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Chapter Summaries

OPERATIONS MANAGEMENT

THIRD CANADIAN EDITION

JAY HEIZER Texas Lutheran University

BARRY RENDER Graduate School of Business, Rollins College

CHUCK MUNSON Carson College of Business, Washington State University

PAUL GRIFFIN Humber Institute of Technology and Advanced Learning

SUSTAINABILITY AND SUPPLY CHAIN MANAGEMENT

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To Kathryn Ann Heizer —JH

To Donna, Charlie, Jesse, and Reva and to Howard G. Kornacki, the teacher who taught

me to love math —BR

To Suzanne, Alexandra, Kenna, Ryan, and Robert Kathleen

—PG

Pearson Canada Inc., 26 Prince Andrew Place, North York, Ontario M3C 2H4.

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Authorized adaptation from Operations Management, Twelfth Edition, Copyright © 2017, Pearson Education, Inc., Hoboken, New Jersey, USA. Used by permission. All rights reserved. This edition is authorized for sale only in Canada.

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If you purchased this book outside the United States or Canada, you should be aware that it has been imported without the approval of the publisher or the author.

ISBN 978-0-13-483807-6

1 20

Library and Archives Canada Cataloguing in Publication

Heizer, Jay, author Operations management : sustainability and supply chain management / Jay Heizer, Barry Render, Chuck Munson, Paul Griffin. -- Third Canadian edition.

Includes bibliographical references and indexes. ISBN 978-0-13-483807-6 (softcover)

1. Production management--Textbooks. 2. Textbooks. I. Render, Barry, author II. Munson, Chuck, author III. Griffin, Paul, 1961-, author IV. Title.

TS155.H3726 2018 658.5 C2018-904040-8

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About the Authors

iii

Jay Heizer Professor Emeritus, the Jesse H. Jones Chair of Business Administration, Texas Lutheran University, Seguin, Texas. He received his B.B.A. and M.B.A. from the University of North Texas and his Ph.D. in Management and Statistics from Arizona State University. He was previously a member of the faculty at the University of Memphis, the University of Oklahoma, Virginia Commonwealth University, and the University of Richmond. He has also held visiting positions at Boston University, George Mason University, the Czech Management Center, and the Otto-Von-Guericke University, Magdeburg.

Dr. Heizer’s industrial experience is extensive. He learned the practical side of operations manage- ment as a machinist apprentice at Foringer and Company, as a production planner for Westinghouse Airbrake, and at General Dynamics, where he worked in engineering administration. In addition, he has been actively involved in consulting in the OM and MIS areas for a variety of organizations, including Philip Morris, Firestone, Dixie Container Corporation, Columbia Industries, and Tenneco. He holds the CPIM certification from APICS—the Association for Operations Management.

Professor Heizer has co-authored five books and has published more than 30 articles on a variety of management topics. His papers have appeared in the Academy of Management Journal, Journal of Purchasing, Personnel Psychology, Production & Inventory Control Management, APICS— The Performance Advantage, Journal of Management History, IIE Solutions, and Engineering Management, among others. He has taught operations management courses in undergraduate, graduate, and executive programs.

Barry Render Professor Emeritus, the Charles Harwood Professor of Operations Management, Crummer Graduate School of Business, Rollins College, Winter Park, Florida. He received his B.S. in Mathematics and Physics at Roosevelt University, and his M.S. in Operations Research and Ph.D. in Quantitative Analysis at the University of Cincinnati. He previously taught at George Washington University, University of New Orleans, Boston University, and George Mason University, where he held the Mason Foundation Professorship in Decision Sciences and was Chair of the Decision Sciences Department. Dr. Render has also worked in the aerospace industry for General Electric, McDonnell Douglas, and NASA.

Professor Render has co-authored 10 textbooks for Prentice Hall, including Managerial Decision Modeling with Spreadsheets, Quantitative Analysis for Management, Service Management, Introduction to Management Science, and Cases and Readings in Management Science. Quantitative Analysis for Management, now in its 11th edition, is a leading text in that discipline in the United States and globally. Dr. Render’s more than 100 articles on a variety of management topics have appeared in Decision Sciences, Production and Operations Management, Interfaces, Information and Management, Journal of Management Information Systems, Socio-Economic Planning Sciences, IIE Solutions, and Operations Management Review, among others.

Dr. Render has been honoured as an AACSB Fellow and was twice named a Senior Fulbright Scholar. He was Vice President of the Decision Science Institute Southeast Region and served as Software Review Editor for Decision Line for six years and as Editor of the New York Times Operations Management special issues for five years. From 1984 to 1993, Dr. Render was President of Management Service Associates of Virginia, Inc., whose technology clients included the FBI, the U.S. Navy, Fairfax County, Virginia, and C&P Telephone. He is currently Consulting Editor to Financial Times Press.

Dr. Render has taught operations management courses in Rollins College’s MBA and Executive MBA programs. He has received that school’s Welsh Award as leading Professor and was selected by Roosevelt University as the 1996 recipient of the St. Claire Drake Award for Outstanding Scholarship. In 2005, Dr. Render received the Rollins College MBA Student Award for Best Overall Course, and in 2009 was named Professor of the Year by full-time MBA students.

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iv About the Authors

Chuck Munson Professor of Operations Management, Carson College of Business, Washington State University, Pullman, Washington. He received his BSBA summa cum laude in finance, along with his MSBA and Ph.D. in operations management, from Washington University in St. Louis. For two years, he served as Associate Dean for Graduate Programs in Business at Washington State. He also worked for three years as a financial analyst for Contel Telephone Corporation.

Professor Munson serves as a senior editor for Production and Operations Management, and he serves on the editorial review board of four other journals. He has published more than 25 articles in such journals as Production and Operations Management, IIE Transactions, Decision Sciences, Naval Research Logistics, European Journal of Operational Research, Journal of the Operational Research Society, and Annals of Operations Research. He is editor of the book The Supply Chain Management Casebook: Comprehensive Coverage and Best Practices in SCM, and he has co-authored the research monograph Quantity Discounts: An Overview and Practical Guide for Buyers and Sellers. He is also coauthor of Managerial Decision Modeling with Spreadsheets (4th edition), published by Pearson.

Dr. Munson has taught operations management core and elective courses at the undergraduate, MBA, and Ph.D. levels at Washington State University. He has also conducted several teaching workshops at international conferences and for Ph.D. students at Washington State University. His major awards include being a Founding Board Member of the Washington State University President’s Teaching Academy (2004); winning the WSU College of Business Outstanding Teaching Award (2001 and 2015), Research Award (2004), and Service Award (2009 and 2013); and being named the WSU MBA Professor of the Year (2000 and 2008).

Paul Griffin Associate Dean, Business Degrees, Humber Institute of Technology & Advanced Learning, Toronto, Ontario, Canada. He received his Ph.D. in Management from the University of Bradford in the United Kingdom and has also achieved 18 professional designations, including Chartered Professional Accountant (CPA), Certified Management Accountant (CMA), Certified General Accountant (CGA), Certified Financial Planner (CFP), Fellow of the Canadian Securities Institute (FCSI), and several others.

Before joining academia, Dr. Griffin was engaged in the financial services sector for over 20 years and was most recently the National Director of Operations and Compliance at ING Canada. He remains an active member of several boards and committees, most notably the Insurance Institute of Canada’s Ethics Advisory Board and the Financial Services Commission of Ontario’s Advisory Board, and he serves as Chair of the Education Committee and Board of Directors for the Canadian Institute of Financial Planning. Before becoming Associate Dean at Humber, Dr. Griffin was a Professor and taught operations management, accounting, finance, and marketing. During that time, he received the Award of Excellence for Outstanding Academic Contribution.

Dr. Griffin continues to write for practitioner-targeted publications and develops a continuous stream of technical manuals, materials, and courses for both the academic and industrial sectors. He remains an active member of the Editorial Advisory Board for the Journal of Financial Planning.

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Brief Table of Contents

v

PART ONE Introduction to Operations Management 1 1 Operations and Productivity 1 2 Operations Strategy in a Global

Environment 26

3 Project Management 58 4 Forecasting 103

PART TWO Designing Operations 151 5 Design of Goods and Services 151 Supplement 5: Sustainability in the

Supply Chain 183

6 Managing Quality 203 Supplement 6: Statistical

Process Control 233

7 Process Strategy 264 Supplement 7: Capacity and

Constraint Management 293

8 Location Strategies 322 9 Layout Strategies 349 10 Human Resources, Job Design,

and Work Measurement 387

PART THREE Managing Operations 421 11 Supply Chain Management 421 Supplement 11: Supply Chain

Management Analytics 453

12 Inventory Management 468

13 Aggregate Planning and Sales and Operations Planning 512

14 Material Requirements Planning (MRP) and ERP 543

15 Short-Term Scheduling 580 16 Lean Operations 617 17 Maintenance and Reliability 643

PART FOUR Business Analytics Modules 661 A Decision-Making Tools 661 B Linear Programming 681 C Transportation Models 711 D Waiting-Line Models 731 E Learning Curves 761 F Simulation 775 Appendix A1

Bibliography B1

Indices I1

Online Tutorials 1 Statistical Tools for Managers T1-1 2 Acceptance Sampling T2-1 3 The Simplex Method of Linear

Programming T3-1

4 The MODI and VAM Methods of Solving Transportation Problems T4-1

5 Vehicle Routing and Scheduling T5-1

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About the Authors

vi

About the Authors iii Preface xvi

PART ONE Introduction to Operations Management 1

1 Operations and Productivity 1 What Is Operations Management? 2 Organizing to Produce Goods and Services 3

The Supply Chain 4 Why Study Operations Management? 4 What Operations Managers Do 5

Where Are the OM Jobs? 6 The Heritage of Operations Management 6 Operations in the Service Sector 9

Differences Between Goods and Services 9 Growth of Services 9 Service Pay 10

New Challenges in Operations Management 11 The Productivity Challenge 11

Productivity Measurement 12 Productivity Variables 14 Productivity and the Service Sector 16

Ethics, Social Responsibility, and Sustainability 17 Chapter Summary 18 • Ethical Dilemma 18 • Discussion Questions 19 • Solved Problems 19 • Problems 20 • Case Studies: National Air Express 21 • Video Case Studies: Frito- Lay: Operations Management in Manufacturing 22 • Hard Rock Cafe: Operations Management in Services 22 • Rapid Review 23 • Self-Test 25

2 Operations Strategy in a Global Environment 26 A Global View of Operations and Supply Chains 28

Reduce Costs 29 Improve the Supply Chain 30 Provide Better Goods and Services 30 Understand Markets 30 Learn to Improve Operations 31 Attract and Retain Global Talent 31

Cultural and Ethical Issues 31 Developing Missions and Strategies 32

Mission 32 Strategy 32

Achieving Competitive Advantage Through Operations 33

Competing on Differentiation 34 Competing on Cost 34 Competing on Response 35

10 Strategic OM Decisions 36 Issues in Operations Strategy 39 Strategy Development and Implementation 40

Key Success Factors and Core Competencies 41 Build and Staff the Organization 42 Integrate OM with Other Activities 42

Strategic Planning, Core Competencies, and Outsourcing 43

The Theory of Comparative Advantage 44 Risks of Outsourcing 44 Rating Outsource Providers 45

Global Operations Strategy Options 47 International Strategy 47 Multidomestic Strategy 48 Global Strategy 48 Transnational Strategy 48 Chapter Summary 49 • Ethical Dilemma 49 • Discussion Questions 50 • Solved Problems 50 • Problems 51 • Case Studies: Mr. Lube 53 • Video Case Studies: Operations Strategy at Regal Marine 53 • Hard Rock Cafe’s Global Strategy 53 • Rapid Review 54 • Self-Test 56

3 Project Management 58 The Importance of Project Management 59 Project Planning 60

The Project Manager 61 Work Breakdown Structure 61

Project Scheduling 62 Project Controlling 64 Project Management Techniques: PERT and CPM 65

The Framework of PERT and CPM 65 Network Diagrams and Approaches 66 Activity-on-Node Example 67 Activity-on-Arrow Example 69

Determining the Project Schedule 70 Forward Pass 70 Backward Pass 72

Table of Contents

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Table of Contents vii

Calculating Slack Time and Identifying the Critical Path(s) 73

Variability in Activity Times 75 Three Time Estimates in PERT 76 Probability of Project Completion 77

Cost–Time Trade-Offs and Project Crashing 81 A Critique of PERT and CPM 83

Advantages 83 Limitations 84

Using Microsoft Project to Manage Projects 84 Entering Data 84 Viewing the Project Schedule 85 PERT Analysis 86 Tracking the Time Status of a Project 86 Chapter Summary 87 • Ethical Dilemma 87 • Discussion Questions 87 • Using Software to Solve Project Management Problems 88 • Solved Problems 88 • Problems 91 • Case Studies: Fast Creek Lightning: (A) 96 • Video Case Studies: Project Management at Arnold Palmer Hospital 97 • Managing Hard Rock’s Rockfest 98 • Rapid Review 100 • Self-Test 102

4 Forecasting 103 What Is Forecasting? 104

Forecasting Time Horizons 105 The Influence of Product Life Cycle 105 Types of Forecasts 106

The Strategic Importance of Forecasting 106 Supply Chain Management 106 Human Resources 106 Capacity 106

Seven Steps in the Forecasting System 107 Forecasting Approaches 107

Overview of Qualitative Methods 107 Overview of Quantitative Methods 108

Time-Series Forecasting 108 Decomposition of a Time Series 108 Naive Approach 109 Moving Averages 109 Exponential Smoothing 112 Measuring Forecast Error 113 Exponential Smoothing with Trend Adjustment 116 Trend Projections 119 Seasonal Variations in Data 122 Cyclical Variations in Data 126

Associative Forecasting Methods: Regression and Correlation Analysis 126

Using Regression Analysis for Forecasting 126 Standard Error of the Estimate 128

Correlation Coefficients for Regression Lines 129 Multiple-Regression Analysis 131

Monitoring and Controlling Forecasts 132 Adaptive Smoothing 133 Focus Forecasting 133

Forecasting in the Service Sector 134 Specialty Retail Shops 134 Fast-Food Restaurants 134 Chapter Summary 135 • Ethical Dilemma 135 • Discussion Questions 136 • Using Software in Forecasting 136 • Solved Problems 138 • Problems 139 • Case Studies: Fast Creek Lightning: (B) 146 • Video Case Studies: Forecasting at Hard Rock Cafe 146 • Rapid Review 147 • Self-Test 150

PART TWO Designing Operations 151

5 Design of Goods and Services 151 Goods and Services Selection 152

Product Strategy Options Support Competitive Advantage 153 Product Life Cycles 154 Life Cycle and Strategy 154 Product-by-Value Analysis 155

Generating New Products 155 New Product Opportunities 155 Importance of New Products 155

Product Development 156 Product Development System 156 Quality Function Deployment (QFD) 157 Organizing for Product Development 160 Manufacturability and Value Engineering 161

Issues for Product Design 162 Robust Design 162 Modular Design 162 Computer-Aided Design (CAD) 162 Computer-Aided Manufacturing (CAM) 163 Virtual Reality Technology 164 Value Analysis 164 Sustainability and Life Cycle Assessment (LCA) 164

Time-Based Competition 164 Purchasing Technology by Acquiring a Firm 166 Joint Ventures 166 Alliances 166

Defining a Product 166 Make-or-Buy Decisions 167 Group Technology 168

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viii Table of Contents

Documents for Production 169 Product Life Cycle Management (PLM) 169

Service Design 170 Process–Chain–Network (PCN) Analysis 170 Adding Service Efficiency 172 Documents for Services 172

Application of Decision Trees to Product Design 173 Transition to Production 175

Chapter Summary 175 • Ethical Dilemma 176 • Discussion Questions 176 • Solved Problem 176 • Problems 177 • Case Studies: StackTeck 179 • Video Case Studies: Product Strategy at Regal Marine 179 • Rapid Review 180 • Self-Test 182

5 Supplement: Sustainability in the Supply Chain 183 Corporate Social Responsibility 184 Sustainability 185

Systems View 185 Commons 185 Triple Bottom Line 185

Design and Production for Sustainability 188 Product Design 188 Production Process 190 Logistics 190 End-of-Life Phase 193

Regulations and Industry Standards 193 International Environmental Policies and Standards 194 Supplement Summary 195 • Discussion Questions 195 • Solved Problems 196 • Problems 197 • Video Case Studies: Building Sustainability at the Orlando Magic’s Amway Center 199 • Green Manufacturing and Sustainability at Frito-Lay 199 • Rapid Review 200 • Self-Test 202

6 Managing Quality 203 Quality and Strategy 204 Defining Quality 205

Implications of Quality 206 National Quality Awards 206 ISO 9000 International Quality Standards 206 ISO 14000 206 Cost of Quality (COQ) 207 Ethics and Quality Management 208

Total Quality Management 208 Continuous Improvement 209 Six Sigma 210 Employee Empowerment 211 Benchmarking 211

Just-in-Time (JIT) 213 Taguchi Concepts 213 Knowledge of TQM Tools 214

Tools of TQM 214 Check Sheets 214 Scatter Diagrams 214 Cause-and-Effect Diagrams 214 Pareto Charts 215 Flowcharts 217 Histograms 218 Statistical Process Control (SPC) 218

The Role of Inspection 219 When and Where to Inspect 219 Source Inspection 220 Service Industry Inspection 220 Inspection of Attributes versus Variables 220

TQM in Services 221 Chapter Summary 223 • Ethical Dilemma 224 • Discussion Questions 224 • Problems 224 • Case Studies: Fast Creek Lightning: (C) 226 • Video Case Studies: The Culture of Quality at Arnold Palmer Hospital 227 • Quality Counts at Alaska Airlines 228 • TQM at Ritz-Carlton Hotels 229 • Rapid Review 230 • Self-Test 232

6 Supplement: Statistical Process Control 233 Statistical Process Control (SPC) 233

Natural Variations 233 Assignable Variations 234 Samples 234 Control Charts 235 Control Charts for Variables 235 The Central Limit Theorem 235 Setting Mean Chart Limits (X -Charts) 237 Setting Range Chart Limits (R-Charts) 240 Using Mean and Range Charts 240 Control Charts for Attributes 242 Managerial Issues and Control Charts 245

Process Capability 246 Process Capability Ratio (Cp) 246 Process Capability Index (Cpk) 247

Acceptance Sampling 248 Operating Characteristic Curve 248 Average Outgoing Quality 250 Supplement Summary 251 • Discussion Questions 251 • Using Software for SPC 252 • Solved Problems 253 • Problems 254 • Case Studies: PEI Potato Purveyors 258 • Video Case Studies: Frito-Lay’s Quality-Controlled Potato Chips 260 • Farm to Fork: Quality at Darden Restaurants 260 • Rapid Review 261 • Self-Test 263

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Table of Contents ix

7 Process Strategy 264 Four Process Strategies 266

Process Focus 266 Repetitive Focus 267 Product Focus 267 Mass Customization Focus 268 Comparison of Process Choices 270

Selection of Equipment and Technology 272 Process Analysis and Design 273

Flowchart 274 Time-Function Mapping 274 Value-Stream Mapping 274 Process Charts 275 Service Blueprinting 276

Special Considerations for Service Process Design 277

Customer Interaction and Process Design 277 More Opportunities to Improve Service Processes 279

Production Technology 279 Machine Technology 279 Automatic Identification Systems (AISs) and RFID 280 Process Control 280 Vision Systems 281 Robots 281 Automated Storage and Retrieval Systems (ASRSs) 281 Automated Guided Vehicles (AGVs) 281 Flexible Manufacturing Systems (FMSs) 281 Computer-Integrated Manufacturing (CIM) 282

Technology in Services 283 Process Redesign 284

Chapter Summary 285 • Ethical Dilemma 285 • Discussion Questions 285 • Solved Problem 286 • Problems 286 • Case Studies: Regina Manufacturing’s Process Decision 287 • Environmental Sustainability at Walmart 287 • Video Case Studies: Process Strategy at Wheeled Coach Ambulance 288 • Process Analysis at Arnold Palmer Hospital 288 • Alaska Airlines: 20-Minute Baggage Process—Guaranteed! 289 • Rapid Review 290 • Self-Test 292

7 Supplement: Capacity and Constraint Management 293 Capacity 293

Design and Effective Capacity 293 Capacity and Strategy 296 Capacity Considerations 296

Managing Demand 297 Demand and Capacity Management in the Service Sector 299

Bottleneck Analysis and the Theory of Constraints 299 Theory of Constraints 302 Bottleneck Management 302

Break-Even Analysis 304 Assumptions 304 Graphic Approach 304 Algebraic Approach 305 Single-Product Case 305 Multiproduct Case 306

Reducing Risk with Incremental Changes 308 Applying Expected Monetary Value (EMV) to Capacity Decisions 309 Applying Investment Analysis to Strategy-Driven Investments 309

Investment, Variable Cost, and Cash Flow 309 Net Present Value 309 Supplement Summary 312 • Discussion Questions 312 • Using Software for Break-Even Analysis 312 • Solved Problems 313 • Problems 315 • Video Case Study: Capacity Planning at Arnold Palmer Hospital 318 • Rapid Review 319 • Self-Test 321

8 Location Strategies 322 The Strategic Importance of Location 323

Location and Costs 324 Factors that Affect Location Decisions 324

Labour Productivity 326 Exchange Rates and Currency Risk 326 Costs 327 Political Risk, Values, and Culture 327 Proximity to Markets 327 Proximity to Suppliers 328 Proximity to Competitors (Clustering) 329

Methods of Evaluating Location Alternatives 329 The Factor Rating Method 329 Locational Break-Even Analysis 330 Centre-of-Gravity Method 332 Transportation Model 333

Service Location Strategy 334 Geographic Information Systems 334 Chapter Summary 336 • Ethical Dilemma 336 • Discussion Questions 336 • Using Software to Solve Location Problems 337 • Solved Problems 337 • Problems 339 • Case Studies: Atlantic Assembly Services 344 • Video Case Studies: Locating the Next Red Lobster Restaurant 344 • Hard Rock’s Location Selection 345 • Rapid Review 346 • Self-Test 348

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x Table of Contents

9 Layout Strategies 349 The Strategic Importance of Layout Decisions 350 Types of Layout 351 Office Layout 352 Retail Layout 353

Servicescapes 355 Warehousing and Storage Layouts 356

Cross-Docking 356 Random Stocking 357 Customizing 358

Fixed-Position Layout 358 Process-Oriented Layout 359

Computer Software for Process-Oriented Layouts 363

Work Cells 364 Requirements of Work Cells 364 Staffing and Balancing Work Cells 365 The Focused Work Centre and the Focused Factory 367

Repetitive and Product-Oriented Layout 367 Assembly-Line Balancing 368 Chapter Summary 373 • Ethical Dilemma 373 • Discussion Questions 373 • Using Software to Solve Layout Problems 373 • Solved Problems 374 • Problems 377 • Case Studies: Automobile Licence Renewals 382 • Video Case Studies: Layout at Arnold Palmer Hospital 383 • Facility Layout at Wheeled Coach Ambulance 384 • Rapid Review 385 • Self-Test 386

10 Human Resources, Job Design, and Work Measurement 387 Human Resource Strategy for Competitive Advantage 389

Constraints on Human Resource Strategy 389 Labour Planning 390

Employment-Stability Policies 390 Work Schedules 390 Job Classifications and Work Rules 391

Job Design 391 Labour Specialization 391 Job Expansion 392 Psychological Components of Job Design 392 Self-Directed Teams 393 Motivation and Incentive Systems 393

Ergonomics and the Work Environment 395 Ergonomics 395 Operator Input to Machines 395 Feedback to Operators 395 The Work Environment 396

Methods Analysis 397 The Visual Workplace 399 Labour Standards 400

Historical Experience 400 Time Studies 400 Predetermined Time Standards 405 Work Sampling 407

Ethics 409 Chapter Summary 410 • Ethical Dilemma 410 • Discussion Questions 410 • Solved Problems 411 • Problems 413 • Case Studies: Jackson Manufacturing Company 416 • Video Case Studies: The “People” Focus: Human Resources at Alaska Airlines 416 • Human Resources at Hard Rock Cafe 417 • Rapid Review 418 • Self-Test 420

PART THREE Managing Operations 421

11 Supply Chain Management 421 The Supply Chain’s Strategic Importance 422

Supply Chain Risk 424 Ethics and Sustainability 425

Personal Ethics 425 Ethics within the Supply Chain 425 Ethical Behaviour Regarding the Environment 425

Supply Chain Economics 426 Make-or-Buy Decisions 427 Outsourcing 427

Supply Chain Strategies 427 Many Suppliers 428 Few Suppliers 428 Vertical Integration 428 Joint Ventures 429 Keiretsu Networks 429 Virtual Companies 429

Managing the Supply Chain 430 Mutual Agreement on Goals 430 Trust 430 Compatible Organizational Cultures 430 Issues in an Integrated Supply Chain 431 Opportunities in an Integrated Supply Chain 431

Eprocurement 433 Electronic Ordering and Funds Transfer 434 Online Catalogues 434 Auctions 434

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Table of Contents xi

RFQs 434 Real-Time Inventory Tracking 434

Vendor Selection 435 Vendor Evaluation 435 Vendor Development 436 Negotiations 436 Contracting 437 Centralized Purchasing 437 E-Procurement 437

Logistics Management 438 Distribution Systems 438 Warehousing 439 Third-Party Logistics 440 Cost of Shipping Alternatives 440 Security and JIT 441

Measuring Supply Chain Performance 442 Supply Chain Performance 442 Assets Committed to Inventory 442 The SCOR Model 444 Chapter Summary 445 • Ethical Dilemma 445 • Discussion Questions 445 • Solved Problems 445 • Problems 446 • Case Studies: Dell’s Value Chain 447 • Video Case Studies: Darden’s Global Supply Chain 448 • Supply Chain Management at Regal Marine 449 • Arnold Palmer Hospital ’s Supply Chain 449 • Rapid Review 450 • Self-Test 452

11 Supplement: Supply Chain Management Analytics 453 Techniques for Evaluating Supply Chains 453 Evaluating Disaster Risk in the Supply Chain 453 Managing the Bullwhip Effect 455

A Bullwhip Effect Measure 456 Supplier Selection Analysis 457 Transportation Mode Analysis 458 Warehouse Storage 459

Supplement Summary 460 • Discussion Questions 460 • Solved Problems 460 • Problems 462 • Rapid Review 465 • Self-Test 467

12 Inventory Management 468 The Importance of Inventory 470

Functions of Inventory 471 Types of Inventory 471

Managing Inventory 472 ABC Analysis 472 Record Accuracy 474 Cycle Counting 474 Control of Service Inventories 476

Inventory Models 478

Independent versus Dependent Demand 478 Holding, Ordering, and Setup Costs 478

Inventory Models for Independent Demand 478 The Basic Economic Order Quantity (EOQ) Model 479 Minimizing Costs 479 Reorder Points 483 Production Order Quantity Model 485 Quantity Discount Models 487

Probabilistic Models and Safety Stock 490 Other Probabilistic Models 493

Single-Period Model 495 Fixed-Period (P) Systems 496

Chapter Summary 497 • Ethical Dilemma 497 • Discussion Questions 497 • Using Software to Solve Inventory Problems 498 • Solved Problem 499 • Problems 502 • Case Studies: Zhou Bicycle Company 507 • Video Case Studies: Managing Inventory at Frito-Lay 507 • Inventory Control at Wheeled Coach Ambulance 508 • Rapid Review 508 • Self-Test 510

13 Aggregate Planning and Sales and Operations Planning 512 The Planning Process 513

Sales and Operations Planning 513 The Nature of Aggregate Planning 515 Aggregate Planning Strategies 516

Capacity Options 517 Demand Options 517 Mixing Options to Develop a Plan 518

Methods for Aggregate Planning 519 Graphical Methods 519 Mathematical Approaches 523 Comparison of Aggregate Planning Methods 525

Aggregate Planning in Services 526 Restaurants 526 Hospitals 527 National Chains of Small Service Firms 527 Miscellaneous Services 527 Airline Industry 528

Yield Management 528 Chapter Summary 531 • Ethical Dilemma 531 • Discussion Questions 532 • Using Software for Aggregate Planning 532 • Solved Problems 533 • Problems 534 • Case Studies: Fast Creek Lightning (G) 538 • Andrew-Carter, Inc. 539 • Video Case Studies: Using Revenue Management to Set Orlando Magic Ticket Prices 540 • Rapid Review 540 • Self-Test 542

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xii Table of Contents

14 Material Requirements Planning (MRP) and ERP 543 Dependent Demand 544 Dependent Inventory Model Requirements 545

Master Production Schedule 545 Bills of Material 547 Accurate Inventory Records 549 Purchase Orders Outstanding 549 Lead Times for Components 549

MRP Structure 550 MRP Management 554

MRP Dynamics 554 MRP and JIT 554

Lot-Sizing Techniques 555 Lot-for-Lot 555 Economic Order Quantity (EOQ) 556 Periodic Order Quantity 557 Lot-Sizing Summary 558

Extensions of MRP 559 Material Requirements Planning II (MRP II) 559 Closed-Loop MRP 560 Capacity Planning 560

MRP in Services 561 Restaurants 562 Hospitals 562 Hotels 562 Distribution Resource Planning (DRP) 563

Enterprise Resource Planning (ERP) 563 ERP in the Service Sector 565 Chapter Summary 566 • Ethical Dilemma 566 • Discussion Questions 566 • Using Software to Solve MRP Problems 566 • Solved Problems 568 • Problems 571 • Case Studies: Hill’s Automotive, Inc. 575 • Video Case Studies: When 18 500 Orlando Magic Fans Come to Dinner 575 • MRP at Wheeled Coach Ambulance 576 • Rapid Review 577 • Self-Test 579

15 Short-Term Scheduling 580 The Importance of Short-Term Scheduling 581 Scheduling Issues 582

Forward and Backward Scheduling 583 Finite and Infinite Loading 584 Scheduling Criteria 585

Scheduling Process-Focused Facilities 586 Loading Jobs 586

Input–Output Control 586 Gantt Charts 588 Assignment Method 588

Sequencing Jobs 592 Priority Rules for Dispatching Jobs 592 Critical Ratio 595 Sequencing N Jobs on Two Machines: Johnson’s Rule 595 Limitations of Rule-Based Dispatching Systems 597

Finite Capacity Scheduling (FCS) 597 Scheduling Repetitive Facilities 599 Scheduling Services 599

Hospitals 599 Banks 599 Retail Stores 600 Airlines 600 24/7 Operations 600 Scheduling Service Employees with Cyclical Scheduling 601 Cyclical Scheduling 601 Chapter Summary 603 • Ethical Dilemma 603 • Discussion Questions 603 • Using Software for Short-Term Scheduling 603 • Solved Problems 605 • Problems 608 • Case Studies: Old Muskoka Wood Store 611 • Video Case Studies: From the Eagles to the Magic: Converting the Amway Center 612 • Scheduling at Hard Rock Cafe 614 • Rapid Review 614 • Self-Test 616

16 Lean Operations 617 Lean Operations 619

Eliminate Waste 619 Remove Variability 621 Improve Throughput 621

Lean and Just-in-Time 621 Supplier Partnerships 621

Lean Layout 624 Distance Reduction 624 Increased Flexibility 624 Impact on Employees 624 Reduced Space and Inventory 625

Lean Inventory 625 Reduce Inventory and Variability 625 Reduce Lot Sizes 626 Reduce Setup Costs 627

Lean Scheduling 628 Level Schedules 628 Kanban 629

Lean Quality 631 Toyota Production System 632

Continuous Improvement 632 Respect for People 633 Processes and Standard Work Practice 633

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Lean Organizations 633 Building a Lean Organization 633 Lean Sustainability 634

Lean Operations in Services 635 Suppliers 635 Layouts 635 Inventory 635 Scheduling 635 Chapter Summary 635 • Ethical Dilemma 636 • Discussion Questions 636 • Solved Problems 636 • Problems 637 • Case Studies: Saskatchewan Mutual Insurance Company 638 • Video Case Studies: Lean Operations at Alaska Airline 638 • JIT at Arnold Palmer Hospital 640 • Rapid Review 640 • Self-Test 642

17 Maintenance and Reliability 643 The Strategic Importance of Maintenance and Reliability 644 Reliability 645

Improving Individual Components 645 Providing Redundancy 647

Maintenance 649 Implementing Preventive Maintenance 649 Increasing Repair Capabilities 652 Autonomous Maintenance 653

Total Productive Maintenance 653 Techniques for Enhancing Maintenance 653

Simulation 653 Expert Systems 654 Automated Sensors 654 Chapter Summary 654 • Ethical Dilemma 654 • Discussion Questions 654 • Using Software to Solve Reliability Problems 655 • Solved Problems 655 • Problems 655 • Video Case Study: Maintenance Drives Profits at Frito-Lay 657 • Rapid Review 658 • Self-Test 659

PART FOUR Business Analytics Modules 661

A Decision-Making Tools 661 The Decision Process in Operations 661 Fundamentals of Decision Making 662 Decision Tables 663 Types of Decision-Making Environments 664

Decision Making Under Uncertainty 664

Decision Making Under Risk 665 Decision Making Under Certainty 665 Expected Value of Perfect Information (EVPI) 666

Decision Trees 667 A More Complex Decision Tree 668

Using Decision Trees in Ethical Decision Making 670

The Poker Decision Process 671 Module Summary 671 • Discussion Questions 671 • Using Software for Decision Models 672 • Solved Problems 673 • Problems 674 • Case Study: Tom Tucker’s Liver Transplant 678 • Rapid Review 678 • Self-Test 680

B Linear Programming 681 Why Use Linear Programming? 681 Requirements of a Linear Programming Problem 682 Formulating Linear Programming Problems 682

Glickman Electronics Example 682 Graphical Solution to a Linear Programming Problem 683

Graphical Representation of Constraints 683 Iso-Profit Line Solution Method 684 Corner-Point Solution Method 687

Sensitivity Analysis 688 Sensitivity Report 689 Changes in the Resources or Right-Hand-Side Values 689 Changes in the Objective Function Coefficient 690

Solving Minimization Problems 690 Linear Programming Applications 692

Production-Mix Example 692 Diet Problem Example 693 Labour Scheduling Example 694

The Simplex Method of LP 695 Integer and Binary Variables 696

Creating Integer and Binary Variables 696 Linear Programming Applications with Binary Variables 696 A Fixed-Charge Integer Programming Problem 697 Module Summary 698 • Discussion Questions 698 • Using Software to Solve LP Problems 699 • Solved Problems 700 • Problems 702 • Case Study: Golding Landscaping and Plants Inc. 708 • Rapid Review 708 • Self-Test 710

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xiv Table of Contents

C Transportation Models 711 Transportation Modelling 711 Developing an Initial Solution 713

The Northwest-Corner Rule 713 The Intuitive Lowest-Cost Method 714

The Stepping-Stone Method 715 Special Issues in Modelling 718

Demand Not Equal to Supply 718 Degeneracy 719 Module Summary 720 • Discussion Questions 720 • Using Software to Solve Transportation Problems 721 • Solved Problems 722 • Problems 724 • Case Study: Custom Vans Inc. 727 • Rapid Review 728 • Self-Test 730

D Waiting-Line Models 731 Queuing Theory 731 Characteristics of a Waiting-Line System 732

Arrival Characteristics 732 Waiting-Line Characteristics 734 Service Characteristics 734 Measuring a Queue’s Performance 736

Queuing Costs 736 The Variety of Queuing Models 737

Model A (M/M/1): Single-Channel Queuing Model with Poisson Arrivals and Exponential Service Times 738 Model B (M/M/S): Multiple-Channel Queuing Model 741 Model C (M/D/1): Constant-Service-Time Model 745 Little’s Law 746 Model D: Limited-Population Model 746

Other Queuing Approaches 749 Module Summary 750 • Discussion Questions 750 • Using Software to Solve Queuing Problems 750 • Solved Problems 751 • Problems 753 • Case Studies: Labrador Foundry Inc. 756 • The Winter Park Hotel 757 • Rapid Review 758 • Self-Test 759

E Learning Curves 761 What Is a Learning Curve? 761 Learning Curves in Services and Manufacturing 762 Applying the Learning Curve 763

Arithmetic Approach 763 Logarithmic Approach 763 Learning-Curve Coefficient Approach 764

Strategic Implications of Learning Curves 766

Limitations of Learning Curves 767 Module Summary 767 • Discussion Questions 767 • Using Software for Learning Curves 767 • Solved Problems 768 • Problems 769 • Case Study: SMT’s Negotiation with IBM 771 • Rapid Review 772 • Self-Test 774

F Simulation 775 What Is Simulation? 775 Advantages and Disadvantages of Simulation 776 Monte Carlo Simulation 777

Step 1. Establishing Probability Distributions 777 Step 2. Building a Cumulative Probability Distribution for Each Variable 778 Step 3. Setting Random-Number Intervals 778 Step 4. Generating Random Numbers 779 Step 5. Simulating the Experiment 779

Simulation of a Queuing Problem 780 Simulation and Inventory Analysis 783

Module Summary 786 • Discussion Questions 786 • Using Software in Simulation 786 • Solved Problems 788 • Problems 789 • Case Study: Canadian Shield Airlines Call Centre 793 • Rapid Review 794 • Self-Test 796

Appendix A1 Bibliography B1 Indices I1

Online Tutorials

1 Statistical Tools for Managers T1-1 Discrete Probability Distributions T1-2

Expected Value of a Discrete Probability Distribution T1-3 Variance of a Discrete Probability Distribution T1-3

Continuous Probability Distributions T1-4 The Normal Distribution T1-4 Summary T1-7 • Key Terms T1-7 • Discussion Questions T1-7 • Problems T1-7 • Bibliography T1-8

2 Acceptance Sampling T2-1 Sampling Plans T2-2

Single Sampling T2-2 Double Sampling T2-2 Sequential Sampling T2-2

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Table of Contents xv

Operating Characteristic (OC) Curves T2-2 Producer’s and Consumer’s Risk T2-3 Average Outgoing Quality T2-5

Summary T2-6 • Key Terms T2-6 • Solved Problem T2-7 • Discussion Questions T2-7 • Problems T2-7

3 The Simplex Method of Linear Programming T3-1 Converting the Constraints to Equations T3-2 Setting Up the First Simplex Tableau T3-2 Simplex Solution Procedures T3-4 Summary of Simplex Steps for Maximization Problems T3-6 Artificial and Surplus Variables T3-7 Solving Minimization Problems T3-7

Summary T3-8 • Key Terms T3-8 • Solved Problem T3-8 • Discussion Questions T3-8 • Problems T3-9

4 The MODI and VAM Methods of Solving Transportation Problems T4-1 MODI Method T4-2

How to Use the MODI Method T4-2 Solving the Arizona Plumbing Problem with MODI T4-2

Vogel’s Approximation Method: Another Way to Find an Initial Solution T4-4

Discussion Questions T4-8 • Problems T4-8

5 Vehicle Routing and Scheduling T5-1 Introduction T5-2

Service Delivery Example: Meals-for-ME T5-2 Objectives of Routing and Scheduling Problems T5-2 Characteristics of Routing and Scheduling Problems T5-3

Classifying Routing and Scheduling Problems T5-3 Solving Routing and Scheduling Problems T5-4

Routing Service Vehicles T5-5 The Traveling Salesman Problem T5-5 Multiple Traveling Salesman Problem T5-8 The Vehicle Routing Problem T5-9 Cluster First, Route Second Approach T5-10

Scheduling Service Vehicles T5-11 The Concurrent Scheduler Approach T5-13

Other Routing and Scheduling Problems T5-13 Summary T5-14 • Key Terms T5-15 • Discussion Questions T5-15 • Problems T5-15 • Case Study: Routing and Scheduling of Phlebotomists T5-17 • Bibliography T5-17

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Preface

Welcome to your operations management (OM) course and to the third Canadian edition of this textbook. This text presents a state-of-the-art view of the activities of the operations function from a Canadian perspective. Operations is an exciting and dynamic area of management that has a profound effect on the productivity of both services and manufacturing. Indeed, few other activities have so much impact on the quality of your life. The goal of this book is to present a broad introduction to the field of operations in a realistic, meaningful, and practical manner. OM includes a blend of subject areas, including accounting, industrial engineering, management, management science, and statistics. Whether you are pursuing a career in the operations field or not, you will likely be working with people in operations. Therefore, having a solid understanding of the role of operations in an organization is of substantial benefit to you. This text will also help you understand how OM affects society and your life. Certainly, you will better understand what goes on behind the scenes when you buy a coffee at Tim Hortons, take a flight from Edmonton to Vancouver, place an order with Amazon.ca, or enter a Canadian hospital for medical care.

Although many readers of this book are not OM majors, students studying marketing, finance, accounting, and MIS will hopefully find the material both interesting and useful as they develop a fundamental working knowledge of the operations side of the firm.

ABOUT THE THIRD CANADIAN EDITION The goal of this third Canadian edition is to retain the features and strengths that have made this book so successful over the years while bringing a new Canadian perspective to the text. Readers will find examples of Canadian companies and success stories woven throughout the book with cases drawn from the manufacturing and service industry taken from both the private and public sectors. The text describes many Canadian locations and uses Canadian data when available. Readers can follow the story of the construction of a hockey arena as a recurring case study that touches upon many aspects of OM in a familiar setting. It is also important to acknowledge the global nature of today’s business environment. Operations management is a discipline that encompasses both the local and the international, with global considerations affecting everything from location strategies to scheduling and transportation. This third Canadian edition therefore retains many of the best and most familiar U.S. and international examples.

NEW TO THIS EDITION We’ve made significant revisions to this edition, and we want to share some of the changes with you.

Five New Video Case Studies Featuring Alaska Airlines In this edition we take you behind the scenes of Alaska Airlines, consistently rated as one of the top carriers in North America. This fascinating organization opened its doors—and planes—so we could examine leading-edge OM in the airline industry. We observe the quality program at Alaska Air (Chapter 6), the process analysis behind the airline’s 20-minute baggage retrieval guarantee (Chapter 7), how Alaska empowers its employees (Chapter 10), the airline’s use of Lean, 5s, kaizen, and Gemba walks (Chapter 16), and the complexities of scheduling (Module B). These videos, and other video case studies that feature real companies, can be found in MyLab Operations Management.

New Sustainability in the Supply Chain Supplement 5 We have enhanced the cov- erage of sustainability in this edition with the inclusion of a brand-new supplement that covers the topics of corporate social responsibility, design and production for sustainability, and regula- tions and industry standards.

Creating Your Own Excel Spreadsheets We continue to provide two free decision support software programs, Excel OM for Windows and Mac and POM for Windows, to help

xvi

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Preface xvii

you and your students solve homework problems and case studies. These excellent packages are found in MyLab Operations Management’s Download Center.

Many instructors also encourage students to develop their own Excel spreadsheet models to tackle OM issues. With this edition we provide numerous examples at chapter end on how to do so. “Creating Your Own Excel Spreadsheets” examples now appear in Chapters 2, 4, 8, 12, and Supplement 6, Supplement 7, and Modules A, and F. We hope these 8 samples will help expand students’ spreadsheet capabilities.

Expanding and Reordering Our Set of Homework Problems We believe that a vast selection of quality homework problems, ranging from easy to challenging (denoted by one to four dots), is critical for both instructors and students. Instructors need a broad selection of problems to choose from for homework, quizzes, and exams—without reusing the same set from semester to semester. We take pride in having more problems than any other OM text. We added dozens of new problems this edition.

Further, with the majority of our adopters now using the MyLab Operations Management learning system in their classes, we have reorganized all the homework problems—both those appearing in the printed text and the additional homework problems that are available in MyLab Operations Management—by topic heading. We identify all problems by topic.

The list of all problems by topic also appears at the end of each boxed example as well as in the Rapid Review that closes each chapter. These handy references should make it easier to assign problems for homework, quizzes, and exams. A rich set of assignable problems and cases makes the learning experience more complete and pedagogically sound.

Lean Operations In previous editions we sought to explicitly differentiate the concepts of just-in-time, Lean, and the Toyota Production System in Chapter 16. However, there is signifi- cant overlap and interchangeability among those three concepts, so we have revised Chapter 16 to incorporate the three concepts into an overall concept of “Lean”. The chapter suggests that students view Lean as a comprehensive integrated operations strategy that sustains competitive advantage and results in increased returns to all stakeholders.

In addition, the following changes have been made for the third Canadian edition: • New section on strategic planning, core competencies, and outsourcing added to Chapter 2. • Coverage of agile and waterfall approaches to project management have been revised in

Chapter 3. • New section on supply chain management in Chapter 4. • Added coverage of sustainability and life cycle assessment (LCA) to Chapter 5. • New section on ISO 9000 International Quality Standards in Chapter 6. • Coverage of bottleneck analysis in Supplement 7 has been completely revised. • Added coverage of supplier certification, contracting, and centralized purchasing to

Chapter 11. • Added section on warehouse storage to Supplement 11. • Coverage of economic order quantity enhanced with new section on period order quantity in

Chapter 14. • Added coverage of finite and infinite loading to Chapter 15. • Added coverage of Lean sustainability to Chapter 16. • Added coverage of parallel redundancy to Chapter 17. • New examples and case studies throughout the text.

MyLab Operations Management Resources In addition to our video case studies and our Excel OM and POM for Windows software, we provide the following resources in MyLab Operations Management: • Excel OM data files: Prepared for specific examples, these files allow users to solve all the

marked text examples without reentering data. • Active Models: These are Excel-based OM simulations, designed to help students under-

stand the quantitative methods shown in the textbook examples. Students may change the

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xviii Preface

ACKNOWLEDGMENTS We wish to acknowledge the contributions of the following reviewers who provided feedback during the development of the manuscript.

Farid Albehadili, University of Prince Edward Island

Gary Llewellyn Evans, University of Prince Edward Island

Scott Hadley, Sheridan College

Elkafi Hassini, McMaster University

Sam Lampropoulos, George Brown College

David Roberts, Southern Alberta Institute of Technology

Publishing a textbook requires the work of many talented individuals to handle the specialized tasks of development, photography, graphic design, illustration, editing, and production, to name only a few. I would like to thank Scott Hardie, Portfolio Manager; and Jennifer Murray, Content Developer, for her editorial guidance throughout the writing stage. I also thank the rest of the talented team: John Polanszky, Content Manager; Pippa Kennard and Christine Selvan, Project Managers; Sally Glover, Copy Editor; the team at Pearson CSC, and, finally, Spencer Snell, Marketing Manager.

But most of all, I thank my wife, Suzanne, and my children, Alexandra and Kathleen; my granddaughter, Kenna; plus Ryan and Robert, family and extended family, friends, and col- leagues. I couldn’t have done it without all of their support.

data to see how the changes affect the answers. These files are available in the Download Center.

• Online Tutorial Chapters: “Statistical Tools for Managers,” “Acceptance Sampling,” “The Simplex Method of Linear Programming,” “The MODI and VAM Methods of Solving Transportation Problems,” and “Vehicle Routing and Scheduling” are provided as additional material.

• Additional case studies: These case studies supplement the ones in the text. • Virtual office hours videos: Professors Heizer, Render, and Munson walk students through

the Solved Problems in a series of 5- to 20-minute explanations.

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Operations and Productivity

PART ONE Introduction to Operations Management (Chapters 1–4)

Learning Objectives LO1 Define operations

management 2

LO2 Explain the distinction between goods and services 9

LO3 Explain the difference between production and productivity 11

LO4 Compute single-factor productivity 12

LO5 Compute multifactor productivity 13

LO6 Identify the critical variables in enhancing productivity 14

Operations Management at Hard Rock Cafe Operations managers throughout the world are producing products daily

to provide for the well-being of society. These products take on a mul-

titude of forms, including auto parts at Magna International, motion pic-

tures at DreamWorks Studios, rides at Disney World, and food at Hard

Rock Cafe. These firms produce thousands of complex products every

day—to be delivered as the customer ordered them, when the customer

wants them, and where the customer wants them. Hard Rock does this

for over 35 million guests worldwide every year. This is a challenging

task, and the operations manager’s job—whether at Magna Internation-

al, DreamWorks, Disney, or Hard Rock—is demanding.

Orlando-based Hard Rock Cafe opened its first restaurant in London in

1971, making it over four decades old and the granddaddy of theme restau-

rants. Although other theme restaurants have come and gone, Hard Rock is

still going strong, with 150 restaurants in 53 countries—and new restaurants

opening each year. Hard Rock made its name with rock music memorabilia,

having started when Eric Clapton, a regular customer, marked his favourite

bar stool by hanging his guitar on the wall in the London cafe. Now Hard

1

1

Global Company Profile Hard Rock Cafe

Ruffer/Agencja Fotograficzna Caro/Alamy Stock Photo

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2 PART 1 Introduction to Operations Management

Rock has 70 000 items and millions of dollars invest-

ed in memorabilia. To keep customers coming back

time and again, Hard Rock creates value in the form

of good food and entertainment.

The operations managers at Hard Rock Cafe at

Universal Studios in Orlando provide more than 3500

custom products—in this case, meals—every day.

These products are designed, tested, and then ana-

lyzed for cost of ingredients, labour requirements, and

customer satisfaction. On approval, menu items are

put into production—and then only if the ingredients

are available from qualified suppliers. The production

process—from receiving, to cold storage, to grilling or

baking or frying, and a dozen other steps—is designed

and maintained to yield a quality meal. Operations

managers, using the best people they can recruit and

train, also prepare effective employee schedules and

design efficient layouts.

Managers who successfully design and deliver

goods and services throughout the world understand

operations. In this textbook, we look not only at how

Hard Rock’s managers create value but also at how

operations managers in other services, as well as in

manufacturing, do so. Operations management is de-

manding, challenging, and exciting. It affects our lives

every day. Ultimately, operations managers determine

how well we live.

What Is Operations Management? Operations management (OM) is a discipline that applies to restaurants like Hard Rock Cafe as well as to factories like Ford and Whirlpool. The techniques of OM apply throughout the world to virtually all productive enterprises. It doesn’t matter if the application is in an office, a hospi- tal, a restaurant, a department store, or a factory—the production of goods and services requires operations management. And the efficient production of goods and services requires effective application of the concepts, tools, and techniques of OM that we introduce in this book.

As we progress through this text, we will discover how to manage operations in a changing global economy. An array of informative examples, charts, text discussions, and pictures illus- trate concepts and provide information. We will see how operations managers create the goods and services that enrich our lives.

In this chapter, we first define operations management, explaining its heritage and exploring the exciting role operations managers play in a huge variety of organizations. Then we discuss production and productivity in both goods- and service-producing firms. This is followed by a discussion of operations in the service sector and the challenge of managing an effective and efficient production system.

Production is the creation of goods and services. Operations management (OM) is the set of activities that creates value in the form of goods and services by transforming inputs into outputs. Activities creating goods and services take place in all organizations. In manufacturing firms, the production activities that create goods are usually quite obvious. In them, we can see the creation of a tangible product such as a Sony TV or a Harley-Davidson motorcycle.

In an organization that does not create a tangible good or product, the production function may be less obvious. We often call these activities services. The services may be “hidden” from the public and even from the customer. The product may take such forms as the transfer of funds from a savings account to a chequing account, the transplant of a human organ, the filling of an empty seat on an airplane, or the education of a student. Regardless of whether the end product is a good or service, the production activities that go on in the organization are often referred to as operations, or operations management.

LO1 Define operations management

VIDEO 1.1 Operations Management

at Hard Rock

VIDEO 1.2 Operations Management

at Frito-Lay

Production The creation of goods and services.

Operations management (OM) Activities that relate to the crea- tion of goods and services through the transformation of inputs to outputs.

Hard Rock Cafe in Orlando, Florida, prepares over 3500 meals each day. Seating more than 1500 people, it is one of the largest restaurants in the world. But Hard Rock’s operations managers serve the hot food hot and the cold food cold.

An dr

e Je

nn y/

Al am

y St

oc k

Ph ot

o

Operations management is one of the three functions that every organization performs.

STUDENT TIP

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Chapter 1 Operations and Productivity 3

Organizing to Produce Goods and Services To create goods and services, all organizations perform three functions (see Figure 1.1). These functions are the necessary ingredients not only for production but also for an organization’s survival. They are:

1. Marketing, which generates the demand, or at least takes the order for a product or service (nothing happens until there is a sale).

Let’s begin by defining what this course is about.

STUDENT TIP

Manufacturing

Operations Facilities

Construction; maintenance

Production and inventory control Scheduling; materials control

Quality assurance and control

Manufacturing Tooling; fabrication; assembly

Supply chain management

Design Product development and design Detailed product specifications

Industrial engineering Efficient use of machines, space, and personnel

Process analysis Development and installation of production tools and equipment

Finance/accounting Disbursements/credits

Accounts receivable Accounts payable General ledger

Funds management Money market International exchange

Capital requirements Stock issue Bond issue and recall

Marketing Sales promotion

Market research Sales Advertising

(C)

Commercial Bank

Operations Teller scheduling Cheque clearing Collection Transaction processing Facilities design/layout Vault operations Maintenance Security

Finance Investments

Real estate Securities

Accounting

Loans Commercial Industrial Financial Personal Mortgage

Trust department

(A)

Auditing

Airline

Operations Ground support equipment

Maintenance

Ground operations Facility maintenance Catering

Flight operations Crew scheduling Flying Communications Dispatching

Management science

Finance/accounting Accounting

Accounts payable Accounts receivable General ledger

Finance Cash control International

exchange

Marketing

Marketing

Traffic administration Reservations Schedules Tariffs (pricing)

Advertising

Sales

(B)

FIGURE 1.1

Organization Charts for Two Service Organizations and One Manufacturing Organization (A) A bank, (B) an airline, and (C) a manufacturing organiza- tion. The blue areas are OM activities.

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4 PART 1 Introduction to Operations Management

2. Production/operations, which creates, produces, and delivers the product. 3. Finance/accounting, which tracks how well the organization is doing, pays the bills, and

collects the money.

Universities, places of worship, and businesses all perform these functions. Even a volunteer group such as Scouts Canada is organized to perform these three basic functions. Figure 1.1 shows how a bank, an airline, and a manufacturing firm organize themselves to perform these functions. The blue-shaded areas of Figure 1.1 show the operations functions in these firms.

THE SUPPLY CHAIN Through the three functions—marketing, operations, and finance—value for the customer is created. However, firms seldom create this value by themselves. Instead, they rely on a variety of suppliers who provide everything from raw materials to accounting services. These suppliers, when taken together, can be thought of as a supply chain. A supply chain (see Figure 1.2) is a global network of organizations and activities that supply a firm with goods and services.

As our society becomes more technologically oriented, we see increasing specialization. Specialized expert knowledge, instant communication, and cheaper transportation also fos- ter specialization and worldwide supply chains. It just does not pay for a firm to try to do everything itself. The expertise that comes with specialization exists up and down the supply chain, adding value at each step. When members of the supply chain collaborate to achieve high levels of customer satisfaction, we have a tremendous force for efficiency and competi- tive advantage. Competition in the 21st century is no longer between companies; it is between supply chains.

Why Study Operations Management? We study OM for four reasons:

1. OM is one of the three major functions of any organization, and it is integrally related to all the other business functions. All organizations market (sell), finance (account), and produce (operate), and it is important to know how the OM activity functions. Therefore, we study how people organize themselves for productive enterprise.

2. We study OM because we want to know how goods and services are produced. The produc- tion function is the segment of our society that creates the products and services we use.

3. We study OM to understand what operations managers do. Regardless of your job in an organization, you can perform better if you understand what operations managers do. In addition, understanding OM will help you explore the numerous and lucrative career oppor- tunities in the field.

4. We study OM because it is such a costly part of an organization. A large percentage of the revenue of most firms is spent in the OM function. Indeed, OM provides a major opportunity for an organization to improve its profitability and enhance its service to society. Example 1 considers how a firm might increase its profitability via the production function.

Supply chain A global network of organizations and activities that supplies a firm with goods and services.

Farmer Syrup producer

Bottler Distributor Retailer

FIGURE 1.2 Soft Drink Supply Chain A supply chain for a bottle of Coke requires a beet or sugar cane farmer, a syrup producer, a bottler, a distributor, and a retailer, each adding value to satisfy a customer. Only with collaborations between all members of the supply chain can efficiency and customer satisfaction be maximized. The supply chain, in general, starts with the provider of basic raw materials and continues all the way to the final customer at the retail store.

Good operations managers are scarce, and as a result, career opportunities and pay are excellent.

STUDENT TIP

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Chapter 1 Operations and Productivity 5

1Fisher Technologies is a small firm that must double its dollar contribution to fixed cost and profit in order to be profitable enough to purchase the next generation of production equipment. Management has determined that if the firm fails to increase its contribution, its bank will not make the loan and the equipment cannot be purchased. If the firm cannot purchase the equipment, the limitations of the old equipment will force Fisher to go out of business and, in doing so, put its employees out of work and discontinue producing goods and services for its customers.

APPROACH c Table 1.1 shows a simple profit-and-loss statement and three strategic options (mar- keting, finance/accounting, and operations) for the firm. The first option is a marketing option, where good marketing management may increase sales by 50%. By increasing sales by 50%, contribution will in turn increase 71%. But increasing sales 50% may be difficult; it may even be impossible.

EXAMPLE

Examining the Options for Increasing Contribution

Marketing Optiona

Finance/ Accounting

Optionb OM Optionc

Current Increase Sales Revenue 50%

Reduce Finance Costs 50%

Reduce Production Costs 20%

Sales $100 000 $ 150 000 $100 000 $100 000

Costs of goods 280 000 2120 000 280 000 264 000

Gross margin 20 000 30 000 20 000 36 000

Finance costs 26 000 26 000 23 000 26 000

Subtotal 14 000 24 000 17 000 30 000

Taxes at 25% 23 500 26 000 24 250 27 500

Contributiond $ 10 500 $ 18 000 $ 12 750 $ 22 500

a Increasing sales 50% increases contribution by $7500, or 71% (5 7500/10 500). b Reducing finance costs 50% increases contribution by $2250, or 21% (5 2250/10 500). c Reducing production costs 20% increases contribution by $12 000, or 114% (5 12 000/10 500). d Contribution to fixed costs (excluding finance costs) and profit.

Table 1.1 Options for Increasing Contribution

The second option is a finance/accounting option, where finance costs are cut in half through good financial management. But even a reduction of 50% is still inadequate for generating the necessary increase in contribution. Contribution is increased by only 21%.

The third option is an OM option, where management reduces production costs by 20% and increases contribution by 114%.

SOLUTION c Given the conditions of our brief example, Fisher Technologies has increased contri- bution from $10 500 to $22 500. It may now have a bank willing to lend it additional funds.

INSIGHT c The OM option not only yields the greatest improvement in contribution but also may be the only feasible option. Increasing sales by 50% and decreasing finance costs by 50% may both be virtually impossible. Reducing operations costs by 20% may be difficult but feasible.

LEARNING EXERCISE c What is the impact of only a 15% decrease in costs in the OM option? [Answer: A $19 500 contribution; approximately an 86% increase.]

Example 1 underscores the importance of an effective operations activity of a firm. Development of increasingly effective operations is the approach taken by many companies as they face growing global competition.

What Operations Managers Do All good managers perform the basic functions of the management process. The management process consists of planning, organizing, staffing, leading, and controlling. Operations man- agers apply this management process to the decisions they make in the OM function. The 10 major decisions of OM are shown in Table 1.2. Successfully addressing each of these decisions requires planning, organizing, staffing, leading, and controlling. Typical issues relevant to these decisions and the chapter in which each is discussed are also shown.

Management process The application of planning, organiz- ing, staffing, leading, and controlling to the achievement of objectives.

An operations manager must successfully address the 10 decisions around which this text is organized.

STUDENT TIP

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6 PART 1 Introduction to Operations Management

WHERE ARE THE OM JOBS? How does one get started on a career in operations? The 10 OM decisions identified in Table 1.2 are made by individuals who work in the disciplines shown in the blue areas of Figure 1.1. Competent business students who know their accounting, statistics, finance, and OM have an opportunity to assume entry-level positions in all of these areas. As you read this text, identify disciplines that can assist you in making these decisions, then take courses in those areas. The more background an OM student has in accounting, statistics, information systems, and mathematics, the more job opportunities will be available. About 40% of all jobs are in OM.

The following professional organizations provide various certifications that may enhance your education and be of help in your career:

• APICS, the Association for Operations Management (www.apics.org) • Standards Council of Canada (www.scc.ca) • Institute for Supply Management (ISM) (www.instituteforsupplymanagement.org) • Project Management Institute (PMI) (www.pmi.org) • Council of Supply Chain Management Professionals (www.cscmp.org)

Figure 1.3 shows some possible job opportunities.

The Heritage of Operations Management The field of OM is relatively young, but its history is rich and interesting. Our lives and the OM discipline have been enhanced by the innovations and contributions of numerous individuals. We now introduce a few of these people, and we provide a summary of significant events in operations management in Figure 1.4.

Eli Whitney (1800) is credited for the early popularization of interchangeable parts, which was achieved through standardization and quality control. Through a contract he signed with the

Table 1.2 10 Critical Decisions of Operations Management

10 Decision Areas Issues Chapter(s)

1. Design of goods and services What good or service should we offer? How should we design these products?

5

2. Managing quality How do we define the quality? Who is responsible for quality?

6, Supplement 6

3. Process and capacity design What process and what capacity will these products require? What equipment and technology are necessary for these processes?

7, Supplement 7

4. Location strategy Where should we put the facility? On what criteria should we base the location decision?

8

5. Layout strategy How should we arrange the facility? How large must the facility be to meet our plan?

9

6. Human resources and job design

How do we provide a reasonable work environment? How much can we expect our employees to produce?

10

7. Supply chain management Should we make or buy this component? Who should be our suppliers, and how can we integrate them into our strategy?

11, Supplement 11

8. Inventory, material requirements planning, and JIT (just-in-time)

How much inventory of each item should we have? When do we reorder?

12, 14, 16

9. Intermediate and short-term scheduling

Are we better off keeping people on the payroll during slowdowns? Which job do we perform next?

13, 15

10. Maintenance Who is responsible for maintenance? 17

Current OM emphasis on quality and supply chain has increased job opportunities in these 10 areas.

STUDENT TIP

M01_HEIZ8076_03_SE_C01.indd 6 27/11/18 7:59 PM

http://www.cscmp.org/
http://www.pmi.org/
http://www.instituteforsupplymanagement.org/
http://www.scc.ca/
http://www.apics.org/
Chapter 1 Operations and Productivity 7

Plant Manager Division of Fortune 1000 company seeks plant manager for plant located in the Vancouver area. This plant manufactures loading dock equipment for commercial markets. The candidate must be experienced in plant management including expertise in production planning, purchasing, and inventory management. Good written and oral communication skills are a must, along with excellent application of skills in managing people. Operations Analyst Expanding national coffee shop: top 10 “Best Places to Work” wants junior-level systems analyst to join our excellent store improvement team. Business or I.E. degree, work methods, labour standards, ergonomics, cost accounting knowledge a plus. This is a hands-on job and excellent opportunity for a team player with good people skills. West coast location. Some travel required. Quality Manager Several openings exist in our small package processing facilities in Montreal and Winnipeg for quality managers. These highly visible positions require extensive use of statistical tools to monitor all aspects of service, timeliness, and workload measurement. The work involves (1) a combination of hands-on applications and detailed analysis using databases and spreadsheets, (2) process audits to identify areas for improvement, and (3) management of implementation of changes. Positions involve night hours and weekends. Send résumé. Supply Chain Manager and Planner Responsibilities entail negotiating contracts and establishing long-term relationships with suppliers. We will rely on the selected candidate to maintain accuracy in the purchasing system, invoices, and product returns. A bachelor’s degree and up to two years’ related experience are required. Working knowledge of MRP, ability to use feedback to master scheduling and suppliers and consolidate orders for best price and delivery are necessary. Proficiency in all PC Windows applications, particularly Excel and Word, is essential. Knowledge of Oracle business systems is a plus. Effective verbal and written communication skills are essential. Process Improvement Consultants An expanding consulting firm is seeking consultants to design and implement lean production and cycle time reduction plans in both service and manufacturing processes. Our firm is currently working with an international bank to improve its back office operations, as well as with several manufacturing firms. A business degree required; APICS certification a plus.

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FIGURE 1.3 Many Opportunities Exist for Operations Managers

Early Concepts

Cost Focus Quality Focus

1776–1880 Labour Specialization (Smith, Babbage) Standardized Parts (Whitney)

Scientific Management Era 1880–1910 Gantt Charts (Gantt) Motion & Time Studies (Gilbreth) Process Analysis (Taylor) Queuing Theory (Erlang)

Mass Production Era 1910–1980 Moving Assembly Line (Ford/Sorensen) Statistical Sampling (Shewhart) Economic Order Quantity (Harris) Linear Programming PERT/CPM (DuPont) Material Requirements Planning (MRP)

Mass Customization Era 1995–2015 Globalization Internet/Ecommerce Enterprise Resource Planning International Quality Standards (ISO) Finite Scheduling Supply Chain Management Mass Customization Build-to-Order Sustainability

Lean Production Era 1980–1995 Just-in-Time (JIT) Computer-Aided Design (CAD) Electronic Data Interchange (EDI) Total Quality Management (TQM) Baldrige Award Empowerment Kanbans

Customization Focus

FIGURE 1.4 Significant Events in Operations Management

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8 PART 1 Introduction to Operations Management

U.S. government for 10 000 muskets, he was able to command a premium price because of their interchangeable parts.

Frederick W. Taylor (1881), known as the father of scientific management, contributed to personnel selection, planning and scheduling, motion study, and the now popular field of ergo- nomics. One of his major contributions was his belief that management should be much more resourceful and aggressive in the improvement of work methods. Taylor and his colleagues, Henry L. Gantt and Frank and Lillian Gilbreth, were among the first to systematically seek the best way to produce.

Another of Taylor’s contributions was the belief that management should assume more responsibility for:

1. Matching employees to the right job. 2. Providing the proper training. 3. Providing proper work methods and tools. 4. Establishing legitimate incentives for work to be accomplished.

By 1913, Henry Ford and Charles Sorensen combined what they knew about standardized parts with the quasi-assembly lines of the meatpacking and mail-order industries and added the revolutionary concept of the assembly line, where men stood still and material moved.

Quality control is another historically significant contribution to the field of OM. Walter Shewhart (1924) combined his knowledge of statistics with the need for quality control and provided the foundations for statistical sampling in quality control. W. Edwards Deming (1950) believed, as did Frederick Taylor, that management must do more to improve the work environ- ment and processes so that quality can be improved.

Operations management will continue to progress with contributions from other disciplines, including industrial engineering and management science. These disciplines, along with statis- tics, management, and economics, contribute to improved models and decision making.

Innovations from the physical sciences (biology, anatomy, chemistry, and physics) have also contributed to advances in OM. These innovations include new adhesives, faster inte- grated circuits, gamma rays to sanitize food products, and higher-quality glass for LCD and plasma TVs. Innovation in products and processes often depends on advances in the physical sciences.

Especially important contributions to OM have come from information technology, which we define as the systematic processing of data to yield information. Information tech- nology—with wireless links, internet, and ecommerce—is reducing costs and accelerating communication.

Decisions in operations management require individuals who are well versed in manage- ment science, in information technology, and often in one of the biological or physical sciences. In this textbook, we look at the diverse ways a student can prepare for a career in operations management.

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Chapter 1 Operations and Productivity 9

Operations in the Service Sector Manufacturers produce a tangible product, while service products are often intangible. But many products are a combination of a good and a service, which complicates the definition of a ser- vice. Even the Canadian government has trouble generating a consistent definition. Because definitions vary, much of the data and statistics generated about the service sector are incon- sistent. However, we define services as including repair and maintenance, government, food and lodging, transportation, insurance, trade, financial, real estate, education, law, medicine, entertainment, and other professional occupations.

DIFFERENCES BETWEEN GOODS AND SERVICES Let’s examine some of the differences between goods and services:

• Services are usually intangible (for example, your purchase of a ride in an empty airline seat between two cities) as opposed to a tangible good.

• Services are often produced and consumed simultaneously; there is no stored inventory. For instance, the beauty salon produces a haircut that is “consumed” simultaneously, or the doctor produces an operation that is “consumed” as it is produced. We have not yet figured out how to inventory haircuts or appendectomies.

• Services are often unique. Your mix of financial coverage, such as investments and insurance policies, may not be the same as anyone else’s, just as the medical procedure or a haircut produced for you is not exactly like anyone else’s.

• Services have high customer interaction. Services are often difficult to standardize, automate, and make as efficient as we would like because customer interaction demands uniqueness. In fact, in many cases this uniqueness is what the customer is paying for; therefore, the oper- ations manager must ensure that the product is designed (i.e., customized) so that it can be delivered in the required unique manner.

• Services have inconsistent product definition. Product definition may be rigorous, as in the case of an auto insurance policy, but inconsistent because policyholders change cars and pol- icies mature.

• Services are often knowledge based, as in the case of educational, medical, and legal services, and therefore hard to automate.

• Services are frequently dispersed. Dispersion occurs because services are frequently brought to the client/customer via a local office, a retail outlet, or even a house call.

The activities of the operations function are often very similar for both goods and services. For instance, both goods and services must have quality standards established, and both must be designed and processed on a schedule in a facility where human resources are employed.

Having made the distinction between goods and services, we should point out that, in many cases, the distinction is not clear-cut. In reality, almost all services and almost all goods are a mixture of a service and a tangible product. Even services such as consulting may require a tangible report. Similarly, the sale of most goods includes a service. For instance, many prod- ucts have the service components of financing and delivery (e.g., automobile sales). Many also require after-sale training and maintenance (e.g., office copiers and machinery). “Service” activ- ities may also be an integral part of production. Human resource activities, logistics, accounting, training, field service, and repair are all service activities, but they take place within a manufac- turing organization. Very few services are “pure,” meaning they have no tangible component. Counselling may be one of the exceptions.

GROWTH OF SERVICES Services constitute the largest economic sector in postindustrial societies. Until about 1900, many Canadians were employed in agriculture. Increased agricultural productivity allowed peo- ple to leave the farm and seek employment in the city. Similarly, manufacturing employment has decreased in North America in the past 30 years. The Canadian market tends to follow U.S. trends, as can be seen in the following comparison. The changes in U.S. agriculture, man- ufacturing, and service employment are shown in Figure 1.5. Although the number of people employed in manufacturing has decreased since 1950, each person is now producing almost 20 times more than in 1950. Services became the dominant employer in the early 1920s, with manufacturing employment peaking at about 32% in 1950. The huge productivity increases in

Services Economic activities that typically produce an intangible product (such as education, entertain- ment, lodging, government, financial, and health services).

LO2 Explain the distinction between goods and services

Services are especially important because almost 80% of all jobs are in service firms.

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10 PART 1 Introduction to Operations Management

agriculture and manufacturing have allowed more of our economic resources to be devoted to services. Consequently, much of the world can now enjoy the pleasures of education, health services, entertainment, and myriad other things that we call services. Examples of firms and percentage of employment in the Canadian service sector are shown in Table 1.3. The table also provides employment percentages for the nonservice sectors of manufacturing, construction, utilities, agriculture, and mining on the bottom five lines.

SERVICE PAY Although there is a common perception that service industries are low paying, in fact, many service jobs pay very well. Operations managers in the maintenance facility of an airline are very

Service sector The segment of the economy that includes trade, financial, lodging, education, legal, medical, and other professional occupations.

Table 1.3 Examples of Organizations in Each Sector Sector Example

Percent of All Jobs

Service-Producing Sector

Trade Hudson Bay Company; Real Canadian Superstore

15%

Transportation and warehousing WestJet; Maritime–Ontario Freight Lines Limited

5%

Finance, insurance, real estate, and leasing

Royal Bank; Manulife 6%

Professional, scientific, and technical services

Borden Ladner Gervais Law Firm 8%

Business, building, and other support services1

Edmonton Waste Management Centre; Carlson Wagonlit Travel

4%

Educational services McGill University 7% Health care and social assistance SickKids Hospital 12% Information, culture, and recreation Calgary Flames; Princess of Wales Theatre 5% Accommodation and food services Tim Hortons; Royal York Hotel 6%

Other Services Joe’s Barber Shop; ABC Landscaping 4% Public administration Province of Manitoba; City of Hamilton 6%

Goods-Producing Sector 22% Agriculture Farming Operations 2% Forestry, fishing, mining, quarrying, oil, and gas2

Canadian Mining Company Inc.; Dome Pacific Logging Ltd.

2%

Utilities Ontario Power Generation 1% Construction PCL Construction Management Inc. 7% Manufacturing Magna International Inc. 10% 1 Formerly “Management of companies, administrative, and other support services.” 2 Also referred to as “Natural resources.”

Source: Statistics Canada, CANSIM, table 282-0008 and Catalogue no. 71F0004XCB.

FIGURE 1.5 U.S. Agriculture, Manufactur- ing, and Service Employment Source: U.S. Bureau of Labor Statistics.

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U.S. Agriculture, Manufacturing, and Service Employment

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Services

Manufacturing

Service jobs with their operations component are growing as a percentage of all jobs.

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Chapter 1 Operations and Productivity 11

well paid, as are the operations managers who supervise computer services to the financial com- munity. However, the accommodation and food services sectors followed by the arts, recreation, and entertainment sectors offer the lowest average weekly pay levels in Canada.

New Challenges in Operations Management Operations managers work in an exciting and dynamic environment that is the result of a variety of challenging forces, from globalization of world trade to the transfer of ideas, products, and money at electronic speeds. Let’s look at some of these challenges:

• Global focus: The rapid decline in communication and transportation costs has made markets global. Similarly, resources in the form of capital, materials, talent, and labour are also now global. As a result, countries throughout the world are contributing to globalization as they vie for economic growth. Operations managers are rapidly seeking creative designs, efficient production, and high-quality goods via international collaboration.

• Supply chain partnering: Shorter product life cycles, demanding customers, and fast changes in technology, materials, and processes require supply chain partners to be in tune with the needs of end users. And because suppliers may be able to contribute unique expertise, oper- ations managers are outsourcing and building long-term partnerships with critical players in the supply chain.

• Sustainability: Operations managers’ continuing battle to improve productivity is concerned with designing products and processes that are ecologically sustainable. This means design- ing green products and packaging that minimize resource use, can be recycled or reused, and are generally environmentally friendly.

• Rapid product development: Technology combined with rapid international communication of news, entertainment, and lifestyles is dramatically chopping away at the lifespan of prod- ucts. OM is answering with new management structures, enhanced collaboration, digital tech- nology, and creative alliances that are more responsive and effective.

• Mass customization: Once managers recognize the world as the marketplace, the cultural and individual differences become quite obvious. In a world where consumers are increas- ingly aware of innovation and options, substantial pressure is placed on firms to respond in a creative way. And OM must rapidly respond with product designs and flexible production processes that cater to the individual whims of consumers. The goal is to produce customized products, whenever and wherever needed.

• Lean operations: Lean is the management model sweeping the world and providing the stand- ard against which operations managers must compete. Lean can be thought of as the driving force in a well-run operation, where the customer is satisfied, employees are respected, and waste does not exist. The theme of this text is to build organizations that are more efficient, where management creates enriched jobs that help employees engage in continuous improve- ment and where goods and services are produced and delivered when and where the customer desires them. These ideas are captured in the phrase Lean.

These trends are part of the exciting OM challenges currently facing operations managers.

The Productivity Challenge The creation of goods and services requires changing resources into goods and services. The more efficiently we make this change, the more productive we are and the more value is added to the good or service provided. Productivity is the ratio of outputs (goods and services) divided by the inputs (resources, such as labour and capital) (see Figure 1.6). The operations manager’s job is to enhance (improve) this ratio of outputs to inputs. Improving productivity means improv- ing efficiency. Efficiency means doing the job well—with a minimum of resources and waste. Note the distinction between being efficient, which implies doing the job well, and being effec- tive, which means doing the right thing. A job well done—say, by applying the 10 decisions of operations management—helps us be efficient; developing and using the correct strategy helps us be effective.

Productivity The ratio of outputs (goods and services) divided by one or more inputs (such as labour, capital, or management).

LO3 Explain the difference between production and productivity

Why is productivity important? Because it determines our standard of living.

One of the reasons OM is such an exciting discipline is that an operations manager is confronted with ever-changing issues, from technology, to global supply chains, to sustainability.

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12 PART 1 Introduction to Operations Management

This improvement can be achieved in two ways: reducing inputs while keeping output con- stant, or increasing output while keeping inputs constant. Both represent an improvement in productivity. In an economic sense, inputs are labour, capital, and management, which are inte- grated into a production system. Management creates this production system, which provides the conversion of inputs to outputs. Outputs are goods and services, including such diverse items as guns, butter, education, improved judicial systems, and ski resorts. Production is the making of goods and services. High production may imply only that more people are working and that employment levels are high (low unemployment), but it does not imply high productivity.

Measurement of productivity is an excellent way to evaluate a country’s ability to provide an improving standard of living for its people. Only through increases in productivity can the standard of living improve. Moreover, only through increases in productivity can labour, capital, and management receive additional payments. If returns to labour, capital, or management are increased without increased productivity, prices rise. On the other hand, downward pressure is placed on prices when productivity increases, because more is being produced with the same resources.

The benefits of increased productivity are illustrated in the OM in Action box “Improving Productivity at Starbucks”. Since 1973, labour productivity in Canada has experienced an annual rate of growth averaging approximately 1.25%, down considerably from the previous level of 3.00% during the period between 1961 and 1973. An increase of one percentage point in this performance would almost double the annual growth rate to 2.25%. Such a growth rate in labour productivity would mean that the average level of labour productivity in Canada would double every 32 years, not every 58 years as it will with a 1.25% growth rate. Moreover, if our labour productivity level were to double every 32 years, then (in the absence of major demographic effects) so would Canada’s standard of living.

PRODUCTIVITY MEASUREMENT In this text, we examine how to improve productivity through operations management. Productivity is a significant issue for the world and one that the operations manager is uniquely qualified to address.