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Operation Management

Operations Management An Integrated Approach

5th EDIT ION

R. Dan Reid Nada R. Sanders

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Library of Congress Cataloging-in-Publication Data

Reid, R. Dan (Robert Dan), 1949- Operations management [electronic resource] / R. Dan Reid, Nada R.

Sanders.—5th ed. 1 online resource.

Includes bibliographical references and index. Description based on print version record and CIP data provided by publisher;

resource not viewed. ISBN 978-1-118-47589-8 (pdf)—ISBN 978-1-118-12267-9 (cloth : alk. paper)

(print) 1. Production management. I. Sanders, Nada R. II. Title. TS155 658.5—dc23 2012030805

ISBN-13 978-1-118-12267-9 (Main book) ISBN-10 1-118-12267-4 ISBN-13 978-1-118-34851-2 (Binder Ready Version)

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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iii

P R E F A C E

Today, companies are competing in a very different environment than they were only a few years ago. Rapid changes such as global competition, e-business, the Internet, and advances in technology have required businesses to adapt their standard practices. Operations management (OM) is the critical function through which companies can succeed in this competitive landscape.

Operations management concepts are not confined to one department. Rather, they are far-reaching, affecting every functional aspect of the organization. Whether studying accounting, finance, human resources, information technology, manage- ment, marketing, or purchasing, students need to understand the critical impact operations management has on any business.

We each have more than 25 years of teaching experience and understand the chal- lenges inherent in teaching and taking the introductory OM course. The vast majority of students taking this course are not majoring in operations management. Rather, classes are typically composed of students from various business disciplines or students who are undecided about their major and have little knowledge of operations management. The challenge is not only to teach the foundation of the field, but also to help students understand the impact operations management has on the business as a whole and the close relationship of operations management with other business functions.

We were motivated to write this book to help students understand operations management and to make it easier for faculty to teach the introductory operations management course. We continue to have three major goals for this book.

GOALS OF THE BOOK 1. Provide a Solid Foundation of Operations Management Our book provides a solid foundation of OM concepts and techniques, but also covers the latest on emerging topics such as e-business, supply chain management, enterprise resource planning (ERP), and information technology. We give equal time to strategic and tactical decisions and provide coverage of both service and manu- facturing organizations. We look closely at some of the unique challenges faced by service operations.

2. Provide an Integrated Approach to Operations Management While several excellent textbooks provide appropriate foundation coverage, we believe that few provide sufficient motivation for students. We are aware that a major teaching challenge in OM is that students aren’t motivated to study OM because they don’t understand its relevance to their majors. We think the course textbook can greatly support the professor in this area; therefore, a chief goal of this book is to integrate coverage of why and how OM is integral to all organiza- tions. Interfunctional coordination and decision making have become the norm in today’s business environment. Throughout each chapter we discuss information flow between business functions and the role of each function in the organization. On the opening page of each chapter we ask the reader “What’s in OM for Me?” and the chapter ends with a section called “OM across the Organization” to review the answers to that question.

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iv • PREFACE

The text also illustrates the linkages and integration between the various OM topics. Our end-of-chapter feature entitled “Within OM: How It All Fits Together” describes how the chapter topic is related to other OM decisions. It addresses the issue that OM topics are linked and interdependent, not independent of one another.

As supply chain management (SCM) has taken on an increasingly important role, we have added an end-of-chapter section titled “The Supply Chain Link” which explains the relationships between the specific chapter topic covered and supply chain management.

3. Help Students to Understand the Concepts This course remains challenging for students to take and professors to teach. Students often have no prior exposure to operations concepts and little real business experi- ence. They have a broad spectrum of quantitative sophistication and often find the math in the course extremely challenging. Therefore, a chief goal of the text and sup- plement package is to help students with these concepts. We begin each chapter with an example from everyday life, often a consumer or personal example, to help students intuitively understand what the chapter will be about. Then we explain each concept clearly and carefully, with enough depth for non-majors. Sustainability in operations is highlighted at the end of each chapter.

The new edition is focused on helping students by offering problem-solving hints and tips as part of the solution to most examples and solved problems throughout the entire text. Two unique supplements support student comprehension. A “Quantitative Survival Guide,” available as an optional supplement packaged with the text, provides “help with the math” for all chapters. WileyPLUS (available on-line via a password in an optional package with the book) provides plenty of homework practice, feed- back for students, an e-book, and much more. In addition, algorithmic homework problems have been designed for each chapter in order to provide unlimited practice opportunity.

ORGANIZATION AND CONTENT OF THE BOOK We have arranged the topics in the book in progressive order from strategic to tactical. Early in the book we cover operations topics that require a strategic perspective and a cultural change within the organization, such as supply chain management, total quality management, and just-in-time systems. Progressively we move to more tactical issues, such as work management, inventory management, and scheduling concerns. We recognize that most faculty will select the chapters relevant to their needs. To make it easier for students and faculty, each chapter can stand alone. Any specific knowledge needed for a chapter is summarized at the beginning of each chapter, with specific topic and page references for easy review.

Balanced Coverage of Quantitative and Qualitative Topics We have tried to find a balance between the quantitative and qualitative treatment and coverage of OM topics. To meet students’ needs, this text presents the applica- tion of OM concepts through the extensive use of practical and relevant business examples. We eliminated from the printed book coverage of topics less frequently covered at the introductory level. However, complete supplementary chapters on spreadsheet modeling, optimization, master production scheduling, rough-cut capac- ity planning, and waiting-line models are available on the book’s Web site (www. wiley.com/college/reid).

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PREFACE • v

Integrated Technology Perspective Advances in e-commerce and the Internet are transforming the business environ- ment, and we integrate these concepts in every chapter. We discuss a range of topics from enterprise resource planning (ERP) and electronic data interchange (EDI) to quality issues of buying goods on-line.

Changes to this Edition We made a number of changes to this edition in order to make the text as cur- rent, user-friendly, and relevant as possible. We updated all the chapters in order to incorporate the latest available information, increased the emphasis on service operations, increased emphasis on e-business and information technology, updated business examples, expanded the number of cases, and increased the number of problem-solving hints. As in the previous editions, we continue to emphasize inter- functional coordination and decision making, and have added or updated a number of features.

Before You Begin. In order to help students when solving quantitative problems, we have added a feature called Before You Begin, placed immediately prior to the solution of most in-chapter example problems and end-of-chapter solved problems. Emphasizing our focus on strong pedagogy, this feature provides problem-solving tips and hints that the student should consider before proceeding to solve the problem.

Supply Chain Link. To emphasize the increasingly important role of supply chain management, we have added a new section on supply chain management and expanded coverage of supply chain and services in every chapter.

Sustainability Link. In order to address the latest challenges facing business, we have added a new feature to each chapter called The Sustainability Link. This feature discusses how the subject of the chapter directly ties to today’s sustainability concerns and challenges, providing specific business examples that illustrate the issues.

Problem Solving. While our goal is to provide balanced coverage of quantitative and qualitative topics, the new edition further emphasizes and integrates problem solving to help students experience the course more successfully. We provide algorithmic homework problems for every chapter of the text (via WileyPLUS) for unlimited practice opportunities, include problem-solving help in the book (Before You Begin) and on-line via WileyPLUS, and provide step-by-step solved problems in the book and on-line. We also provide “help with math” as needed via WileyPLUS. We believe that these changes to the new edition greatly enhance student learning.

FEATURES OF THE BOOK We have developed our pedagogical features to implement and reinforce the goals discussed previously and address the many challenges in this course.

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vi • PREFACE

Pedagogy that Provides an Integrated Approach Chapter Opening Vignettes and Within OM: How It All Fits Together To help students intuitively under- stand the topic, each chapter begins with a description of a personal prob- lem that can be solved using the con- cepts discussed in the chapter. Our objective is to attract the attention of students by starting with a personal example to which they can relate. We demonstrate that OM is not just about operating a plant or a busi- ness, but that it is relevant in every- thing that we do. An end-of-chapter section titled “Within OM: How It All Fits Together” describes how the chapter topic is related to other OM decisions. It emphasizes the point

that OM decisions are not made independent of one another, but that they are linked together and are dependent on one another.

Links to Practice Other OM texts have many boxes and sidebars, which make it diffi- cult for students to understand what they need to know. Furthermore, the many examples frequently interrupt the flow of the text and make a chap- ter difficult to read and assimilate. We recognize the importance of includ- ing “real-world” examples, but believe they should be integrated into the stream of the text instead of interrupt- ing the text. Therefore, we have devel- oped embedded boxes titled Links

to Practice, which provide brief examples from actual companies in every chapter. Embedded by both content and design into the general text discussion, each provides a concise and relevant example without interrupting the flow of the text.

Current textbooks typically do not use business examples to which students can relate. The typical examples provided are from large corporations such as General Motors, IBM, or Xerox. Primarily using these types of examples creates the impression for students that this is a field that is either beyond their reach or irrelevant to their needs. We have found that students understand the concepts better when these concepts are also presented in a context that is smaller in scale. The examples chosen range from large multinational organizations to small local businesses.

The Bama Companies is an inno- vator of wholesome bakery products and caters to the needs of many well- known restaurant chains. The company’s core product lines are hand-held pies, biscuits, buns, pie shells, and pizza crust. Bama supplies innovative culinary and product development services and cus- tom-made oven-ready products to cus- tomers in more than 20 countries. Bama is a past Malcolm Baldrige National

Quality Award (discussed in Chapter 5) winner. The key to Bama’s success has been focus- ing on quality relationships and products.

The old adage, treat others how you want to be treated, is the basis for the rela- tionships Bama builds with its suppliers. Bama reduced the number of suppliers used and focused on developing long-term relationships. Now the company only deals with 50–60 key suppliers and most of these have been partners with Bama for at least 15 years. The company prefers to deal with a single supplier for an ingredient rather than multiple sources, thereby giving as much business as possible to that single supplier. This creates supplier loyalty and a commitment to the success of Bama.

LINKS TO PRACTICE The Bama Companies

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Wouldn’t it be frustrating if every time you wanted to get a cup of coffee you had to go to one end of the kitchen to get a cup, then to another end to get the coffee, and then to a third end to get a spoon? What if when you wanted to study you had to go to one room to get your backpack, then to another room to get your books, and then to a third room to get your writing material? What if when you went to your college cafeteria for lunch you had to go to one area of the cafeteria for a tray, then to another area for the plates, and then to yet another area for the utensils? You would be experiencing wasted energy and time, as well as disorganization due to poor layout planning. As you can see from these examples, your experience would be frustrating. Now imagine the same kinds of problems in a company and you will appreciate the consequences of poor layout planning.

Proper layout planning cuts costs by eliminating unnecessary steps and increasing efficiency. However, a good layout plan can do much more for a company by improving worker attitude and creat- ing a positive organizational climate. Consider the SAS Institute, a software company known for having its facilities arranged for comfort and enjoyment of their employees. The company has on-site child care facilities, a cafeteria with a pianist, a gym with a swimming pool, horseback riding, and a health clinic. The facility layout was designed to be aesthetically pleasing to the employees. The consequences have been high pro- ductivity and very low turnover. For this reason, SAS is regularly on Fortune maga- zine’s list of top companies to work for.

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PREFACE • vii

OM across the Organization and Cross-Functional Icons Unique to this book is an end-of-chap- ter summary titled “OM across the Organization” that highlights the rela- tionship between OM and key business functions, such as accounting, finance, human resources, information tech- nology, management, marketing, and purchasing. This section is designed to help students understand the close relationship of operations manage- ment with other business functions and appreciate the critical impact OM has on other business functions. In addition, a cross-functional icon is used throughout the text to highlight sections in the text where the relationships between OM and other key business functions are discussed.

Interactive Cases There are two Web-based cases for this edi- tion. The first case features an Internet site for a simulated cruise company that has hired a student intern to help solve operations prob- lems. The second case features an Internet site for a simulated consulting company that works in the medical industry that has hired a student to help solve operations problems. In both cases, the students are given assign- ments that require them to use information provided at the book Web site to develop solutions. These exercises offer students hands-on experience in the areas of supply chain management, statistical quality control, forecasting, just-in-time, aggregate planning, inventory management, scheduling, and project manage- ment, and help tie all the topics in the book together in a service environment.

Cases Each chapter ends with four cases that reinforce the issues and topics discussed in the chapter. The first two cases are within the text, while the other two are online cases. The cases can provide the basis for group discussion or can be assigned as individual exer- cises for students. Many cases conclude with a list of questions for students to answer.

In addition, each chapter offers a unique interactive learning exercise titled Internet Challenge where students are provided with a short case and given specific Internet assignments.

Pedagogy to Help Students Master the Course Learning Objectives At the beginning of each chapter, students are provided with a short statement of what they need to either know or review from previous chapters, referring students to specific topic and page information. This enables students to review previous material necessary to understand the topic being covered.

www.wiley.com/college/reidINTERACTIVE CASE Virtual Company

On-line Case: Cruise International, Inc.

Assignment: Introduction to Cruise International, Inc. You will be an intern for Cruise International, Inc. (CII). The company competes in the cruise industry in the small-ship, medium-ship, and large-ship markets. Your internship begins in a few weeks. Bob Bristol, your immediate boss, has asked you to become familiar with the cruise industry and its basic markets prior to beginning any of your assignments. This assignment will enhance your knowledge of the material in Chapter 1 of your textbook while preparing your future assignments.

To access the Web site:

• Go to www.wiley.com/college/reid • Click Student Companion Site • Click Virtual Company/Cruise International, Inc. • Click Consulting Assignments

OM ACROSS THE ORGANIZATION Now that we know the role of the operations management function and the decisions that operations managers make, let’s look at the relationship between operations and other business functions. As mentioned previously, most businesses are supported by three main functions: operations, marketing, and finance. Although these functions involve different activities, they must interact to achieve the goals of the organization. They must also follow the strategic direction developed at the top level of the organiza- tion. Figure 1-10 shows the flow of information from the top to each business func- tion, as well as the flow between functions.

Many of the decisions made by operations managers are dependent on informa- tion from the other functions. At the same time, other functions cannot be carried out properly without information from operations. Figure 1-11 shows these relationships.

Marketing is not fully capable of meeting customer needs if marketing managers do not understand what operations can produce, what due dates it can and cannot meet, and what types of customization operations can deliver. The marketing depart- ment can develop an exciting marketing campaign, but if operations cannot produce the desired product, sales will not be made. In turn, operations managers need infor- mation about customer wants and expectations. It is up to them to design products with characteristics that customers find desirable, and they cannot do this without

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L E A R N I N G O B J E C T I V E S

After completing this chapter you should be able to

1 Defi ne operations management. 2 Explain the role of operations management in business. 3 Describe decisions that operations managers make. 4 Describe the diff erences between service and manufacturing operations. 5 Identify major historical developments in operations management. 6 Identify current trends in operations management. 7 Describe the fl ow of information between operations management and other business functions.

OM

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viii • PREFACE

Before You Go On Sections strate- gically placed within every chapter summarize key material the student should know before continuing. Often the material in chapters can be over- whelming. We felt that breaking up the chapter with a brief summary of key material is highly beneficial in aiding learning and comprehension.

Key Terms and Definitions Key terms and concepts are highlighted in boldface when they are first explained in the text, are defined in the margin next to their discus- sion in the text, and are listed at the end of the chapter with page references.

Before You Begin Most example problems within the chapters, and end-of- chapter solved problems, have an added feature called Before You Begin. The feature provides the student with problem-solving tips and hints they need to consider before solving the problem. The purpose is to help students with their problem- solving ability.

Solved Problems Numerous solved prob- lems are provided, complete with step- by-step explanations to ensure students understand the process and why the prob- lem is solved in a particular way. Where appropriate, we provide a series of steps for problem solving and offer Problem-Solving Tips.

On-line Resources Using the Text and the Web Site We have created a number of interactive learning activities for students, which will help them learn the material in a dynamic and interesting way. At the end of each chapter, there is a list of activities avail- able on the Web site. Students can work on these activities on their own, and instruc- tors have the flexibility to assign material for individual or group study. The activities include the Interactive Case, interactive simulations, interactive spreadsheets, com- pany tours, Internet Challenge, and addi- tional Web resources.

Before You Go On

You should understand that operations management (OM) is the business function responsible for planning, coor- dinating, and controlling the resources needed to produce a company’s goods and services. OM is directly respon- sible for managing the transformation of a company’s inputs (e.g., materials, technology, and information) into finished products and services. OM requires a wide range of strategic and tactical decisions. Strategic decisions are long-range and very broad in scope (e.g., unique features of the company’s product and process). They determine the direction of tactical decisions, which are more short term and narrow in scope (e.g., policy for ordering raw materials). All organizations can be separated into manufacturing and service operations, which differ based on product tangibility and degree of customer contact. Service and manufacturing organizations have very different operational requirements.

Solved Problems • Problem 1 Bluegill Furniture is a small furniture shop that focuses on mak- ing kitchen chairs. The weekly dollar value of its output, includ- ing finished goods and work in progress, is $14,280. The value of inputs, such as labor, materials, and capital, is approximately $16,528. Compute the total productivity measure for Bluegill Furniture.

• Before You Begin: In this problem you are being asked for the total productivity. Recall that it is simply the ratio of total output over input.