CE2 Chapter 01 - Operation and Technology Management
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Transcript of CE2 Chapter 01 - Operation and Technology Management
Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western 1
Goods, Services, and Operations Management
CHAPTER 1
OPERATIONS MANAGEMENTGoods, Services and Value Chains
DAVID A. COLLIERAND
JAMES R. EVANS
2Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
• Operations management (OM) is the science and art of ensuring that goods and services are created and delivered successfully to customers.
• The principles of OM help one to view a business enterprise as a total system, in which all activities are coordinated not only vertically throughout the organization, but also horizontally across multiple functions.
3Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Learning Objectives
1. To understand the nature of typical OM activities in business, what operations managers do, and how everyone uses OM principles in their work, no matter what their functional job is.
2. To understand the nature of goods and services, their similarities and differences, the concept of a customer benefit package, and why they are important for managing operations.
4Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
3. To understand the concept of a process and value chain, and how they are used in operations to support the creation of goods and services.
4. To understand the role of quantitative methods in operations management and how models can be used to assist in making OM decisions.
5. To be able to identify the key themes that have evolved over the last half-century and understand their impact on goods, services, and operations.
Chapter 1 Learning Objectives
5Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
OM Spotlight: Ferguson Metals
• Ferguson Metals, located in Hamilton, Ohio, is a supplier of stainless steel and high temperature alloys for the specialty metal market.
• Ferguson’s primary production operations include
slitting coil stock and cutting sheet steel to customer specifications with rapid turnaround times from order to delivery (see Exhibit 1.1).
• Bob Vogel is the Vice President of Operations at
Ferguson. He is involved in a variety of daily activities that draw upon knowledge of not only OM and engineering, but also finance, accounting, organizational behavior, and other subjects.
6Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.1
Operations Management at Ferguson Metals
7Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
OM Spotlight: Ferguson Metals
While understanding specialty metals is certainly a vital part of Mr. Vogel’s job, the ability to understand customer needs, apply approaches to continuous improvement, understand and motivate people, work cross-functionally across the business, and integrate processes and technology within the value chain define Scott’s job as an operations manager.
8Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Example of “What Operations Managers Do?”
• Brooke Wilson is a Process Manager for J.P. Morgan Chase in the Credit Card Division. Among his OM-related activities are
• Planning and budgeting –representing the plastic card production area in all meetings, developing annual budgets and staffing plans, and watching technology that might affect the production of plastic credit cards.
9Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Example of “What Operations Managers Do?”
• Inventory management – overseeing the management of inventory for items such as plastic blank cards, inserts such as advertisements, envelops, postage, and credit card rules and disclosure inserts.
• Scheduling and capacity –daily to annual scheduling of all resources (equipment, people, inventory) necessary to issue new credit cards and reissue cards that are up for renewal, replace old or damaged cards, and one's that are stolen.
10Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Example of “What Operations Managers Do?”
• Brooke Wilson is a Process Manager for J.P. Morgan Chase in the Credit Card Division. Among his OM-related activities are
• Quality – embossing the card with
accurate customer information and quickly getting the card in the hands of the customer.
• Brooke was an accounting major in college.
11Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Understanding Goods and Services
• A good is a physical product that you can see, touch, or possibly consume. Examples of goods include: oranges, flowers, televisions, soap, airplanes, fish, furniture, coal, lumber, personal computers, paper, and industrial machines.
• A durable good is a product that typically lasts at least three years. Vehicles, dishwashers, and furniture are some examples of durable goods.
12Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Understanding Goods and Services
• A non-durable good is perishable and generally lasts for less than three years. Examples are toothpaste, software, shoes, and fruit.
• A service is any primary or complementary activity that does not directly produce a physical product.
13Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Understanding Goods and Services
• Service management integrates marketing, human resource, and operations functions to plan, create, and deliver goods and services, and their associated service encounters.
• A service encounter is an interaction between the customer and the service provider.
14Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Understanding Goods and Services
A broader definition is
• Service encounters consist of one or more moments of truth – any episodes, transactions, or experiences in which a customer comes into contact with any aspect of the delivery system, however remote, and thereby has an opportunity to form an impression.
• Here, a service encounter includes the impression an empty parking lot has on whether the customer goes into a facility or the interaction with other customers such as while waiting in line.
15Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Similarities Between Goods and Services
1. Goods and services provide value and satisfaction to customers who
purchase and use them. 2. They both can be standardized or
customized to individual wants and needs.
3. A process creates and delivers each good or service, and therefore, OM is a critical
skill.
16Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Differences Between Goods and Services
1. Goods are tangible while services are intangible.
2. Customers participate in many service processes, activities, and transactions.
3. The demand for services is more difficult to predict than the demand for goods.
4. Services cannot be stored as physical inventory.
5. Service management skills are paramount to a successful service encounter.
6. Service facilities typically need to be in close proximity to the customer.
7. Patents do not protect services.
17Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.2
How Goods and Services Affect Operations Management Activities
18Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.3
Examples of Goods and Service Content
19Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Customer Benefit Packages
• A customer benefit package (CBP) is a clearly defined set of tangible (goods-content) and intangible (service-content) features that the customer recognizes, pays for, uses, or experiences.
• In simple terms, a CBP is some combination of goods and services configured in a certain way to provide value to customers.
• A CBP consists of a primary good or service, coupled with peripheral goods and/or services.
20Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Customer Benefit Packages
• A primary good or service is the “core” offering that attracts customers and responds to their basic needs. For example, the primary service of a personal checking account is the capability to do convenient financial transactions.
• Examples of a primary good or service: an airline flight, a personal digital assistance (PDA) device, a checking account, a brief case, a football game, tax preparation advice, and so on.
21Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Customer Benefit Packages
• A peripheral goods or services are those that are not essential to the primary good or service, but enhance it.
• Examples of peripheral goods or services for a personal checking account: on-line access and bill payment, debit card, designer checks, paper or electronic account statement, etc.
• Remember each primary or peripheral good or service requires a process to create and deliver it to customers.
22Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Customer Benefit Packages
• A variant is a CBP attribute that departs from the standard CBP and is normally location or firm specific.
• A variant allows for adding unique goods or services such as a fishing pond or pool at an automobile dealership where kids can fish while the parents shop for vehicles.
• Once a variant is incorporated and standardized into all CBP delivery sites on a continuous basis it becomes a permanent peripheral good or service.
23Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.4
A CBP Example for Purchasing a Vehicle
24Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.5
Operations Management and the Customer Benefit Package
25Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.6
Customer Wants and Needs, CBP Definition, and Process Design Automobile Example
26Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Customer Benefit Packages
• It is very important that you understand Exhibits 1.5 and 1.6 and the difference between customer wants and needs versus the CBP features selected by management to fulfill those needs.
• Processes create CBP features such as the (a) physical vehicle itself or (b) a leasing package that fits what the customer can afford. These CBP features fulfill certain customer’s wants and needs such as (a) physical transportation from point A to B, or (b) how can I pay for the vehicle?
27Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Another Example of Consumer Benefit Package
28Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.7
How Primary, Support, Supplier, and Management Processes Are Related
29Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.8
Organization by Function versus Process
30Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations ManagementOM Spotlight: Pal’s Sudden Service
• Pal’s Sudden Service is a small chain of mostly drive-through quick service restaurants located in Northeast Tennessee and Southwest Virginia.
• Pal’s competes against major national chains and outperforms all of them by focusing on important customer requirements such as speed, accuracy, friendly service, correct ingredients and amounts, proper food temperature, and safety.
31Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
OM Spotlight: Pal’s Sudden Service
• Pal’s uses extensive market research to fully understand customer requirements: convenience; ease of driving in and out; easy-to-read menu, simple, accurate order-system; fast service; wholesome food; and reasonable price.
• Every process is flowcharted and analyzed for opportunities for error, and then mistake-proofed if at all possible.
32Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.9
Pal’s Sudden Service Value Chain
33Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
OM Spotlight: Pal’s Sudden Service • Entry-level employees – mostly high
school students in their first job – receive 120 hours of training on precise work procedures and process standards in unique self-teaching, classroom, and on-the-job settings, and reinforced by a “Caught Doing Good” program that provides recognition for meeting quality standards and high performance expectations.
• Pal’s collect performance measures such as complaints, profitability, employee turnover, safety, and productivity.
34Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.10 Satisfaction Data and Linear Trend Chart
35Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations ManagementBreak-Even Model
The amount of sales at which the net profit is zero – or equivalently, the point where total
cost equals total revenue – is called the break-even point.
The equation for total cost is Total cost = Fixed cost + Variable cost. If 10,000 units were produced and sold, the total cost would be
Total cost = 100,000 + 12(10,000) = $220,000.
36Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations Management
Break-Even Model
The revenue received from selling 10,000 units would be 20(10,000) = $200,000, so at this production level, the firm would incur a loss of $220,000 - $200,000 = $20,000.
However, if 13,000 units were produced and sold, the projected profit would be 20(13,000) - 100,000 - 12(13,000) = $4,000.
37Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Chapter 1 Goods, Services & Operations ManagementBreakeven Model
We can find the break-even point by developing a simple mathematical model. Let x be the sales volume at the break-even point. Then
Total cost = 100,000 + 12xTotal revenue = 20x.
Setting the total revenue equal to total cost we have
20x = 100,000 + 12xand hence
x = 12,500.
If sales are less than 12,500 units, the firm will incur a loss; if sales are more than 12,500, a profit will be realized.
38Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.11 Spreadsheet Model for Break-Even Analysis (Break Even Model.xls)
39Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.12 Sensitivity Analysis of Variable Cost for the Break-Even Model
40Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.13 Five Focus of Operations Management
41Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.14 U.S. 2001 Employment and Projected Change by Major Industry (slide 1)
* Durable goods are items such as instruments, vehicles, aircraft, computer and office equipment, machinery,furniture, glass, metals, and appliances. ** Nondurable goods are items such as textiles, apparel, paper, food, coal, oil, leather, plastics, chemicals, and books.
Source:United States Bureau of Labor Statistics, October 2001, http://www.bls.gov/EMP
42Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.14 U.S. 2001 Employment and Projected Change by Major Industry (slide 2)
43Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
U.S. Economy Structure and Service Related Jobs
Goods-producing industries (manufacturing, construction, fishing, forestry, mining, and agriculture) account for 20 percent of the jobs in the U.S. economy.
Service-providing industries account for 80 percent of the jobs in the U.S. economy.
One-half of those jobs in goods-producing industries involve service processes such as human resource management, accounting, and financial.
44Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
U.S. Economy Structure and Service Related Jobs
Therefore, more than 90 percent of the jobs in the U.S. economy involve designing and managing service-, information- or entertainment-intensive processes.
Most people in the United States are working in the service sector or service processes or in service-related aspects of manufacturing firms.
45Operations Management, 2e/Ch. 1 Goods, Services, and Operations Management©2007 Thomson South-Western
Exhibit 1.15 Case: Dietary Department Organizational Chart