketing, finance, accounting, engineering, and information systems.

• Operations is composed of many parts or subsystems, which should be effec- tively coordinated to build the organization’s competitive position.

• Organizations should design business processes to achieve competitive capabili- ties rather than focusing on functional specialization.

Case Studies

Our Lady of Lourdes Hospital As a management trainee for a large consulting firm, you are part of a team that has been assigned to study operations at Our Lady of Lourdes Hospital (OLL). Recently, OLL was purchased by a for-profit health care provider. The team is tasked with reporting on oper- ations and making recommendations to enhance revenues and reduce expenses.

Before it was sold, OLL had begun many of the outreach programs that are common in health care. An alcohol and drug rehabilitation center, a women’s health center, and a sleep therapy center exist, but all have lost money. Following are summaries of key points from interviews the team had with the directors of marketing, operations, and medicine.

Director of Marketing:

1. A major problem has been the lack of a budget for advertising these centers. These projects need large sums of up-front money for advertising and promotion.

2. We are having trouble getting the kind of cooperation necessary to make these programs work. Basic operations, from meal preparation to cleaning and main- tenance, have not been done well. Medical problems at these centers are given a lower priority by the medical staff because the patients “are not really sick.”

3. What we need is time to identify problems and implement efficient solutions to these programs.

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CHAPTER 1Case Studies

Director of Operations:

1. I do not have any problems that could not be solved if I had an unlimited supply of money. Major renovation efforts are needed to improve food preparation areas, the laundry, and the heating system. These three improvements could probably save enough to cover OLL’s annual deficit.

2. If these problems are not bad enough, my people are saddled with several new responsibilities. These new centers require more work than the administrators think. Sufficient operating funds were not allocated to cover the expenses. Sev- eral of the centers are off the main site, making it difficult for my supervisors to do a proper job.

3. In my opinion, these centers are a drain on resources.

Director of Medicine:

1. The medical staff requires better support. Certain key medical equipment requires immediate replacement, and the laboratories need updating. To attract the best doctors, we need to purchase equipment we have never had before.

2. The new centers are taking time away from the medical staff. We don’t get proper credit for the work we do in those centers.

3. We need to pull back and reexamine our commitment to these new efforts.

The leader for the consultants has asked each member of the team to review the interview summaries and to report on the following points by tomorrow:

1. What are the major areas of conflict that exist in the organization? 2. Do you think having scarce resources is typical of most organizations? 3. Are key administrators working together to make these new centers successful? 4. How would you propose to direct all parts of the organization toward common

goals?

Flick Fabrication, Inc. Flick Fabrication, Inc. is responsible for providing sheet metal parts to assembly plants in the home appliance industry. One set of parts used in the door of a dishwasher passes through a stamping department, where the metal is bent into the proper shape. Next, the welding department attaches threaded fasteners that will accept a bolt during final assem- bly at a customer’s plant.

Engineers at Flick, working to improve productivity and reduce manufacturing costs, have redesigned a threaded fastener so it can be used to eliminate a welding operation. The new equipment will cost Flick $100,000. In addition, there will be a $.05 increase in material costs for each set of parts. Attaching the new threaded fastener to the sheet metal will increase assembly costs by $.01 per unit. Also, modification to the dies used in the stamping press will require an additional investment of $25,000.

Savings generated by this change include a $.035 reduction in welding labor and a $.005 reduction in welding materials. Operating expenses for stamping will decline by $.03 per set of parts. Engineering estimates that changing the fastener will allow Flick’s customers to reduce their assembly labor by $.06 because quicker location and fastening techniques

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CHAPTER 1Key Terms

business process A set of work activi- ties with a preferred order, an identifiable beginning and end, inputs, and clearly defined outputs that add value to the customer. A business process is usually cross-functional.

ethics A sense of what is right and wrong that guides behavior. This set of stan- dards is often more stringent than legal standards.

functional areas The parts or subsystems of an organization such as accounting, marketing, finance, and engineering.

can be used. Flick’s engineers also believe this method will provide a better-quality prod- uct with less chance of failure in assembly at customers’ plants and after the dishwasher is purchased for home use.

Prepare a report that addresses the following:

1. List the benefits and costs that will result if this change is implemented. Do not limit your search for benefits to Flick’s operations.

2. What are the risks to Flick if it proceeds with this process improvement? What are the risks if it does not?

3. If Flick produces 2 million sets of parts in 1 year, can it recover the total invest- ment in 5 years? (Consider only those savings internal to Flick.)

4. With the costs and benefits given in the case, how long will it take Flick to pay for the investment? (Hint: How many units have to be sold to earn back the initial $125,000 investment?)

5. Why is it important to understand the systems concept to work effectively within the organization?

6. How should Flick consider the savings generated for its customers?

Discussion Questions

1. What is the role of operations in an organization? 2. What does value-added operations mean? How would it apply to not-for-profit

organizations? 3. Explain the major differences between producers of services and producers of

goods? How do these differences affect operations? 4. Agree or disagree with the following statement and support your position: Study

of operations management issues should be narrowly focused on for-profit pro- ducers of goods, such as Microsoft, Ford, and General Electric (GE).

5. What impact has global competition had on operations? 6. What is meant by the systems approach to operations? 7. Why should an organization have a strategy? Should operating strategy be a part

of this overall strategy? 8. What is the basic framework for operations management presented in this

chapter? 9. How do ethical issues impact organizations and operations?

10. How is a business process different from a business function?

Key Terms

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CHAPTER 1Key Terms

goods Physical products.

key policies Methods or guidelines for achieving an organization’s goals.

manufacturing A production process that produces goods.

market research The study of consumer needs so the organization can determine new markets for existing products and discover demand for new products.

operations The processes by which peo- ple, capital, and material (inputs) are com- bined to produce the services and goods the public can consume (outputs). Opera- tions employs labor and management (people), and uses facilities and equipment (capital) to change materials into finished goods (farm tractors) or to provide services (computer software development).

operations management Decision mak- ing involving the many factors that affect operations. Decisions that need to be made can include which products to produce, how large a facility to build, and how many people to hire on first shift.

organizational structure The formal rela- tionship between different function areas or subsystems.

process Describes how to accomplish a task.

process design Describes how a product is made.

process technology The application of knowledge to improve a process.

product Refers to either a good or a service.

product design The determination of the characteristics and features of a product, i.e., how does it function?

product technology The application of knowledge to improve a product.

relative advantage The difference between the lowest-cost producer and the next-lowest cost producer.

services Intangible products.

stakeholders Groups of people that are affected by a decision; that is, they have a stake in the decision. In a business organi- zation, stakeholders would include stock- holders, management, labor, consumers, and the general public.

strategy Consists of the organizational goals and the methods for implement- ing the goals, called key policies. Strategy defines how an organization chooses to compete within the framework dictated by the external environment.

system A group of items, events, or actions in which no item, event, or action occurs independently of at least one other. Accordingly, no item that is studied in isolation will act in the same way it would in the normal environment.

technology The application of knowledge, usually in the form of recently developed tools, processes, and procedures, to solve problems.

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