Toledo custom manufacturing quality control

Toledo

" Toledo Custom Manufacturing Quality Control".

Operations Management in the Supply Chain Decisions and Cases Eighth Edition

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

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mheducation.com/highered

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

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2021 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2018, 2013, and 2011. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN 978-1-260-36810-9 (bound edition) MHID 1-260-36810-6 (bound edition) ISBN 978-1-260-93700-8 (loose-leaf edition) MHID 1-260-93700-3 (loose-leaf edition)

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Library of Congress Cataloging-in-Publication Data

Names: Schroeder, Roger G., author. | Goldstein, Susan Meyer. Title: Operations management in the supply chain decisions and cases / Roger G. Schroeder, Susan Meyer Goldstein, Carlson School of Management, University of Minnesota. Other titles: Operations management Description: Eighth edition. | New York, NY : McGraw-Hill Education, [2019] | Original edition entitled: Operations management. | Includes index. Identifiers: LCCN 2019018226| ISBN 9781260368109 (acid-free paper) | ISBN 1260368106 (acid-free paper) Subjects: LCSH: Production management. | Production management—Case studies. | Decision making. Classification: LCC TS155 .S334 2019 | DDC 658.5—dc23 LC record available at https://lccn.loc.gov/2019018226

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

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SUPPLY CHAIN MANAGEMENT Benton Purchasing and Supply Chain Management Third Edition

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

Burt, Petcavage, and Pinkerton Supply Management Eighth Edition

Johnson Purchasing and Supply Management Sixteenth Edition

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

Stock and Manrodt Fundamentals of Supply Chain Management

PROJECT MANAGEMENT Brown and Hyer Managing Projects: A Team-Based Approach Larson Project Management: The Managerial Process Eighth Edition

SERVICE OPERATIONS MANAGEMENT Bordoloi, Fitzsimmons, and Fitzsimmons Service Management: Operations, Strategy, Information Technology Ninth Edition

MANAGEMENT SCIENCE Hillier and Hillier Introduction to Management Science: A Modeling and Case Studies Approach with Spreadsheets Sixth Edition

BUSINESS RESEARCH METHODS Schindler Business Research Methods Thirteenth Edition

BUSINESS FORECASTING Keating and Wilson Forecasting and Predictive Analytics Seventh Edition

LINEAR STATISTICS AND REGRESSION Kutner, Nachtsheim, and Neter Applied Linear Regression Models Fourth Edition

BUSINESS SYSTEMS DYNAMICS Sterman Business Dynamics: Systems Thinking and Modeling for a Complex World

OPERATIONS MANAGEMENT Cachon and Terwiesch Operations Management Second Edition

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

Jacobs and Chase Operations and Supply Chain Management Sixteenth Edition

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

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

Stevenson Operations Management Fourteenth Edition

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

BUSINESS MATH Slater and Wittry Practical Business Math Procedures Thirteenth Edition

Slater and Wittry Math for Business and Finance: An Algebraic Approach Second Edition

BUSINESS STATISTICS Bowerman, Drougas, Duckworth, Froelich, Hummel, Moninger, and Schur Business Statistics in Practice Ninth Edition

Doane and Seward Applied Statistics in Business and Economics Sixth Edition

Doane and Seward Essential Statistics in Business and Economics Third Edition

Lind, Marchal, and Wathen Basic Statistics for Business and Economics Ninth Edition

Lind, Marchal, and Wathen Statistical Techniques in Business and Economics Eighteenth Edition

Jaggia and Kelly Business Statistics: Communicating with Numbers Third Edition

Jaggia and Kelly Essentials of Business Statistics: Communicating with Numbers Second Edition

McGuckian Connect Master: Business Statistics

The McGraw-Hill Education Series Operations and Decision Sciences

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iv

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

Susan Meyer Goldstein is Associate Professor in the Supply Chain and Operations Department at the Curtis L. Carlson School of Management, University of Minnesota. She earned a B.S. degree in Genetics and Cell Biology and an M.B.A. at the University of Minnesota and worked in the health care industry for several years. She later obtained a Ph.D. in operations management from Fisher College of Business at The Ohio State University. She has served on the faculty at the Uni- versity of Minnesota since 1998 and was a Visiting Professor at the Olin Business School at Washington University in St. Louis for two years. Her current research and teaching interests involve service process design and management, as well as operations strategy issues. Her research has been published in Decision Sciences, Journal of Operations Management, Production and Operations Management, and Manufacturing and Service Operations Management, among others. She serves on the editorial boards of many operations and ser- vice journals. She is the recipient of several research awards and research grants, and has received the Carlson School of Management Teaching Award and the Carlson School of Management Service Award.

About the Authors

Dedication To our families, whose encouragement and love we appreciate

—Roger G. Schroeder —Susan Meyer Goldstein

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v

Preface FEATURES

Operations and supply chain management is an exciting and vital field in today’s com- plex business world. Therefore, students in both MBA and undergraduate courses have an urgent need to understand operations—an essential function in every business.

This textbook on Operations Management in the Supply Chain emphasizes decision making in operations with a supply chain orientation. The text provides materials of inter- est to general business students and operations and supply chain management majors. By stressing cross-functional decision making, the text provides a unique and current business perspective for all students. This is the first text to incorporate cross-functional decision making in every chapter, which provides more relevance for non-majors.

The book is organized into five unique sections to help students understand the key types of decisions made by operations and supply chain managers. See the illustration below.

Introduction 1. Process design - How to get work done? 2. Quality - How to satisfy customers? 3. Capacity and scheduling - When and how much work to do? 4. Inventory - How to manage parts and products? 5. Supply chain decisions - How to manage across organizations?

The text provides a balanced treatment of both service and manufacturing firms. Many books give only cursory treatment to service operations.

The most current knowledge is incorporated, including global operations, supply chain management, service blueprinting, competency-based strategy, Six Sigma, lean systems, 3D printing, blockchain technology, artificial intelligence, analytics, sustainability, and sup- ply chain risk. Complete coverage is also provided on traditional topics, including process design, service systems, quality management, ERP, inventory control, and scheduling.

Decision-making framework for operations in the supply chain.

The Firm

Process

Quality

Capacity

Inventory

Supply Chain

Decisions

Human Resources Finance

Marketing

Accounting Information

Systems

Supplier

Process

Quality

Capacity

Inventory

Supply Chain

Decisions Process

Quality

Capacity

Inventory

Supply Chain

Decisions

Distributor

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vi Preface

While covering the concepts of operations and supply chain management in 18 chapters, the book also provides 19 case studies. A key feature of this book is learning how operations issues are tackled in real situations. The cases are intended to strengthen problem formula- tion skills and illustrate the concepts presented in the text. Long and short case studies are included. The cases are not just large problems or examples; rather, they are substantial man- agement case studies, including some from Amazon, 3M, Mayo Clinic, and Polaris Industries.

The softcover edition with fewer pages than most introductory books covers all the essen- tials students need to know about operations management in the supply chain, leaving out only superfluous and tangential topics. By limiting the size of the book, we have condensed the material to the basics. The book is also available in Connect and LearnSmart digital versions.

This book is ideal for regular operations and supply chain management courses and also case courses and modular courses. It is particularly useful for those who desire a cross- functional and decision-making perspective that reaches across the supply chain. Instructors can easily supplement the text with their own cases, readings, or course materials as desired.

The Connect Library and Instructor Resources contain 22 Excel templates designed to assist in solving analytic problems at the end of chapters and the case studies. These resources also contain technical chapters on linear programming, simulation, transportation method, and queuing, which can be assigned by the instructor, if desired. Using these resources covers all the main analytics in operations and supply chain management. The resources also have PowerPoint slides, a solutions manual, and the test bank. Access to these resources can be obtained from your McGraw-Hill sales representative or directly in the Connect Library.

Walkthrough of Key Learning Features

∙ Over forty Operations Leader boxes are included in the chapters to illustrate current practices implemented by leading firms

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68 Part Two Process Design

design of the eyewear by taking a digital photo of the customer and recommending a style of lenses that fits the customer’s face. An optometrist then adjusts the lenses to fit the cus- tomer’s preference. Finally, the customer selects options for nose bridges, hinges, and arms for the frame. The customer receives a photo of the proposed eyewear. Finally, a technician makes the lenses and frames at the store within one hour.

There are three forms of mass customization:

1. Modular production and assemble-to-order (ATO). 2. Fast changeover (nearly zero setup time between orders). 3. Postponement of options.

Modular production can provide a variety of options by using an assemble-to-order process. For example, when Dell receives a computer order, the company assembles stan- dard modules or components rapidly to fulfill the customer’s order. The order is then shipped and the customer receives it in a few days. But this requires modular design, as well as modular production. Dell also uses the same process to make standard computers for stock and shipment to retail stores.

Fast changeover is the form of mass customization used by Paris Miki for its glasses, where moving from one customer order to the next is very quick, with little or no setup between them. In this case, it is critical that each order is uniquely identified by a bar code, or other identifier, that specifies the customer’s options. It is also essential to have nearly zero changeover time on equipment so that a lot size of a single unit can be produced economically.

Postponement is used to defer a portion of the production until the point of delivery. For example, customized T-shirt shops can put a unique design on a T-shirt at the point of purchase. Hewlett-Packard printers receive their final configuration for various volt- ages and power supplies at U.S. or overseas warehouses before delivery. Postponement makes it possible to ship standard units anywhere in the world and customize them at the last minute.

From a manufacturing point of view, mass customization has changed the dynamics of the product-process matrix. Flexible automation makes it possible to make small lot sizes along with large lot sizes without a great cost penalty. Thus, with mass customiza- tion a firm can operate over a wider range of product choices without major changes to its

Shoes with a customized “fit” are significantly more elusive. While there are firms offering custom-fitted shoes, they sell at prices reflecting the significant work to individually size the shoe, most likely performed in a job shop. These shoes are cus- tom, but not mass customized.

Mass customization gives custom- ers many options, as well as the enjoyment of designing and using a product with their own personal stamp on it.

Nike and Nike-owned Converse, among other athletic shoe brands, offer customized shoes that can be ordered online for a reasonable price and delivered within a few weeks. Customers can select from numerous fabric or leather colors and patterns on various pieces of the shoe, as well as the colors of laces, stitching, and soles. These shoes, with their many customizable options, are an example of successful mass customization.

Nike Does It

OPERATIONS LEADER

obsession.24k/Stockimo/Alamy Stock Photo

∙ Every function in every organization touches Operations and the Supply Chain in some manner. This is the first book to add materials in every chapter to show how topics apply to majors in Marketing, Finance, Accounting, Human Resources, and Information Systems. The hand- shake symbol indicates these cross-functional decisions.

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Preface vii

∙ Students can both preview and review the key points and terms. These are found at the end of each chapter.

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132 Part Two Process Design

container is being moved from A to B, two full contain- ers are sitting in the input area of work center B, and one container is being used at B. These eight containers are needed since work center A also produces parts for other work centers, machines at A may break down, and move times from A to B are not always exactly predictable.

Some companies control the movement of containers by using two types of kanban cards: production cards and withdrawal (move) cards. These cards are used to authorize production and to identify the parts in any container. Instead of using cards, production can also be controlled by kanban squares that visually signal the need for work (to fill the kanban square), or by visual control of the empty containers.

Most importantly, the kanban system is visual in nature. As empty containers accumulate, it is a clear signal that the producing work center is falling behind. When all the containers are filled, production is stopped. The production lot size is exactly equal to one container of parts. All parts are neatly placed in containers of a fixed size. All of these are visual indicators of the work that should be done or stopped.

The number of containers needed to operate a work center is a function of the demand

formula:2

n = DT ___ C

where n = total number of containers

D = demand rate of the using work center

C = container size, in number of parts, usually less than 10 percent of daily demand

T = time for a container to complete an entire circuit: filled, wait, moved, used, and returned to be filled again (also called lead time)

2 Safety stock can be added to the numerator to account for uncertainty in demand or time.

KANBAN SQUARE AT HONEYWELL. The dashed rectangle signals the need for the production of a cabinet. Only one cabinet is placed on this square at a time. When the square is emptied by subsequent production, another cabinet is produced. ©Tulasi Ranganathan/Honeywell

Suppose demand at the receiving work center B is 2 parts per minute and a standard con- tainer holds 25 parts. It takes 100 minutes for a container to make a complete circuit from work center A to work center B and back to A again, including all setup, run, move, and wait times. The number of containers needed in this case is:

n = 2(100)

______ 25

= 8

The maximum inventory in the production system, a useful measure of how lean the system is, equal to the container size times the number of containers (200 units = 8 × 25), since the most inventory we can have is all containers filled:

Maximum inventory = nC = DT

Example

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138 Part Two Process Design

LEARNING ENRICHMENT (for self-study or instructor assignments)

Introduction to Lean Thinking—Gemba Academy Video https://youtu.be/a255lkYgIpI 6:35

Routing Out Waste in a Hospital Video https://youtu.be/jZLtbye--sg 8:46

Lean Manufacturing Tour—5S implementation Video https://youtu.be/mqgHUwSaKj8 9:13

The Toyota Production System Video https://youtu.be/P-bDlYWuptM 4:14

Push vs. Pull with Kanban Simulation Video https://youtu.be/a7YvJB0n16I 8:48

SOLVED PROBLEMS

1. Kanban and takt time. A work center uses kanban containers that hold 300 parts. To produce enough parts to fill the container, 90 minutes of setup plus run time are needed. Moving the container to the next workstation, waiting time, processing time at the next workstation, and return of the empty container take 140 minutes. There is an overall demand rate of nine units per minute.

a. Calculate the number of containers needed for the system. b. What is the maximum inventory in the system? c. A quality team has discovered how to reduce setup time by 65 minutes. If these

changes are made, can the number of containers be reduced? d. What is the takt time for this process?

Problem

a. T is the time required for a container to complete an entire circuit, in this case 90 minutes for setup and run time plus 140 minutes to move the container through the rest of the circuit.

n = DT ÷ C = (9 × (90 + 140)) ÷ 300 = 6.9 (round up to 7)

b. Since production will stop when all the containers are full, the maximum inventory is when all containers are full, that is, nC:

nC = 7(300) = 2100

c. n = DT ÷ C = (9 × (25 + 140)) ÷ 300 = 4.95 (round up to 5), so yes, the number of containers can be reduced from 7 to 5.

d. Takt time = 1/9 minute = 60/9 seconds = 6.67 seconds. Since the process produces 9 units per minute, the takt time is 1/9 minute or 6.67 seconds per unit.

Solution

2. Kanban. Work center A produces parts that are then processed by work center B. Kanban containers used by the work centers hold 100 parts. The overall rate of demand is 4.5 parts per minute at work center B. The table below shows setup, run, move, and wait times for parts at each of the work centers.

Problem Revised Pages

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7.7 KEY POINTS AND TERMS

Lean concepts, principles, and tenets can be deployed to reduce waste in manufacturing and service firms. We have seen how the lean tenets create lean production systems with non-value-added activities eliminated and waste minimized. Key points in the chapter include the following:

∙ Lean thinking is a way of thinking about processes that includes five tenets: specify customer value, improve the value stream, flow the product or service, pull from the customer, and strive for perfection.

∙ The five lean tenets seek to eliminate waste by utilizing the full capability of workers and partners in continuous improvement efforts. Lean tools, or methods, are described for each of the five tenets.

∙ In manufacturing, smooth flow is ensured by a stable and level master schedule. This requires consistent daily production within the master schedule and mixed model assembly. Takt time matches the rate of output with the average demand rate in the market.

∙ Reducing lot sizes, setup times, and lead times is the key to decreasing inventories in a lean production system and ensures smooth flow. Service and administrative activities should also work toward a fast changeover from one customer to the next and a reduced lead time.

∙ The plant layout in a lean production system requires much less space and encourages evolution toward cellular or group technology layouts.

∙ A lean system requires cross-trained workers who can perform multiple tasks. A flex- ible workforce will require changing the way workers are selected, trained, evaluated, and rewarded.

∙ A kanban system is used to pull parts through the production system. A fixed number of containers is provided for each part, thus limiting the amount of work-in-process inven- tory. The pull system can also be applied in service operations by providing only what is needed when it is needed by the customer.

∙ New supplier relationships must be established to make lean production successful. Frequent deliveries and reliable quality are required. Often, long-term single-source contracts will be negotiated with suppliers.

∙ Kaizen emphasizes continuous improvement. Kaizen events are used to implement lean thinking improvements quickly in one week or less on a particular process.

∙ Lean concepts, principles, and techniques can be applied to design, manufacturing, dis- tribution, services, and the supply chain.

Key Terms Toyota Production System (TPS) 119

Just-in-Time (JIT) manufacturing 119

Lean production 119 Lean thinking 120 Waste (muda) 121 Value stream 121 Value stream

mapping 121 Gemba 121

Internal setup 128 External setup 128 Cellular manufacturing 129 Preventative maintenance 129 Cross-training 130 Respect for people 130 Kanban 130 Reducing lead time 133 Supplier relationships 133 Co-location 133 Kaizen 135

Push 123 Pull 123 Perfection 124 5 Whys 125 5S 125 Stabilizing the master

schedule 127 Uniform load 127 Takt time 127 Reducing setup time 128 Single setups 128

∙ To help practice calculations, example boxes are included within chapters and solved problems are added at the end of the chapter.

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viii Preface

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7.7 KEY POINTS AND TERMS

Lean concepts, principles, and tenets can be deployed to reduce waste in manufacturing and service firms. We have seen how the lean tenets create lean production systems with non-value-added activities eliminated and waste minimized. Key points in the chapter include the following:

∙ Lean thinking is a way of thinking about processes that includes five tenets: specify customer value, improve the value stream, flow the product or service, pull from the customer, and strive for perfection.

∙ The five lean tenets seek to eliminate waste by utilizing the full capability of workers and partners in continuous improvement efforts. Lean tools, or methods, are described for each of the five tenets.

∙ In manufacturing, smooth flow is ensured by a stable and level master schedule. This requires consistent daily production within the master schedule and mixed model assembly. Takt time matches the rate of output with the average demand rate in the market.

∙ Reducing lot sizes, setup times, and lead times is the key to decreasing inventories in a lean production system and ensures smooth flow. Service and administrative activities should also work toward a fast changeover from one customer to the next and a reduced lead time.

∙ The plant layout in a lean production system requires much less space and encourages evolution toward cellular or group technology layouts.

∙ A lean system requires cross-trained workers who can perform multiple tasks. A flex- ible workforce will require changing the way workers are selected, trained, evaluated, and rewarded.

∙ A kanban system is used to pull parts through the production system. A fixed number of containers is provided for each part, thus limiting the amount of work-in-process inven-

is needed when it is needed by the customer. ∙ New supplier relationships must be established to make lean production successful.

Frequent deliveries and reliable quality are required. Often, long-term single-source contracts will be negotiated with suppliers.

∙ Kaizen emphasizes continuous improvement. Kaizen events are used to implement lean thinking improvements quickly in one week or less on a particular process.

∙ Lean concepts, principles, and techniques can be applied to design, manufacturing, dis- tribution, services, and the supply chain.

Key Terms Toyota Production System (TPS) 119

Just-in-Time (JIT) manufacturing 119

Lean production 119 Lean thinking 120 Waste (muda) 121 Value stream 121 Value stream

mapping 121 Gemba 121

Internal setup 128 External setup 128 Cellular manufacturing 129 Preventative maintenance 129 Cross-training 130 Respect for people 130 Kanban 130 Reducing lead time 133 Supplier relationships 133 Co-location 133 Kaizen 135

Push 123 Pull 123 Perfection 124 5 Whys 125 5S 125 Stabilizing the master

schedule 127 Uniform load 127 Takt time 127 Reducing setup time 128 Single setups 128

∙ Twenty-two Excel spreadsheets are included for solving problems and analyzing case studies using analytic methods.

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188 Part Three Quality

a. Using this five-day sample, is the process of the fish supplier in control in average and range?

b. How can the supplier more carefully control the pro- cess to provide 100 pounds of fish each day?

11. As cereal boxes are filled in a factory, they are weighed for their contents by an automatic

scale. The target value is to put 10 ounces of cereal in each box. Twenty samples of three boxes each have been weighed for quality control purposes. The fill weight for each box is shown below.

a. Calculate the center line and control limits for the _ x

and R charts from these data. b. Plot each of the 20 samples on the

_ x and R control

charts and determine which samples are out of control.

c. Do you think the process is stable enough to begin to use these data as a basis for calculating  x and

_ R

and to begin to take periodic samples of 3 for quality control purposes?

12. A certain process has an upper specification limit of 220 and a lower specification limit of 160. The process standard deviation is 6, and the mean is 170.

a. Calculate Cp and Cpk for this process. b. What could be done to improve the process capabil-

ity Cpk to 1.0? 13. A certain process is under statistical control and

has a mean value of μ = 130 and a standard devia- tion of σ = 8. The specifications for this process are USL = 150, LSL = 100.

a. Calculate Cp and Cpk. b. Which of these indices is a better measure of process

capability? Why? c. Assuming a normal distribution, what percent

of the output can be expected to fall outside the specifications?

14. A customer has specified that they require a process capability of Cp = 1.5 for a certain product. Assume that USL = 1100, LSL = 700, and the process is cen- tered within the specification range.

a. What standard deviation should the process have? b. What is the process mean value? c. What can the company do if it is not capable of

meeting these requirements?

Observation Sample 1 2 3

1 10.01 9.90 10.03 2 9.87 10.20 10.15 3 10.08 9.89 9.76 4 10.17 10.01 9.83 5 10.21 10.13 10.04 6 10.16 10.02 9.85 7 10.14 9.89 9.80 8 9.86 9.91 9.99 9 10.18 10.04 9.96 10 9.91 9.87 10.06 11 10.08 10.14 10.03 12 9.71 9.87 9.92 13 10.14 10.06 9.84 14 10.16 10.17 10.19 15 10.13 9.94 9.92 16 10.16 9.81 9.87 17 10.20 10.10 10.03 18 9.87 9.93 10.06 19 9.84 9.91 9.99 20 10.06 10.19 10.01

∙ Throughout the text, company and industry examples illustrate real use of the ideas.

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a service, rather than volume, is the main characteris- tic that affects the design of the service process and the way the service is delivered.

Self-service by customers is also a consideration in service delivery system design. Customers may serve as labor at key points in a service process, such as bagging their own groceries, or they may complete an entire service process independently, as occurs when they fill their tanks at a self-service gas station. Self-service usually benefits the firm as customers provide “free” labor during service delivery. For self-service to be a successful component of service delivery system design firms must design their service processes carefully for both simplicity and customer satisfaction.

Self-service is possible for any of the types of ser- vices defined in the service delivery system matrix,

from simple standardized services to highly customized services. A key issue for opera- tions managers is designing self-service opportunities that customers are both willing and able to perform. While the relatively simple self-service offered at ATMs appeals to a wide range of customer segments, having to pull one’s retail selections from warehouse shelv- ing (e.g., at IKEA stores) may limit the appeal of the retail service for some segments. An understanding of the needs of a firm’s target customer segments must serve as a guide to the right service delivery system design.

5.4 CUSTOMER CONTACT

We now look at interactions between customers and service organizations in detail to understand how the extent of customer contact relates to service processes. With low- contact services, it is possible to separate a service into two portions: a service creation or production portion and a service consumption or delivery portion. By doing so, the cus- tomer can be removed from the service creation portion. Separating the customer from the service production portion allows for greater standardization of processes and therefore better efficiency. Examples of low-contact services are processing of online orders and ATM transactions. As indicated above, these services are usually designed using a provider-routed approach. See Figure 5.3, in which low-contact services are referred to as buffered core because these services are designed to be buffered or removed from interac- tions with the customer.

At the other end of the contact spectrum, high-contact services involve the customer during the production of the service. Examples are dentistry, haircutting, and consulting. In these services, the customer can introduce uncertainty into the process with a result- ing loss of efficiency. For example, a customer may impose unique requirements on the service provider, resulting in a need for more processing time. In this case, the service delivery system design typically will be customer-routed unless customization has been limited by the provider. These interactions are referred to as reactive in Figure 5.3 because the service delivery system must react to customer requests.

In the middle ground of customer contact, permeable systems have processes that are penetrated by customers in fairly restricted ways, usually via telephone or limited face-to- face contact. Here, limited interaction with customers allows some customer preferences to be met. But such accommodation is restricted to maintain process efficiency.

LO5.4 Describe the effect on the service delivery system of customer contact.

Grocery self-service is a provider-routed service. Syda Productions/Shutterstock

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technology and systems. For example, Southwest Airlines has the most productive employ- ees in the airline industry. As a result of short routes, fast turnaround, and productive employees, Southwest has 40 percent greater aircraft and pilot utilization than its competi- tors. Employee retention and low employee turnover help drive productivity and customer value. Traditionally, the cost of employee turnover considers only the cost of recruiting, hiring, and training replacements. In reality, the greatest cost of turnover is the lost produc- tivity and decreased customer satisfaction associated with new employees. At Southwest Airlines, customer perceptions of service value are high, based on low fares, on-time ser- vice, and friendly and helpful employees.

Employee retention and productivity are driven by having satisfied employees. For example, a study of insurance company employees found that 30 percent of dissatisfied employees intended to leave the company, a potential turnover rate three times that of satis- fied employees. Satisfied employees are the result of internal service quality. This includes the employee selection process, job design, reward systems, and the technology used to support service workers. Focusing management’s attention on improving internal service quality systems to provide support for employees in conducting their work can improve employee satisfaction, productivity, and turnover. Employees will be satisfied with their jobs when they feel that they can act on behalf of customers. This will lead to both employee and customer satisfaction. This is achieved in part by giving front-line employees latitude to use resources to meet customer needs immediately. For example, in Ritz-Carlton Hotels, front-line employees are authorized to spend up to $2000 to satisfy a customer need.

The service-profit chain illustrates the central role of employees in delivering services to customers. During the delivery of services, employees are the “face” of the company and their satisfaction is directly observed by customers, often influencing customer perceptions of the service as well. This differentiates services from manufacturing, since manufacturing employees rarely have direct contact with customers. A manufacturing employee’s effect on customer satisfaction is through the product that the customer may receive days, weeks, or months later. However, the morale, attitude, and satisfaction of service employees is directly—and immediately—related to customer satisfaction and loyalty. There is no buffer zone between service employees and customers in high- or medium-contact services.

The service delivery system design should reflect this direct contact between service employees and customers. This can be done by providing real-time (during the service delivery) tools such as access to customer information to help service employees perform their jobs. For example, bank tellers who can quickly scan relevant portions of a cus- tomer account while the cus- tomer is face-to-face or on the telephone with them can pres- ent banking products that fit the customer profile. Such per- sonalized selling opportunities tend to be more successful than low-contact marketing, such as mail or e-mail. Services can also be improved through so-called “smile training” in which service workers are trained to be nice to customers and seek their satisfaction even in pressure situations. Service workers should be rewarded for

Harrah’s uses superior customer service to increase profits. Leonard Zhukovsky/123RF

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470

The changeover cost of the production line depends on which type of mower is being produced and the next production model planned. For example, it is relatively easy to change over from the 20-inch push mower to the 20-inch self-propelled mower, since the mower frame is the same. The self-propelled mower has a propulsion unit added and a slightly larger engine. The company estimated the changeover costs as shown in Exhibit 2.

Lawn King fabricates the metal frames and metal parts for its lawn mowers in its own machine shop. These fabri- cated parts are sent to the assembly line along with parts purchased directly from vendors. In the past year, approx- imately $8 million in parts and supplies were purchased, including engines, bolts, paint, wheels, and sheet steel. An inventory of $1 million in purchased parts is held to supply the machine shop and the assembly line. When a particular mower is running on the assembly line, only a few days of parts are kept at the plant, since supplies are constantly coming into the factory.

John Conner, marketing manager for Lawn King, looked over the beautiful countryside as he drove to the cor- porate headquarters in Moline, Illinois. John had asked his boss, Kathy Wayne, the general manager of Lawn King, to call a meeting in order to review the latest fore- cast figures for fiscal year 2020.1 When he arrived at the plant, the meeting was ready to begin. Others in attendance at the meeting were James Fairday, plant manager; Joan Peterson, controller; and Harold Pinter, personnel officer.

John started the meeting by reviewing the latest situ- ation: “I’ve just returned from our annual sales meeting, and I think we lost more sales last year than we thought, due to back-order conditions at the factory. We have also reviewed the forecast for next year and feel that sales will be 110,000 units in fiscal year 2020. The marketing department feels this forecast is realistic and could be exceeded if all goes well.”

At this point, James Fairday interrupted by saying, “John, you’ve got to be kidding. Just three months ago we all sat in this same room and you predicted sales of 98,000 units for fiscal 2020. Now you’ve raised the forecast by 12 percent. How can we do a reasonable job of production planning when we have a moving target to shoot at?”

Kathy interjected, “Jim, I appreciate your concern, but we have to be responsive to changing market condi- tions. Here we are in September and we still haven’t got a firm plan for fiscal 2020, which has just started. I want to use the new forecast and develop a Sales and Opera- tions Plan (S&OP) for next year as soon as possible.”

John added, “We’ve been talking to our best custom- ers, and they’re complaining about back orders during the peak selling season. A few have threatened to drop our product line if they don’t get better service next year. We have to produce not only enough product but also the right models to service the customer.”

MANUFACTURING PROCESS Lawn King is a small-sized producer of lawn mower equipment. Last year, sales were $14.5 million and pretax profits were $2 million, as shown in Exhibit 1. The com- pany makes four lines of lawn mowers: an 18-inch push mower, a 20-inch push mower, a 20-inch self-propelled mower, and a 22-inch deluxe self-propelled mower. All these mowers are made on the same assembly line. Dur- ing the year, the line is changed over from one mower to the next to meet the actual and projected demand.

Case Study Lawn King, Inc.: Sales and Operations Planning

EXHIBIT 1 Profit and loss statement ($000).

FY2018 FY2019

Sales $ 11,611 $ 14,462 Cost of goods sold Materials 6,340 8,005 Direct labor 2,100 2,595 Depreciation 743 962 Overhead 256 431 Total CGS 9,439 11,993 G&A expense 270 314 Selling expense 140 197 Total expenses 9,849 12,504 Pretax profit 1,762 1,958

1The Lawn King 2020 fiscal year runs from September 1, 2019, to August 31, 2020.

This case was prepared by Roger G. Schroeder for class discussion. Copyright © by Roger G. Schroeder, 2016, 2019. All rights are reserved. Reprinted with permission.

Pixtal/age fotostock

∙ Case studies provide students practice in formulating and solving unstructured problems.

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Preface ix

∙ At the end of every chapter, Learning Enrichment boxes provide videos and websites where students can extend their knowledge on chapter topics using Internet content.

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50 Part One Introduction

∙ 3D printing, or additive manufacturing is useful for creating product prototypes. The speed and flexibility of this new technology enhances product design opportunities.

∙ Supply chain collaboration in NPD is essential. This should be accomplished by col- laborating with both customers and suppliers in the NPD process.

∙ QFD is used to connect customer attributes to engineering characteristics. This typi- cally is done through a technique called the house of quality that can be used for both manufacturing and services.

∙

considering only the combinations of options that have significant market demand.

Key Terms Market pull 38 Technology push 38 Interfunctional view 39 Concept development 40 Product design 40 Pilot production/testing 40 Process design 40

Quality function deployment 45 House of quality 45 Customer attributes 46 Engineering characteristics 46 Trade-offs 46 Target value 46 Modular design 48

Production prototypes 41 3D printing 41 Additive manufacturing 41 Misalignment 42 Sequential process 42 Concurrent engineering 42 Collaboration 43

LEARNING ENRICHMENT (for self-study or instructor assignments)

What Is the New Product Development Process? Video https://youtu.be/vQZjNIRpuFg 2:49

Tools for Accelerating a Cross-functional Design Process Web Link https://www.mckinsey.com/business-functions/operations/our-insights/ accelerating-product-development-the-tools-you-need-now

Prototyping Video https://youtu.be/5SWt-TSYD08 2:26

3D Printing Prototype Example Video https://youtu.be/RpFTRT8FkP0 3:02

Sustainability in New Product Development Video https://youtu.be/-HS-slU-XTc 3:56

Discussion Questions 1. Why is cross-functional cooperation important for new

product design? What are the symptoms of a possible lack of cooperation?

2. In what circumstances might a market-pull approach or a technology-push approach to new product design be the best approach?

3. Describe the steps that might be required in writing and producing a play. Compare these steps to the three steps for NPD described in Section 3.2. How are they similar?

4. Why has there been an increase in product variety in global markets?

5. How can modular design help to control production variety and at the same time allow product variety?

6. What is the proper role of the operations function in product design?

7. What form does the product specification take for the following firms: a travel agency, a beer company, and a consulting firm?

KEY CHANGES IN THE EIGHTH EDITION This book is known for its decision orientation and case studies. We have strengthened the decision-making framework by adding new material on digital technology, lean systems, sustainability, and global supply chains. We also include new and existing cases to address these decisions. The Eighth Edition features a new 4-color design and the following major changes:

1. Cross-functional. Most books for operations and supply chain core courses are merely summaries for majors in operations and supply chain management. None address the general business student who is interested in Marketing, Finance, Accounting, or Information Systems. We make this book more applicable and interesting to the approximately 80 percent of business students who don’t major in operations and supply chain management. We add cross-functional materials in each chapter to show how the topics apply to non-majors. The handshake symbols in the margin identify the content.

2. Digital Technology. The Eighth Edition has substantial updates and additions on four digital technologies. 3D printing is becoming useful for producing spare parts, custom manufacturing, medical devices, dental implants, and architectural models. Blockchain software is being developed and tested by many global logistics compa- nies. Artificial intelligence is rapidly developing for service applications, automo- biles, and manufacturing plants. Analytics are being applied to both large and small databases. Analytics that are descriptive, predictive, or prescriptive in nature are discussed. These digital technologies are described in detail in several chapters in the book.

3. Supply Chain Sustainability. We introduce the idea of the triple bottom line regarding environmental, social, and economic sustainability. Sustainability is preserving the earth and resources for future generations. Environmental sustainability is related to global warming, clean water, clean air, and environmental protection. Social sustainability means hiring a diverse workforce, ethical practices, providing equal opportunity, and safe working conditions, for example. Economic sustainability is making a sufficient profit for the firm’s survival in the future. Operations and supply chain managers are actively pursuing all three aspects of sustainability of operations and associated supply chains.

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50 Part One Introduction

∙ 3D printing, or additive manufacturing is useful for creating product prototypes. The speed and flexibility of this new technology enhances product design opportunities.

∙ Supply chain collaboration in NPD is essential. This should be accomplished by col- laborating with both customers and suppliers in the NPD process.

∙ QFD is used to connect customer attributes to engineering characteristics. This typi- cally is done through a technique called the house of quality that can be used for both manufacturing and services.

∙ Modular design is used to minimize the number of different parts needed to make a product line of related products. This can be done by designing standard modules and considering only the combinations of options that have significant market demand.

Key Terms Market pull 38 Technology push 38 Interfunctional view 39 Concept development 40 Product design 40 Pilot production/testing 40 Process design 40

Quality function deployment 45 House of quality 45 Customer attributes 46 Engineering characteristics 46 Trade-offs 46 Target value 46 Modular design 48

Production prototypes 41 3D printing 41 Additive manufacturing 41 Misalignment 42 Sequential process 42 Concurrent engineering 42 Collaboration 43

LEARNING ENRICHMENT (for self-study or instructor assignments)

What Is the New Product Development Process? Video https://youtu.be/vQZjNIRpuFg 2:49

Tools for Accelerating a Cross-functional Design Process Web Link https://www.mckinsey.com/business-functions/operations/our-insights/ accelerating-product-development-the-tools-you-need-now

Prototyping Video https://youtu.be/5SWt-TSYD08 2:26

3D Printing Prototype Example Video https://youtu.be/RpFTRT8FkP0 3:02

Sustainability in New Product Development Video https://youtu.be/-HS-slU-XTc 3:56

Discussion Questions 1. Why is cross-functional cooperation important for new

product design? What are the symptoms of a possible lack of cooperation?

2. In what circumstances might a market-pull approach or a technology-push approach to new product design be the best approach?

3. Describe the steps that might be required in writing and producing a play. Compare these steps to the three steps for NPD described in Section 3.2. How are they similar?

4. Why has there been an increase in product variety in global markets?

5. How can modular design help to control production variety and at the same time allow product variety?

6. What is the proper role of the operations function in product design?

7. What form does the product specification take for the following firms: a travel agency, a beer company, and a consulting firm?

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x Preface

4. Global Supply Chains. In this new edition we have increased our attention to global supply chains by adding new sections on global services, global sourcing, and global logistics. The text explains how to make global decisions that balance the lower costs of overseas sourcing and logistics with the risks of quality failures, loss of intellectual property, increased monitoring costs, and exposure to financial and political risks.

5. Lean Systems. Most books discuss up to 15 techniques of lean including reduced setup time, small lot sizes, uniform load, and takt time. We have completely reor- ganized the lean chapter around the five tenets and principles of lean systems to include all of these techniques. This clarifies lean systems in terms of creating value for the customer, eliminating waste, ensuring flow, customer pull, and striv- ing for perfection.

6. Practical Examples. The text contains over 70 practical examples of concepts, ideas, and analytics. Nineteen new Operations Leader boxes have been added for companies including Southwest Airlines, Lego Group, Culver’s, Nike, LG Electronics, and Trader Joe’s. In addition twenty-five existing Operations Leader boxes have been updated in the various chapters.

7. Learning Enrichment boxes. Every chapter ends with a Learning Enrichment box for student self-study or instructor assignments. These boxes have YouTube video links and websites that expand on the coverage in the chapter. They cover ideas from the chapter in more detail or provide examples of the how the ideas are used. This is one of the first books to make extensive use of the Internet to enrich the material covered in the text.

When reviewers of this book were asked how they would describe the text to a col- league, they said:

“I would highly recommend the book to them. While other textbooks either focus on the techniques or concepts, this book does a good job in addressing both equally well.”

“A solid textbook that is well-written. Good coverage of basic operations management material.”

“It is a guide to operations that takes a practical approach with a strong emphasis on case materials to put concepts into practice.”

CHAPTER REVISIONS AND CASES FOR THE EIGHTH EDITION 1. Introduction to Operations. The first part of the chapter is rewritten to clearly define

operations and supply chain management. A new section explains the role of operations in the firm and the economy including productivity calculations. The triple bottom line is defined for environmental, social, and economic sustainability. Internet links are pro- vided in the Learning Enrichment box on sustainability and globalization.

2. Operations and Supply Chain Strategy. A new Operations Leader box on Southwest Airlines is added. Sustainability, as an objective, is added to cost, quality, delivery and flexibility. Emphasis is placed on decision making in operations that is contingent on strategy.

3. Product Design. New content is added on the use of 3D printing for creating proto- types. Concurrent engineering is illustrated using a new example from NASA. New Operations Leader boxes describe how The LEGO Group tackles sustainability chal- lenges and how TPI Composites is developing and manufacturing blades for wind tur- bine energy systems.

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Preface xi

4. Process Selection. There is a new example of focused operations in a service firm, Midwest Orthopedic Specialty Hospital. Two new Operations Leader boxes describe the food production system at Culver’s and mass customization at Nike. We also expand on the role of 3D printing in modern manufacturing, particularly in the medi- cal sector.

5. Service Process Design. The relevance of service operations to non-majors is dis- cussed. A new Operations Leader box on the City of Fort Collins is added. This edition is the first to offer sections on Technology for Services and Globalization of Services.

6. Process-Flow Analysis. Cross-functional material is added to show its importance to systems thinking. A Learning Enrichment box is included with YouTube videos and Internet links on process mapping, Little’s Law, and queueing at Disney.

7. Lean Thinking and Lean Systems. This chapter is completely reorganized around the five lean tenets to clarify the principles and concepts underlying lean thinking. New material is added on cellular manufacturing and the pull system. The chapter is the first to take a principle and conceptual approach to lean systems, rather than a list- ing of techniques and methods used.

8. Managing Quality. YouTube videos are added to the Learning Enrichment box to expand on ISO9000 certification, mistake proofing, and the Baldrige Award for health care. Quality is expanded to include the entire supply chain, not just the focal firm. The highly cross-functional nature of quality is emphasized.

9. Quality Control and Improvement. We explain why all business students should learn about quality control. The difference between special causes and common causes is emphasized. We clarify the differences between statistical process control and pro- cess capability. The section on Six Sigma was rewritten to expand the content.

10. Forecasting. We shift our description of forecasting to “analytics” so that students can understand how the popular focus on analytics is utilized in operations and supply chain. There is a new section on big data and its use in forecasting, along with a new Operations Leader box on how Amazon uses big data in its own forecasting. When and how to use MADt is clarified, in addition to many minor clarifications in using formulas throughout the chapter.

11. Capacity Planning. We expand discussion about how all functions are involved in and impacted by capacity planning. Improvements in the descriptions of Sales and Operations Planning (S&OP) as well as aggregate planning help to clarify the process involved and the challenges faced. Calculations for level and chase strategies are clari- fied. New Operations Leader boxes on Delta Airlines and Hostess Brands make these concepts tangible for students.

12. Scheduling Operations. We add new material on the theory of constraints about how to identify the bottleneck constraint and eliminate it while subordinating everything else. In the Learning Enrichment box interesting YouTube videos are provided on job shop scheduling at Washburn Guitar, round-robin CPU scheduling, and the theory of constraints.

13. Project Planning and Scheduling. The chapter is updated to illustrate the many industry settings in which projects require skilled management—from manufacturing to service firms, nonprofits, and government. A new Operations Leader box on the Carlsbad Desalination Plant in San Diego provides a nice example of a major multi- government project. Other updates include the Project Management Institute’s Body of Knowledge in Table 13.3.

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xii Preface

14. Independent Demand Inventory. The chapter includes additional content on ven- dor managed inventory (VMI), along with a new Operations Leader box illustrating VMI at Procter and Gamble Co. An additional new Operations Leader box on IKEA describes the use of a min/max inventory replenishment system. The Learning Enrich- ment box at the end of the chapter provides video and web sources for additional information.

15. Materials Requirements Planning and ERP. We clarify for students exactly which elements constitute the MRP system. We also describe the use of Oracle’s ERP soft- ware at Cleveland Clinic to help students understand the breadth of these system’s use in industry. A new Operations Leader box on LG Electronics provides a useful illustra- tion of how a global firm benefits from these systems.

16. Supply Chain Management. This is one of the first books to have a separate section on blockchain technology to explain its uses and methods. More details are also pro- vided on the SCOR model. We rewrote the section on measures of throughput time, cash-to-cash cycle time and total delivered cost for analyzing an entire supply chain. We added a new section on the Amazon effect and omni-channel marketing, also a first in textbooks.

17. Sourcing. The chapter includes an entirely new section on Global Sourcing, including discussion of risks and benefits. Presentation of Total Cost Analysis is expanded. A new Operations Leader box on Trader Joe’s sourcing strategy will appeal to students.

18. Global Logistics. A new section on Global Logistics includes a figure to illustrate the multimodal activities in global supply chains. The concepts of intermodal and ship- ping zones have been added and described. A new Operations Leader box on Home Depot provides insight on how online sales are served from stores and warehouses, while an expanded box on Ryder gives students a glimpse of the people and assets needed for this major 3PL provider.

Case Study Revisions A few of the 19 case studies are described below:

Amazon Revolutionizes Supply Chain Management. This new case, written exclusively for this book, describes the evolution of Amazon’s supply chain and its purchase of Whole Foods. It challenges students to think about how Amazon can change the future of Whole Foods to increase its revenues and earnings. The case also contrasts what Walmart is doing to use e-commerce to compete with Amazon. The case asks students to define the effect of the emergent business strategies of Amazon and Walmart on the supply chains of these companies in terms of locations, sourcing, capacity, and inventory.

Operations Strategy at BYD of China, Electrifying the World’s Automotive Market. BYD, the leading electric vehicle company in the world, must develop a strategy for adapt- ing its supply chain in the future. We updated this case from its last update in 2015 and revised the teaching note for this rapidly changing industry.

Early Supplier Integration for John Deere Skid-Steer Loader. Deere and Company must decide how to involve suppliers in the design of its new Skid-Steer Loader. This case is updated and the teaching note revised.

The Evolution of Lean Six Sigma at 3M Inc. Students are asked to evaluate 3M’s use of Six Sigma and lean thinking. We added significant new information since the last update in 2012.

Consolidated Electric: Inventory Control. Management is designing a new inven- tory control system. The student questions are tailored to increase student learning about this system.

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Preface xiii

Altimus Brands: Managing Procurement Risk. Altimus is deciding which of four off- shore suppliers offers the lowest cost and risk for future purchase contracts. We updated the case and wrote a new teaching note.

ShelterBox: A Decade of Disaster Relief. After the Haiti earthquake of 2010, ShelterBox provided immediate relief and is considering what decisions should be made in advance of future disasters. A new teaching note was written for this case.

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

Instructor Library. The Connect Operations Management Instructor Library is your repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. The Connect Instructor Library includes: ∙ Solutions Manual. Prepared by the authors, this manual contains solutions to all the

end-of-chapter problems and cases. ∙ Test Bank. The Test Bank includes true/false, multiple-choice, and discussion ques-

tions/problems at varying levels of difficulty. All test bank questions are also available in a flexible electronic test generator. The answers to all questions are given, along with a rating of the level of difficulty, chapter learning objective met, Bloom’s taxonomy question type, and the AACSB knowledge category.

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

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

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

∙ Technical Chapters. Additional Operations analytics are available in four inline Tech- nical Chapters. These are available in the Instructor Resource Library through Connect, or by visiting the URL at www.mhhe.com/schroeder8e The instructor and student resources can also be accessed directly at www.mhhe.com/

schroeder8e.

Tegrity Campus: Lectures 24/7 Tegrity Campus is a service that makes class time available 24/7 by automatically cap- turing every lecture in a searchable format for students to review when they study and complete assignments. With a simple one-click start-and-stop process, you capture all computer screens and corresponding audio. Students can replay any part of any class with easy-to-use browser-based viewing on a PC or Mac.

Educators know that the more students can see, hear, and experience class resources, the better they learn. In fact, studies prove it. With Tegrity Campus, students quickly recall key moments by using Tegrity Campus’s unique search feature. This search helps stu- dents efficiently find what they need, when they need it, across an entire semester of class recordings. Help turn all your students’ study time into learning moments immediately supported by your lecture. To learn more about Tegrity, watch a two-minute Flash demo at http://tegritycampus.mhhe.com.

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xiv Preface

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

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Preface xv

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

The authors would also like to thank the staff at McGraw-Hill Education who had a direct hand in the editing and production of the text, including Ryan McAndrews, product developer; Noelle Bathurst, portfolio manager; Harper Christopher, executive marketing manager; and Fran Simon and Angela Norris, project managers.

We would like to thank our colleagues at the University of Minnesota who listened to our ideas and provided suggestions for book improvement. Additional thanks go to Doug and Letty Chard, who diligently and carefully prepared the index. We would also like to thank Tom Buchner of the University of Minnesota who carefully prepared the test bank questions. Our thanks to Ed Pappanastos of Troy University for constructing the Connect solutions to problems. Finally, we thank our families for their patience and perseverance during the many months of writing and editing. Without their support and encouragement this textbook would not have been possible.

Roger G. Schroeder

Susan Meyer Goldstein

Abirami Radhakrishnan Morgan State University

Anita Lee-Post University of Kentucky

Canchu Lin Carroll University

Enar Tunc California Polytechnic State University San Luis Obispo

John Wu California State University San Bernardino

Jooh Lee Rowan University

Jose Ablanedo-Rosas University of Texas El Paso

Kathy Schaefer Southwest Minnesota State University

Kimball Bullington Middle Tennessee State University

Kwasi Amoako-Gyampah University of North Carolina Greensboro

Mark Goudreau Johnson & Wales University

Mark Hanna Georgia Southern University

Mark Jacobs University of Dayton

Richard Hopfensperger Marian University of Wisconsin

Ross Fink Bradley University

Steven Dickstein Fisher College- Ohio State University

Therese Gedemer Marian University of Fond du Lac

Todd Henning Indiana University

Veena Adlakha University of Baltimore

Weiyong Zhang Old Dominion University

William Ramshaw Eastern Washington University

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xviii

Brief Table of Contents About the Authors iv Preface v

PART ONE Introduction 1 1 Introduction to Operations 2 2 Operations and Supply Chain

Strategy 20 3 Product Design 37

PART TWO Process Design 53 4 Process Selection 54 5 Service Process Design 76 6 Process-Flow Analysis 97 7 Lean Thinking and Lean

Systems 118

PART THREE Quality 141 8 Managing Quality 142 9 Quality Control and

Improvement 163

PART FOUR Capacity and Scheduling 189 10 Forecasting 190

Supplement: Advanced Methods 215

11 Capacity Planning 220

12 Scheduling Operations 249 13 Project Planning and Scheduling 267

PART FIVE Inventory 291 14 Independent Demand Inventory 292

Supplement: Advanced Models 320 15 Materials Requirements Planning

and ERP 323

PART SIX Supply Chain Decisions 347 16 Supply Chain Management 348 17 Sourcing 376 18 Global Logistics 397

PART SEVEN Case Studies 423

APPENDIXES 507

INDEX 509

ACRONYMS 519 Technical Chapters available in the Instructor’s Resource Library in Connect

Waiting Lines Simulation Transportation Method Linear Programming

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xix

Contents About the Authors iv Preface v

PART ONE INTRODUCTION 1

Chapter 1 Introduction to Operations 2 1.1 Definition of Operations and Supply Chain

Management 3 1.2 The Role of Operations and Supply Chain

Management 4 1.3 Why Study Operations and Supply Chain

Management? 6 1.4 Decisions at Pizza U.S.A. 9 1.5 Operations Decisions in the Supply

Chain—A Framework 10 1.6 Cross-Functional Decision Making 12 1.7 Operations as a Process 13 1.8 Trends in Operations and Supply Chain

Mangement 15 Sustainability 15

Services 15

Digital Technologies 16

Integration of Decisions Internally and

Externally 16

Globalization of Operations and the Supply

Chain 17

1.9 Key Points and Terms 17 Learning Enrichment 18

Discussion Questions 18

Chapter 2 Operations and Supply Chain Strategy 20 2.1 Operations Strategy Model 22

Corporate and Business Strategy 23

Operations Mission 24

Operations Objectives 24

Strategic Decisions 25

Distinctive Competence 26

2.2 Competing with Operations Objectives 27 2.3 Cross-Functional Strategic Decisions 28

2.4 Global Operations and Supply Chains 30 2.5 Supply Chain Strategy 31 2.6 Environment and Sustainable

Operations 33 2.7 Key Points and Terms 34

Learning Enrichment 35

Discussion Questions 36

Chapter 3 Product Design 37 3.1 Strategies for New Product

Introduction 38 3.2 New Product Development Process 39

Concept Development 40

Product Design 40

Pilot Production/ Testing 41

3.3 Cross-Functional Product Design 42 3.4 Supply Chain Collaboration 43 3.5 Quality Function Deployment 45

Customer Attributes 46

Engineering Characteristics 46

3.6 Modular Design 48 3.7 Key Points and Terms 49

Learning Enrichment 50

Discussion Questions 50

PART TWO PROCESS DESIGN 53

Chapter 4 Process Selection 54 4.1 Product-Flow Characteristics 55 4.2 Approaches to Order Fulfillment 60 4.3 Process Selection Decisions 63 4.4 Product-Process Strategy 64 4.5 Focused Operations 66 4.6 Mass Customization 67 4.7 3D Printing and Additive

Manufacturing 69 4.8 Environmental Concerns 70 4.9 Cross-Functional Decision Making 71 4.10 Key Points and Terms 72

Learning Enrichment 74

Discussion Questions 74

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Chapter 5 Service Process Design 76 5.1 Defining Service 78 5.2 Service-Product Bundle 79 5.3 Service Delivery System Matrix 80 5.4 Customer Contact 83 5.5 Service Recovery and Guarantees 86 5.6 Technology for Services 87

Artificial Intelligence 88

5.7 Globalization of Services 90 5.8 Service Profitability and Employees 92 5.9 Key Points and Terms 94

Learning Enrichment 95

Discussion Questions 96

Chapter 6 Process-Flow Analysis 97 6.1 Process Thinking 98 6.2 The Process View of Business 99 6.3 Process Flowcharting 100 6.4 Process-Flow Analysis as Asking

Questions 104 6.5 Process Analytics 106 6.6 Analyzing Process Flows at Pizza

U.S.A. 108 6.7 Process Redesign 110 6.8 Key Points and Terms 112

Learning Enrichment 113

Solved Problems 113

Discussion Questions 115

Problems 115

Chapter 7 Lean Thinking and Lean Systems 118 7.1 Evolution of Lean 119 7.2 Lean Tenets 120

Create Value 120

Value Stream 121

Ensure Flow 122

Customer Pull 123

Strive for Perfection 124

7.3 Ensure Flow 126 Stabilize Master Schedule 127

Reducing Setup Time and Lot Sizes 127

Changing Layout and Maintenance 129

Cross-Training and Engaging

Workers 130

7.4 Customer Pull 130 7.5 Changing Relationships with

Suppliers 133 7.6 Implementation of Lean 135 7.7 Key Points and Terms 137

Learning Enrichment 138

Solved Problems 138

Discussion Questions 139

Problems 140

PART THREE QUALITY 141

Chapter 8 Managing Quality 142 8.1 Quality as Customer Requirements 143 8.2 Product Quality 144 8.3 Service Quality 146 8.4 Quality Planning, Control, and

Improvement 146 8.5 Mistake-Proofing 149 8.6 Ensuring Quality in the Supply

Chain 150 8.7 Quality, Cost of Quality, and Financial

Performance 151 8.8 Quality Pioneers 154

W. Edwards Deming 154

Joseph Juran 154

8.9 ISO 9000 Standards 156 8.10 Malcolm Baldrige Award 158 8.11 Why Some Quality Improvement Efforts

Fail 160 8.12 Key Points and Terms 161

Learning Enrichment 162

Discussion Questions 162

Chapter 9 Quality Control and Improvement 163 9.1 Design of Quality Control

Systems 164 9.2 Process Quality Control 167 9.3 Attribute Control Chart 169 9.4 Variables Control Chart 170 9.5 Using Control Charts 171 9.6 Process Capability 172 9.7 Continuous Improvement 174 9.8 Six Sigma 178

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Contents xxi

9.9 Lean and Six Sigma 180 9.10 Key Points and Terms 182

Learning Enrichment 183

Solved Problems 183

Discussion Questions 186

Problems 186

PART FOUR CAPACITY AND SCHEDULING 189

Chapter 10 Forecasting 190 10.1 Forecasting for Decision Making 192 10.2 Qualitative Forecasting Methods 193 10.3 Time Series Analytics 195 10.4 Moving Average 196 10.5 Exponential Smoothing 198 10.6 Forecast Accuracy 201 10.7 Advanced Time-Series Forecasting 203 10.8 Causal Forecasting Analytics 204 10.9 Selecting a Forecasting Method 206

Big Data 207

10.10 Collaborative Planning, Forecasting, and Replenishment 208

10.11 Key Points and Terms 209 Learning Enrichment 210

Solved Problems 210

Discussion Questions 212

Problems 213

Supplement: Advanced Methods 215

Chapter 11 Capacity Planning 220 11.1 Capacity Defined 221 11.2 Facilities Decisions 223

Amount of Capacity 224

Size of Facilities 225

Timing of Facility Decisions 226

Facility Location 226

Types of Facilities 227

11.3 Sales and Operations Planning 228 11.4 Cross-Functional Nature of S&OP 230 11.5 Planning Options 231 11.6 Basic Aggregate Planning

Strategies 233 11.7 Aggregate Planning Costs 234 11.8 Aggregate Planning Example 235

11.9 Key Points and Terms 239 Learning Enrichment 240

Solved Problems 240

Discussion Questions 245

Problem 246

Chapter 12 Scheduling Operations 249 12.1 Batch Scheduling 250 12.2 Gantt Charts 251 12.3 Finite Capacity Scheduling 254 12.4 Theory of Constraints 256 12.5 Priority Dispatching Rules 258 12.6 Planning and Control Systems 260 12.7 Key Points and Terms 262

Learning Enrichment 263

Solved Problems 263

Discussion Questions 265

Problems 265

Chapter 13 Project Planning and Scheduling 267 13.1 Objectives and Trade-offs 268 13.2 Planning and Control in Projects 269 13.3 Scheduling Methods 272 13.4 Constant-Time Networks 273 13.5 CPM Method 279 13.6 Use of Project Management

Concepts 281 13.7 Key Points and Terms 282

Learning Enrichment 283

Solved Problems 284

Discussion Questions 287

Problems 287

PART FIVE INVENTORY 291

Chapter 14 Independent Demand Inventory 292 14.1 Definition of Inventory 293 14.2 Purpose of Inventories 295 14.3 Costs of Inventory 296 14.4 Independent versus Dependent

Demand 297

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xxii Contents

14.5 Economic Order Quantity 298 14.6 Continuous Review System 302 14.7 Periodic Review System 306 14.8 Using P and Q Systems in Practice 309 14.9 Vendor Managed Inventory 311 14.10 ABC Classification of Inventory 312 14.11 Key Points and Terms 313

Learning Enrichment 314

Solved Problems 315

Discussion Questions 317

Problems 317

Supplement: Advanced Models 320

Chapter 15 Materials Requirements Planning and ERP 323 15.1 The MRP System 324 15.2 MRP versus Order-Point Systems 326 15.3 Parts Explosion: How an MRP System

Works 327 15.4 MRP System Elements 332

Master Scheduling 332

Bill of Materials (BOM) 333

Inventory Records 333

Capacity Planning 334

Purchasing 334

Shop-Floor Control 334

15.5 Operating an MRP System 335 15.6 The Successful MRP System 336 15.7 Enterprise Resource Planning

Systems 337 15.8 Key Points and Terms 340

Learning Enrichment 341

Solved Problem 341

Discussion Questions 343

Problems 344

PART SIX 347 SUPPLY CHAIN DECISIONS 347

Chapter 16 Supply Chain Management 348 16.1 Supply Chain and Supply Chain

Management 349 16.2 Measuring Supply Chain Performance 351

16.3 Supply Chain Dynamics—The Bullwhip Effect 355

16.4 Improving Supply Chain Performance 358

16.5 Supply Chain Structural Improvements 358

16.6 Supply Chain System Improvements 361 16.7 Technology and Supply Chain

Management 362 E-commerce and Omni-channel

Marketing 364

Blockchain Technology 364

16.8 Supply Chain Risk and Resilience 366 Analysis of Supply Chain Risk 367

16.9 Sustainability of the Supply Chain 369 16.10 Key Points and Terms 372

Learning Enrichment 374

Discussion Questions and Problems 374

Chapter 17 Sourcing 376 17.1 Importance of Sourcing 377 17.2 Sourcing Goals 378 17.3 Insource or Outsource? 378

Advantages of Outsourcing 379

Disadvantages of Outsourcing 380

Total Cost Analysis 381

17.4 Offshoring 382 Costs of Offshoring 382

Reshoring 383

17.5 Global Sourcing 384 17.6 Supply Base Optimization 385

Spend Analysis 385

Total Number of Suppliers 385

Single or Multiple Suppliers 386

17.7 The Purchasing Cycle 387 Internal User-Buyer Interface 387

Sourcing Make-Buy Decision 388

Find Suppliers 388

Supplier Selection 388

Supplier Relationship Management 389

17.8 Challenges Facing Purchasing 389 17.9 Key Points and Terms 391

Learning Enrichment 392

Solved Problems 393

Discussion Questions 394

Problems 394

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Chapter 18 Global Logistics 397 18.1 Role of Logistics in Supply Chain

Management 398 18.2 Transportation 400

Transportation Economics 400

Modes of Transportation 401

Selecting the Transportation Mode 404

18.3 Distribution Centers and Warehousing 405 18.4 Logistics Networks 408

Location 408

Number of Warehouses (Distribution

Centers) 411

18.5 Global Logistics 412 18.6 Third-Party Logistics Providers 414 18.7 Logistics Strategy 416 18.8 Key Points and Terms 418

Learning Enrichment 419

Solved Problems 419

Discussion Questions 421

Problems 421

PART SEVEN CASE STUDIES Introduction 423

Operations Strategy at BYD of China, Electrifying the World’s Automotive Market 424

Early Supplier Integration for John Deere Skid-Steer Loader 430

Process Design

Eastern Gear, Inc.: Job Shop 432 Sage Hill Inn Above Onion Creek: Focusing

on Service Process and Quality 435 U.S. Stroller: Lean 439 The Westerville Physician Practice: Value

Stream Mapping 445

Quality

Mayo Clinic and the Path to Quality 449 Toledo Custom Manufacturing: Quality

Control 455 The Evolution of Lean Six Sigma at

3M, Inc. 457

Capacity and Scheduling

Best Homes, Inc.: Forecasting 463 Polaris Industries Inc.: Global Plant

Location 465 Lawn King, Inc.: Sales and Operations

Planning 470

Inventory

Consolidated Electric: Inventory Control 474

Southern Toro Distributor, Inc. 479 ToysPlus, Inc.: MRP 485

Supply Chain

Amazon Revolutionizes Supply Chain Management 489

Altimus Brands: Managing Procurement Risk 496

Murphy Warehouse Company: Sustainable Logistics 499

ShelterBox: A Decade of Disaster Relief 503

APPENDIXES A Areas Under the Standard Normal

Probability Distribution 507 B Random Number Table 508

INDEX 509

ACRONYMS 519

Online Technical Chapters Technical Chapters available in the

Instructor’s Resource Library in Connect

Waiting Lines Simulation Transportation Method Linear Programming

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1. Introduction to Operations

2. Operations and Supply Chain Strategy

3. Product Design

The introductory part of this text provides an overview of operations management in the supply chain. In Chapter 1 students gain an appreciation for the importance to the firm of decisions made in the operations function and its associated supply chain. In Chapter 2 the need for strategy to guide all decision making is emphasized. In Chapter 3 new product design is treated as a cross- functional decision responsibil- ity that precedes the production and delivery of goods or services. ■

Pa rt i

Introduction

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2

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The operations and supply chain management field deals with the production of goods and services and management of the associated supply chain. Every day we come in contact with an abundant array of goods and services, all of which are produced by the operations function within the firm. Without management of operations and its associated supply chain, a modern industrialized society cannot exist. The operations function is the engine that creates goods and services for the firm and in aggregate the global economy.

Supply chains are critical in supporting operations within the firm. Supply chains con- sist of a network of organizations outside the firm that supply the materials and services to the firm and distribute the product or service to the ultimate customer. A global supply chain engages in all the activities and processes needed to plan, source, make, deliver, and return or dispose of a set of products or services. Managing the supply chain is essential in addition to managing internal operations of the firm.

1 c h a p t e r

Introduction to Operations

LO1.1 Define operations and supply chain management.

LO1.2 Review the role of operations in the firm and the economy.

LO1.3 Describe the five main decisions made by operations and supply chain managers.

LO1.4 Explain the nature of cross-functional decision making with operations.

LO1.5 Describe typical inputs and outputs of an operations transformation system.

LO1.6 Analyze trends in operations and supply chain management.

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

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This book deals with operations management in the supply chain. This means we take a supply chain per- spective to traditional operations. We take ideas from operations management within the firm and combine them with a view of the entire supply chain.

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

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

In the past when the field was primarily related to manufacturing, operations management was called pro- duction management. Later, the name was expanded to operations management to include both manufacturing and service industries. Now it has been expanded again

to operations and supply chain management to include not only operations, but also its associated supply chain.

1.1. DEFINITION OF OPERATIONS AND SUPPLY CHAIN MANAGEMENT

Operations management is defined as managing the production of goods and services. The focus is on production within an organization, for example, production within the four walls of a factory or within multiple factories in a company. Similarly, production of services is treated as within individual service locations or across multiple locations within a single company.

Operations management focuses on decisions for the internal production of the firm’s products or services.

1 U.S. Census Bureau, Statistical Abstract of the U.S., Washington, D.C. 2019 ed.

LO1.1 Define operations and supply chain management.

Apple manages a complex supply chain and operations across the globe. Jill Braaten/McGraw-Hill Education

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4 Part One Introduction

Supply chain management deals with managing the flow of materials, information, and money across multiple organizations from the suppliers to operations to distribution to the final customer, along with reverse flows. The entire supply chain is included from the raw materials through suppliers, factories, warehouses, and retailers to the ultimate customer as shown in Figure 1.1. Reverse flows also occur in the supply chain for returned products, recycled products, and information.

Operations and supply chain management deals with the sourcing, production and distribu- tion of the product or service along with managing the relationships with supply chain partners.

This definition expands the notion of operations and reflects the role of operations in the supply chain. It adds sourcing and distribution to the traditional definition of operations, and it adds managing the relationships/interactions with supply chain partners. Sourcing, also called purchasing, works with manufacturing and service suppliers of the firm and is part of the larger definition of operations and supply chain management. Distribution, also called logistics, is concerned with transporting materials into operations and taking the output of operations to the ultimate customer. Operations and supply chain management must be concerned with managing not only the internal operations of the firm, but also the relationships and processes shared with supply chain partners along the supply chain.

This text brings together two previously separate fields of operations management and supply chain management into what is called operations and supply chain management. While operations management is concerned with the internal operations of the firm, sup- ply chain management adds external relationships with other firms.

Moreover, every organization along the supply chain needs to manage its own operations together with the relationship with the rest of the supply chain partners. Thus operations management appears in the suppliers, the factories, the wholesalers, and the retail companies, since each of them is producing a product or service that is passed along the supply chain.

1.2 THE ROLE OF OPERATIONS AND SUPPLY CHAIN MANAGEMENT

All countries are dependent on economic growth as measured by their GDP (Gross Domestic Product). GDP is the monetary value of all the goods and services produced within a country’s borders. GDP growth leads not only to prosperity of the country, but income growth for the population, since income is closely related to GDP per capita.

LO1.2 Review the role of operations in the firm and the economy.

FIGURE 1.1 A typical supply chain.

Suppliers Suppliers Factories Warehouses Retail Customers

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Productivity is the amount of output from a given amount of inputs or vice versa. It is one factor that leads to economic growth and profitability of the firm. More output over time from the same resources increases GDP and allows people to get more of what they want beyond mere survival. Operations and supply chain management plays a central role in achieving GDP growth and productivity not only for individual companies but, in aggre- gate, for the entire economy of a country.

Productivity is output divided by inputs, all in constant dollars. Since price changes should not affect productivity, constant dollars are used.

Productivity = output ____________ capital + labor

If the same output can be achieved by less capital and labor, productivity will improve. Vice versa, more output achieved from the same levels of capital and labor will also improve productivity. Productivity ratios can be calculated at the firm, industry, and national levels.

Henry Ford believed in producing a reliable automobile at the lowest possible cost to be affordable for all Americans. He represented the epitome of productivity improvement by using better production line design and labor training to produce more output at lower costs, illustrating the power of production in improving productivity and profits, and pro- viding higher wages to employees. This story has been repeated thousands of time in many industries, even to the present time. See the Operations Leader box for how Dell drives productivity and value for its customers.

How are productivity growth and firm profitability achieved? It is only through the creativity, imagination, and innovation of operations and supply chain employees,

Orders for products, once taken, are assembled in one of Dell’s factories and often shipped to customers or retail stores within days, with the factories carrying very little finished goods inventory.

In addition to the importance of the operations func- tion at Dell, sourcing and logistics activities are criti- cal. Sourcing managers source the many components required to manufacture Dell products, and logistics managers handle the global movement of components and finished goods to satisfy customer demand. Manag- ing Dell’s fast and rapidly changing supply chain is a chal- lenging task that they perform well.

Dell today is pursuing environmentally friendly best practices: Its global headquarters campus is now pow- ered by 100 percent green energy; its desk computer systems have been designed to reduce carbon dioxide emissions; Dell was the first computer manufacturer to offer free computer recycling to customers worldwide; and its “Plant a Tree for Me” and “Plant a Forest for Me” programs have planted over 600,000 trees.

Source: Adapted from www.dell.com, 2019.

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

tomers while passing along cost savings to customers by cutting out the middlemen. The company offers a range of products beyond personal desktop and mobile com- puting products; servers, storage, and networking products; print-

ing and imaging products; electronics and accessories; enhanced business and consumer services; and busi- ness solutions. Nearly half of Dell’s revenue comes from outside of the U.S.

A key to Dell’s strategy is its customer-driven approach to innovation. This approach signals a commit- ment to delivering new products and services that are valued by customers and that address customer needs while improving productivity. This approach explains how Dell pioneered the direct-selling system to allow customer orders to be placed over the Internet or over the phone and, since 2007, through select retail outlets.

Dell Delivers Productivity and Value

OPERATIONS LEADER

Pe3k/Shutterstock

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6 Part One Introduction

managers, and executives. This can be done through innovative product or service design, but also through continuous improvement of the production process and supply chain. A large component of this is achieved through automation, but also the imagination of designers and operations managers for both product and process improvements. It is the responsibility of operations and supply chain managers to improve profitability and pro- ductivity for the firm.

Below is a simple example of a computation of labor productivity in a firm.2

2 For simplicity we consider only labor inputs for the partial labor productivity ratio. A total productivity ratio would include both capital and labor, and perhaps energy and materials inputs, as well.

For a firm with the following labor and output numbers, calculate the rate of labor pro- ductivity change assuming annual labor inflation of 3 percent and annual output (sales) inflation of 2 percent.

Year 1 Year 2 Annual Inflation

Output (sales) $million $56.7 $64.8 2%

Labor (payroll) $million $23.4 $26.6 3%

Labor productivity year 1 = Output year 1

___________ Labor year 1

= 56.7

____ 23.4

= 2.42

Labor productivity year 2 = Deflated output year 2

__________________ Deflated labor year 2

= 64.8(.98)

________ 26.6(.97)

= 2.46

Change in productivity = 2.46

____ 2.42

= 1.016 which is a 1.6% increase

Notice, both the output and input in year 2 have been adjusted for inflation between year 1 and year 2. The productivity increase achieved by operations and supply chain managers in one year is 1.6 percent.

Example

Productivity improvement is not the only way to increase GDP and prosperity in a coun- try. Just being more efficient is not enough, if there is no longer demand for the product. Therefore, GDP growth requires innovation and new product development to meet the evolving needs of markets. As a result, productivity improvement and innovation are two of the most important factors that affect GDP growth, firm output, and firm profitability. Operations and supply chain managers have a key role in introducing new products and achieving scale-up of production. They also participate in product design teams consist- ing of design, marketing, and finance managers. In this way they contribute to both new product innovation and productivity improvement for existing products and ultimately the profitability of the firm and GDP growth.

1.3 WHY STUDY OPERATIONS AND SUPPLY CHAIN MANAGEMENT?

For students majoring in operations and supply chain management this will be an intro- ductory course to the subject. This major leads to challenging and interesting jobs both in domestic and international industries ranging from entry level to middle management

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and top management positions. Some of these positions in both service and manufacturing industries are illustrated in the Operations Leader box on careers in operations and supply chain management.

For non-majors this course is important to gain an understanding of what operations does and its interactions with other functions within the firm and its supply chain. Every decision is cross-functional in nature.3 You will be working with operations and need to understand it no matter what career path you choose. The organization in which someone works only with people from his or her own function does not exist. That is why we take a cross-functional perspective in this text, so the content is useful to the majority of students who are not majors.

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

all operations functions associated with branches and cen- tral operations. This individual will participate in the devel- opment of strategic implementation plans and related objectives. Candidates must have strong communication skills and acknowledge the important relationship with customer members in supporting the credit union’s vision and mission.

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

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

Source: Abstracted from www.monster.com.

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

job requires international travel to manufacturing and distribution sites. Responsibilities include product and distribution manage- ment, on time and on budget; reviewing inventory reports with supply partners; arranging freight shipments globally; and coordi-

nating and collaborating with internal groups within Pay- Pal and eBay. The job description also requests “maniacal attention to detail.”

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

VICE PRESIDENT OF OPERATIONS Envista Credit Union is seeking an executive whose responsibilities include organizing, planning, and directing

Careers in Operations and Supply Chain from Monster.com

OPERATIONS LEADER

NetPics/Alamy Stock Photo

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8 Part One Introduction

As you study operations, you will find that many of the ideas, techniques, and prin- ciples can be applied across the business, not just in operations. For example, all work is accomplished through a process (or sequence of steps). The principles of process think- ing found in this text can be applied to all parts of business. Toyota, for example, uses lean thinking to improve processes in human resources, accounting, finance, information systems, and even the legal department. Many students find that the ideas learned in this course can be applied to their own department, career, or functional responsibilities and are useful to non-majors.

Operations and supply chain management is an exciting and challenging field of study. The ideas that you learn are both qualitative and quantitative, and both are essential to good management practice. You are embarking on a journey that is interesting and useful no matter what career you choose!

There are three aspects of operations and supply chain management that require elaboration:

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

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

3. Process. Operations managers plan and control the transformation process and its interfaces in organizations as well as across the supply chain. This process view is a powerful basis for the design and analysis of operations in an organization and across the supply chain. Using the process (or systems) view, we consider operations and sup- ply chain managers as designers of the conversion process in the firm. But the process view also provides important insights for the management of productive processes in functional areas outside the operations function. For example, a sales office may be viewed as a production process with inputs, transformation, and outputs. The same is true for an accounts payable office and for a loan office in a bank. In terms of the pro- cess view, operations management concepts have applicability beyond the functional area of operations.

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

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1.4 DECISIONS AT PIZZA U.S.A.

Pizza U.S.A., Inc., produces and markets pizzas on a national basis. The firm consists of 285 company-owned and franchised outlets (each called a store) in the U.S. The opera- tions function in this company exists at two levels: the corporate level and the level of the individual store.

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

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

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

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

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

Capacity Decisions about capacity determine the maximum level of output of pizzas. The capacity available at any point in time is determined by the availability of equipment and labor inputs for the pizza-making process at that time. First, when the initial location and process deci- sions are made, the corporate staff determines the phys- ical capacity of each facility. Individual store managers then plan for annual, monthly, and daily fluctuations in capacity within the available physical facility. Dur- ing peak periods, they may employ part-time help, and

LO1.3 Describe the five main decisions made by operations and supply chain managers.

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

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10 Part One Introduction

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

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

Supply Chain The supply chain decisions consist of sourcing and logistics. Sourcing is done by the cor- porate office. They select the specific suppliers for all inputs, negotiate prices, write con- tracts, and issue blanket purchase orders that stores use to order individual ingredients and items as they need them. The orders are then fulfilled by the suppliers, and a logistics provider ensures the orders are delivered on time. Logistics is handled by a third-party provider who secures transportation and uses its distribution centers to make deliveries to Pizza U.S.A. stores.

1.5 OPERATIONS DECISIONS IN THE SUPPLY CHAIN—A FRAMEWORK

The five decision groupings showcased in the Pizza U.S.A. example provide a framework for understanding the various decisions made by operations and supply chain managers. Although many different frameworks are possible, the primary one used here is a conceptual scheme for grouping decisions according to decision respon- sibilities. The five key decision areas—process, quality, capacity, inventory, and sup- ply chain—encompass what operations and supply chain managers do. This novel and useful decision framework is shown in Figure 1.2. Notice how the five decision areas in the figure apply not only to the firm, but to the supplier and the distributor, since all three must make the same types of decisions in managing their own operations and coordinating those decisions across the supply chain. In Table 1.1, examples are given of key decisions in each area.

FIGURE 1.2 Decision-making framework for operations in the supply chain. The Firm

Process

Quality

Capacity

Inventory

Supply Chain

Decisions

Human Resources Finance

Marketing

Accounting Information

Systems

Supplier

Process

Quality

Capacity

Inventory

Supply Chain

Decisions Process

Quality

Capacity

Inventory

Supply Chain

Decisions

Distributor

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TABLE 1.1 Operations and Supply Chain Decisions—A Framework

Decisions Examples of Decisions

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

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

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

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

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

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

Careful attention to the five decision areas in the framework is the key to the successful management of operations and the associated supply chain. Indeed, well-managed opera- tions and its supply chain can be defined in terms of this decision framework. If decisions in each of the five groupings support the strategy of the firm, provide value, and are well integrated with the other functions of the organization, the operations function and its associated supply chain can be considered well managed.

Each major section of this text is devoted to one of the five decision categories.4 The framework thus provides an integrating mechanism for the text that covers both the deci- sions faced by operations and supply chain managers as well as the cross-functional issues that must be considered.

The five decisions areas of operations and supply chain can be compared to the 4 Ps of marketing: product, price, place, and promotion. These four Ps in the marketing mix are the tools or decision types that marketing managers can use to influence demand. In a similar way the five decision types of operations and supply chain can be used to influence supply and must be compatible and consistent with the 4 Ps of marketing. They are just two sides of the same coin, one influencing demand and the other supply.

Analytics is the analysis of data to make better decisions. Analytics uses many tech- niques for the analysis including those from operations research, statistics, data sciences, and computer science. The analysis can use either big data from massive databases or small data depending on the application. Analytics can be descriptive, predictive, or pre- scriptive in nature. A descriptive analysis typically summarizes the present situation from data. The data can be used to go one step further and predict what will happen in the future. Prescriptive analytics typically uses mathematical models to find an optimal or best deci- sion. Analytics are used in operations and supply chains for a variety of decisions, includ- ing quality control, forecasting, capacity, scheduling, inventory, logistics, and sourcing.

4 Students have called these five categories QPICS, Quality, Process, Inventory, Capacity, and Supply chain, pronounced “Q-PICS.”

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12 Part One Introduction

Throughout the text, best practices are presented. Additionally, discussion and examples of firms in which the best practice is not the best for their particular situation are included. These contingencies, situations, or conditions that require different solutions offer a more nuanced view of operations decision making. For example, successful implementation of a new method such as lean or Six Sigma is contingent on top management support. Simi- larly, the “best” forecasting tools and concepts depend on the availability of data. If there was a single best practice that works for all firms, then operations would not be the chal- lenging function to manage that it is. Therefore, by offering insight into specific conditions in which best practices may not be best, the text addresses the various contingencies or prerequisites or situations that need to be considered.

1.6 CROSS-FUNCTIONAL DECISION MAKING

The operations function is a critical element in every business. No business can survive without good decisions being made by operations managers. The operations function is one of the three primary functions in an organization, along with marketing and finance. In addition, an organization has supporting functions that include human resources, infor-

mation systems, and accounting. Some organizations also have separate sourcing and logistics functions that support operations. In others, the operations, sourcing, and logistics functions are joined together to become the supply chain function.

Functional areas are concerned with a particular focus of responsibility or decision making in an organization. The market- ing function is typically responsible for creating demand and gen- erating sales revenue; the operations function is responsible for the production and distribution of goods or services (generating supply); and finance is responsible for the acquisition and alloca- tion of capital. Within for-profit businesses, functional areas tend to be closely associated with organizational departments because businesses typically are organized on a functional basis. Support- ing functions are essential to provide staff support to the three primary functions.

Every function must be concerned not only with its own deci- sion responsibilities but also with integrating decisions with other functions. The five areas of operations and supply chain decisions, for example, cannot be made sepa- rately; they must be carefully integrated with one another and, equally important, with decisions made in marketing, finance, and other parts of the organization. In the Pizza U.S.A. example, if marketing decides to change the price of pizza, this is likely to affect sales and change the capacity needs of operations as well as the amount of ingre- dients (materials) used. Also, if finance cannot raise the necessary capital, operations may have to redesign the process to require less capital or manage pizza-related inven- tories more efficiently. This in turn may affect the response time to serve customers, costs, and so on.

Decision making is therefore highly interactive and systemic in nature. Unfortunately, functional silos have developed in many organizations and impede cross-functional deci- sion making. As a result, the overall organization suffers due to an emphasis on functional prerogatives. In a similar way, the five decisions need to be coordinated externally with supply chain partners. If capacity of the firm is increased, the capacity of suppliers and distributors must also be increased. The same can be said about coordination of decisions about inventory, quality, sourcing, and logistics.

LO1.4 Explain the nature of cross-functional decision making with operations.

Managerial decision making is cross-functional in nature. ammentorp/123RF

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But some companies are different. Texas Instruments, for example, has been a leader in fostering cross-functional integration. Some companies have done a very good job of cross- functional management. They do this by forming cross-functional teams for new product introductions and for day-to-day improvement. Each member of the team is trained in com- mon methodologies, and the team is given responsibility for achieving its own goals. Some of the key cross-functional decision-making relationships are shown in Table 1.2.

1.7 OPERATIONS AS A PROCESS

Operations can be defined as a transformation system (or process) that converts inputs into outputs. Inputs to the system include energy, materials, labor, capital, and information (see Figure 1.3). Process technology is then used to convert inputs into outputs. The pro- cess technology is the methods, procedures, and equipment used to transform materials or inputs into products or services.

Viewing operations as a process is very useful in unifying seemingly different opera- tions from different industries. For example, the transformation process in manufacturing is one of material conversion from raw materials into finished products. When an automo- bile is produced, steel, plastics, aluminum, cloth, and many other materials are transformed into parts that are then assembled into the finished automobile. Labor is required to operate

LO1.5 Describe typical inputs and outputs of an operations transformation system.

TABLE 1.2 Examples of Cross-Functional Decision Making

Key Decision Area Interface with Operations Decisions

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

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

Finance and Accounting Availability of capital Inventory levels, degree of automation, process type selected, and capacity Efficiency of conversion process Process type selection, process flows, value-added determination and sourcing

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

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

full-time employment Capacity and scheduling decisions

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

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

decisions in operations

Software development Software is needed for capacity, quality, inventory, scheduling, and supply chain decisions

Hardware acquisition Hardware is needed to support automation decisions in operations and to run software

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14 Part One Introduction

and maintain the equipment, and energy and information are also required to produce the finished automobile.

In service industries a transformation process is also used to transform inputs into ser- vice outputs. For example, airlines use capital inputs of aircraft and equipment and human inputs of pilots, flight attendants, and support personnel to produce safe, reliable, fast, and efficient transportation. Transformations of many different types occur in all industries, as indicated in Table 1.3. By studying these different types of transformation processes, you can learn a great deal about how to analyze and manage any operation.

Operations as a process provides a basis for seeing an entire business as a system of interconnected processes. This makes it possible to analyze an organization and improve it from a process point of view. All work, whether in finance, marketing, accounting, or other functions, is accomplished by processes. For example, financial analysis of a stock, closing the books at the end of the year, or conducting market research are each conducted by carrying out an appropriate process. Thus, process principles and tools can be applied in every function in a business.

All of these processes and systems interact with their internal and external environments. We have indicated the nature of internal interaction through cross- functional decision making. Interaction with the external environment occurs through the economic, physical, social, and political environment of operations. Examples include

FIGURE 1.3 An operation as a productive system.

OPERATIONS MANAGEMENT OUTPUTSINPUTS

EXTERNAL BUSINESS ENVIRONMENT

NATURAL ENVIRONMENT

Transformation (conversion)

process

Energy

Materials

Labor

Capital

Information

Goods or services

Feedback information for control of process inputs and process technology

TABLE 1.3 Examples of Productive Systems

Operation Inputs Outputs

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

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

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

Meals, entertainment, and satisfied customers

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

Health services and healthy patients

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

Educated students, research, and public service

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

Finished goods

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

Transportation from one location to another

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economic changes such as rising labor costs, social changes such as customer preference for “green” products, and political changes such as regulations. Each of these can mean that the operations function and associated supply chain will have to change the way it was producing products and services.

Operations is surrounded by both internal and external environments and constantly interacts with them. The interactive nature of these relationships makes it necessary to constantly monitor the environment and make decisions related to corresponding changes in operations and the supply chain when needed. In the fast-changing world of today’s global business, constant change has become essential as a means of survival. Viewing operations as a process or a constantly updating transformation system helps us understand how operations and the supply chain cannot be insulated from changes in the environment but rather must adapt to them.

1.8 TRENDS IN OPERATIONS AND SUPPLY CHAIN MANGEMENT

Operations and supply chain managers face serveral opportunities and trends that will be addressed repeatedly throughout this text. These trends make operations and supply chain management an exciting and interesting career for future leaders.

The focus on sustainability of the natural environment has been heightened in recent years with concerns over global warming, water contamination, air pollution, and so on. Organizations are increasingly being asked to produce and deliver products or services while minimizing the negative impact on the global ecosystem and not endangering the ability to meet the needs of future generations. See the Operations Leader box titled “Sustainability in Interface Inc.’s Operations Transformation Pro- cess” for an example of one firm’s success in facing these issues. Operations and supply chain partners have made tremendous strides in reducing pollution of the envi- ronment from air to ground to water, but there is still a long way to go. Operations and its supply chain are going beyond environmental sustainability to include social and economic sustainability: the so-called triple bottom line. Social sustainability means hiring a diverse workforce, ethical practices, providing equal opportunity, and safe working conditions, for example. Economic sustainability is making a sufficient profit for firm survival into the future. Operations and their supply chains are find- ing they can reduce pollution, conserve resources, recycle products, and be socially responsible to provide a sustainable world for future generations. Sustainability is an opportunity that progressive operations and supply chain organizations are pursuing. For more details, see the sustainability link in the Learning Enrichment box at the end of this chapter.

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

LO1.6 Analyze trends in operations and supply chain management.

Sustainability

Services

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16 Part One Introduction

Emerging digital technologies that operations and supply chain managers are implement- ing include artificial intelligence, blockchain, 3D printing, and data analytics. Artificial intelligence is used in manufacturing and services to perform complex tasks that require human learning. Block chain technology is used to secure information that is passed along the supply chain. 3D printing is used to rapidly make prototypes or custom products. All of these technologies and analytics are discussed throughout this text.

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

Digital Technologies

Integration of Decisions Internally and Externally

With production on four con- tinents and offices in more than 100 countries, Interface Inc. is the global leader in the design, production, and sales of modu- lar carpet squares. Since under- taking the goal of sustainability, Interface Inc. reports more than 133 million pounds of post- consumer carpet waste has been diverted from landfills to serve as raw materials for new carpet squares. They have achieved a series of major milestones at the European manufacturing facility in The Netherlands. As of 2015, the plant is operating with 100 percent renewable energy, using virtually zero water in man- ufacturing processes and has attained zero waste to landfill.

Source: Adapted from Dave Gustashaw and Robert W. Hall, “From Lean to Green: Interface, Inc.,” Target 24, no. 5 (2008), pp. 6–14 and interfaceglobal.com 2019.

The philosophy of sustain- ability is “meeting the needs of the present without com- promising the ability of future generations to meet their own needs.” Over the past 15 years, carpet manufacturer Interface Inc. has shifted its operations toward this philosophy and tri- ple bottom-line impacts: social, environmental, and financial. Or, in their words: People, Planet, and Profit.

Following production, cus- tomers use and then dispose of carpet products. Interface Inc. set out to change this typi- cal supply chain. Creating a closed-loop supply chain, they use their own post-consumer waste (used carpet) as raw material input to their produc- tion system. It is not a perfect system, as it still requires some newly extracted raw materials, but they believe they are moving in the right direction for achieving sustainability.

Sustainability in Interface Inc.’s Operations Transformation Process

OPERATIONS LEADER

Arcaid Images/Alamy

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Finally, the globalization of operations and supply chains is a pervasive theme in business today. One can hardly avoid information on the accelerat- ing nature of global business. Strategies for operations and its supply chain partners should be formulated with global effects in mind. Even many small businesses compete glob- ally, sourcing or selling goods and services in markets with global competitors. Facility location must be considered in view of its global implications. Technology can be transferred rapidly across national borders. All decisions in operations and its associated supply chains are affected by the global nature of business.

1.9 KEY POINTS AND TERMS

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

Key points emphasized in the chapter are these:

∙ Operations and its associated supply chain produces and delivers goods or services deemed to be of value to customers in a global economy. Operations and supply chain management is responsible for productivity, innovation and GDP growth in aggregate. Without operations and supply chain management a firm, industry, and country can- not prosper.

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

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

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

Globalization of Operations and the Supply Chain

Coke is produced and sold globally. StreetVJ/Shutterstock

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18 Part One Introduction

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

∙ We identify several opportunities and trends facing operations and supply chain man- agers that are emerging and will be important in the future. These are sustainability, services, digital technologies, integration of decisions, and globalization of operations and the supply chain.

Key Terms Supply chain 2 Operations management 3 Supply chain management 4 Operations and supply chain

management 4 Gross Domestic Product

(GDP) 4 Productivity 5

Cross-functional decision making 12

Transformation system 13 Internal and external

environments 14 Sustainability 15 Triple bottom line 15 Globalization 17

Five major decision responsibilities 8

Process 8 Quality 8 Capacity 8 Inventory 8 Supply chain 8 Analytics 11

What Is Operations Management? Video https://youtu.be/leMOReAE2hk 5:19

Supply Chain Management: A Force for Good Video https://youtu.be/Bl0UhiOvrdc 5:01

Coca-Cola: Supply Chain Video https://youtu.be/UBSOiHUctrY 2:29

Sustainability Web Link https://www.epa.gov/sustainability/learn-about-sustainability#what

Globalization Web Link http://www.globalization101.org/what-is-globalization/

LEARNING ENRICHMENT (for self-study or instructor assignments)

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

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

and supply chain management? 4. How does the work of an operations manager differ

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

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

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

a. A college library b. A hotel c. A small manufacturing firm 7. For the organizations listed in question 6, describe the

inputs, transformation process, and outputs of the pro- duction system.

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Chapter 1 Introduction to Operations 19

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

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

10. Review job postings from various sources for manage- ment positions that are available for operations manage- ment graduates. Summarize the responsibilities of these positions.

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

a. Acquisition of another company. b. Closing the books at the end of the year. c. Marketing research for a new product. d. Design of an information system. e. Hiring a new employee. 12. What is the role of operations and supply chain manage-

ment in national economic prosperity? How does it con- tribute to GDP, jobs, income, and society in general?

13. What is the role of the operations function? How does it contribute to profitability, return on investment, growth, and other corporate objectives?

14. For the following problem calculate the labor produc- tivity improvement from year 1 to year 2.

Year 1 Year 2 Annual Inflation

Output (sales) $million $103.4 $108.4 2%

Labor (payroll) $million $ 19.6 $ 22.4 3%

15. A company has experienced the following changes in sales, labor, and capital. Calculate the total productivity percentage improvement from year 1 to year 2. Does the total productivity measure make more sense in this problem, since both labor and capital have been used?

Year 1 Year 2 Annual Inflation

Output (sales) $million $260.5 $270.4 2%

Labor (payroll) $million $110.4 $111.5 3%

Capital $ 60.2 $ 61.0 1%

16. The Atlas company makes weight lifting equipment. They are in the process of automating and have added $5 million in capital equipment to their operations and reduced the labor content. Has this resulted in increased productivity based on the following numbers? What is the productivity gain or loss as a percentage?

Year 1 Year 2 Annual Inflation

Output (sales) $million $358.5 $361.4 2%

Labor (payroll) $million $110.4 $100.6 3%

Capital $ 60.2 $ 65.2 0%

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Operations and Supply Chain Strategy

There is an increasing awareness that operations and the supply chain contribute to the global competitive position of a business and are not merely making a firm’s products or services. This can be done by contributing distinctive capability (or competence) to the business and continually improving the products, services, and processes. Operations strategies and deci- sions should fulfill the needs of the business and add competitive advantage to the firm. The Operations Leader box on Southwest Airlines illustrates how operations adds competitive advantage to its firm.

The operations function is a key value creator for the firm. Value is providing products and services that customers want to buy at low cost. All functions of the firm must be well coordinated for value to be created and competitive advantage to occur. The cross- functional coordination of decision making is facilitated by an operations strategy that is developed by a team of managers from across the entire business.

LO2.1 Define operations strategy.

2 c h a p t e r

LO2.1 Define operations strategy.

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

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

LO2.4 Compare product imitator and innovator strategies.

LO2.5 Explain the nature of global operations and supply chains.

LO2.6 Analyze two types of supply chain strategies.

LO2.7 Illustrate how operations and supply chain can become more sustainable.

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

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The following definition of operations strategy is a starting point for our discussion:

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

This definition will be expanded throughout this chapter as a basis for guiding all decisions that occur in operations and its supply chain with decisions in other functions.

We will use McDonald’s as an example in the next several sections to illustrate the elements of an operations strategy. In 1955, Ray Kroc opened his first restaurant in Des Plaines, Illinois, patterned after the McDonald brothers’ hamburger stand in California. The McDonald’s service system was designed on the idea of a very limited menu and fast production of standardized food and service with convenience and a low price. Never before had customers been served food so fast in a clean and courteous environment. Using a standard design for equipment, facilities, and employee training, the McDonald’s system was replicated in many locations and rapidly expanded throughout the U.S. and then the world.

• Flying out of regional secondary airports such as Midway Field in Chicago and Love Field in Dallas where gate fees and operating costs are much lower, and flights are more convenient and accessible for customers.

• Flying only point-to-point routes between pairs of cit- ies avoiding large airport hubs and thus cutting turn- around time between flights to only 15 minutes with very high aircraft utilization. High utilization of very expensive capital investment is a key to their success.

• Achieving high productivity from employees who have significant profit sharing, training, excellent working conditions, and low employee turnover.

• Making flights fun for the aircrews and passengers and giving passengers free bags when all other air- lines charge a bag fee. This improves customer ser- vice and customer satisfaction.

Southwest Airlines has received numerous awards for customer satisfaction including being ranked #1 by the U.S. Department of Transportation, and receiving the Best Customer Service Award by Freddie Awards for frequent flyers. It has withstood fierce competition from global airlines and other low-cost airlines such as JetBlue. Southwest Airlines has achieved its success by implementing a consistent operations strategy that is well integrated with business strategy and market- ing strategy.

Southwest Airlines was founded in 1971 as a regional airline. It has achieved financial success with its 47th consecutive year of profitability. In 2018 it reported $3.5 billion in net income on $21 billion in revenue with an annual return on invested capital of 25.9 percent. It has achieved this amazing record through a consistent business and operations strategy over its history.

The mission of Southwest Airlines is to provide the highest quality customer service at the lowest cost fares. This might have seemed impossible for a start-up regional airline competing against existing large airlines with massive economies of scale and purchasing power. Southwest Airlines accomplished this by using an inno- vative operations strategy from the beginning with the following features:

• Purchasing only Boeing 737 aircraft. Operating a single aircraft saved on maintenance training, spare parts stor- age, and special prices from Boeing for aircraft. Today, Southwest airlines operates 706 aircraft, all 737s.

Southwest Airlines

OPERATIONS LEADER

Markus Mainka/123RF

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22 Part One Introduction

The McDonald’s system is a standardized service system designed to meet stringent speci- fications. Every detail of the system is designed to provide fast and efficient food and service.

McDonald’s has continuously adapted its service system and supply chain over the years. For example, the menu has been expanded to offer many more food and beverage items, but always within the capability of the existing restaurants. They have updated their information systems in operations, and responded to environmental challenges by replac- ing, for example, the foam boxes previously used for sandwiches with biodegradable paper wrappers. In response to healthy food trends, they added salads, apple slices, and grilled chicken. Nevertheless, McDonald’s still has its critics and sometimes is blamed for the obesity of Americans and for having an adverse environmental impact.

McDonald’s is a global service firm. The operations strategy for global expansion has been to replicate the service system design and supply chain in each country with minimum modifications to the menu or processes. However, a few local international options are pro- vided. For example, McDonald’s serves beer in Germany, McRice in Indonesia, soup in Portugal, and salmon burgers in Japan. They have also extended their supply chain forward by developing a franchise system that maintains strong control over the product and service.

Today, McDonald’s is the global leader in food service with more than 37,000 restau- rants in 120 countries serving an average of 68 million customers each day. Next we will describe the elements of operations strategy in detail and use McDonald’s to illustrate how the elements of operations strategy support overall business strategy.

2.1 OPERATIONS STRATEGY MODEL

Operations strategy is a functional strategy along with the firm’s other functional strate- gies such as those of marketing, engineering, information systems, and human resources. Since operations strategy is a functional strategy, it should be guided by the business and corporate strategies shown in Figure 2.1. The four elements inside the dashed box— mission, objectives, strategic decisions, and distinctive competence—are the heart of oper- ations strategy. The other elements in the figure are inputs or outputs from the process of

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

McDonald’s is a leading global service firm with an operations and supply chain strategy. Christopher Kerrigan/ McGraw-Hill Education

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developing operations strategy. The outcome of using the operations strategy is a consis- tent pattern of operations decisions that are well connected with the other functions in the business and help provide a competitive advantage to the business.

Corporate strategy and business strategy are at the top of Figure 2.1. The corporate strat- egy defines the business that the company is pursuing. For example, Walt Disney Cor- poration considers itself in the business of “making people happy.” Disney Corporation includes not only theme parks but the production of cartoons, movie production, merchan- dising, and a variety of entertainment-related businesses around the world.

Business strategy follows from the corporate strategy and defines how each particular business will compete. Most large corporations have several different businesses, each com- peting in different market segments. Michael Porter describes three generic business strat- egies: differentiation, low cost, and focus. Differentiation is associated with a unique and

Corporate and Business Strategy

FIGURE 2.1 Operations strategy process.

Operations strategy Functional strategies in

marketing, finance,

engineering,

human resources, and

information systems

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

supply chain)

Mission

Distinctive competence

Objectives (cost, quality, flexibility,

and delivery)

Business strategy

Corporate strategy

Internal analysis

External analysis

Results

Consistent pattern of decisions

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24 Part One Introduction

frequently innovative product or service, while low cost is pursued in commodity markets where the products or services are imitative. Focus refers to the geographical or product portfolio being narrow or broad in nature. Focus can be combined with either a differentiation or a low-cost strategy.

Every operation should have a mission that is connected to the business strategy and is coordinated with the other functional strate- gies. For example, if the business strategy is differentiation through innovative products, the operations mission should emphasize new product introduction and flexibility to adapt products to changing market needs. Other business strategies lead to other operations missions, such as low cost or fast delivery. The operations mission is thus derived from the particular business strat- egy selected by the business unit.

At McDonald’s, the operations mission is to provide food and service quickly to customers with consistent quality and low cost in a clean and friendly environment.

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

Definitions of the four common operations objectives follow:

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

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

Table 2.1 shows some common measures of objectives that can be used to quantify long-range operations performance. The four common objectives are listed along with a fifth objective, sustainability, that is becoming more important to many firms. The objec- tives for five years into the future are compared to the current year and also to a current world-class competitor. The comparison to a world-class competitor is for benchmarking purposes and may indicate that operations is behind or ahead of the competition. However, the objectives should be suited to the particular business, which will not necessarily exceed the competition in every category.

At McDonald’s, each restaurant has specific objectives with respect to cost, quality, and service times. These objectives are pursued using extensive standards and are frequently

Operations Mission

Operations Objectives

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

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measured for compliance. McDonald’s tracks the performance of each restaurant and com- pares the results with those of competitors.

Strategic decisions constitute the third element of operations strategy. These decisions determine how the operations objectives will be achieved. A consistent pattern of strategic decisions should be made for each of the major operations decision categories (process, quality, capacity, inventory, and supply chain). These decisions must be well integrated with other functional decisions. This coordination and consistency is one of the most dif- ficult things to achieve in business.

Table 2.2 indicates some important strategic decisions for operations. Note that these decisions may require trade-offs or choices. For example, in the capacity area there is a

Strategic Decisions

TABLE 2.1 Typical Operations Objectives

Current Year

Objective: 5 Years in the Future

Current: World-Class Competitor

Cost

Manufacturing cost as a percentage of sales Inventory turnover

55% 4.1

52% 5.2

50% 5.0

Quality

Customer satisfaction (percentage satisfied with products)

Percentage of scrap and rework Warranty cost as a percentage of sales

85% 3% 1%

99% 1%

0.5%

95% 1% 1%

Delivery

Percentage of orders filled from stock Lead time to fill stock

90% 3 wk

95% 1 wk

95% 3 wk

Flexibility

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

10 mo 3 mo

6 mo 3 mo

8 mo 3 mo

Sustainability

Reduce carbon emissions (ppm) Reduce workplace accidents per thousand

workers

400

30

200

15

400

15

TABLE 2.2 Examples of Important Strategic Decisions in Operations

Strategic Decision Decision Type Strategic Choice

Process Span of process Automation

Make or buy Handmade or machine-made

Process flow Job specialization

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

Quality Approach Training Suppliers

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

Capacity Facility size Location Investment

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

Inventory Amount Distribution Control systems

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

Supply Chain Sourcing Logistics

Insource or outsource products National or global distribution

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26 Part One Introduction

choice between one large facility and several smaller ones. While the large facility may require less total investment due to economies of scale, the smaller facilities can be located in their markets and provide better customer service. Thus, the strategic decision depends on what objectives are being pursued in operations, the availability of capital, marketing objectives, and so forth.

McDonald’s illustrates how a consistent pattern of strategic decisions is made in the five operations decisions areas:

Process: Specialized equipment and work flows ensure meals are delivered to customers quickly. For example, the special French fry scoop puts the right amount of fries in each serving with little effort. Also, servers use information technology to instantly communicate orders to food preparers. Quality: More than 2000 quality, food safety, and inspections monitor food as it moves from farms to suppliers to restaurants. McDonald’s requires that 72 safety and quality protocols be conducted at each restaurant every day. Managers are trained at “Hamburger U” in the McDonald’s system to ensure standards for service, speed, food quality, cleanliness, and courtesy are met. Capacity: Restaurant capacity is carefully designed to control customer waiting times. Employees are scheduled to meet the fluctuating demand during the day. Inventory: Just-in-time replenishment ensures food and packaging are available when needed. Food and packaging are highly standardized across restaurants. Supply Chain: Each restaurant is connected to its supply chain for fast replenish- ment. The supply chain is designed for frequent deliveries and to avoid stockouts.

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

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

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

Walmart has a mission to be the low-cost retailer. To achieve this mission it has developed a distinctive competence in cross-docking aimed at lowering the costs of shipping. Using cross-docking, goods from suppliers’ trucks are transferred across the loading dock to waiting Walmart trucks and delivered to the stores without enter- ing the warehouse. Walmart also has a sophisticated inventory con- trol system and more purchasing power than its competitors and

Distinctive Competence

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

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therefore can minimize inventories and related costs. These distinctive competencies help Walmart compete on the basis of low cost.

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

2.2 COMPETING WITH OPERATIONS OBJECTIVES

We will now use the four operations objectives discussed above to describe different ways to compete through operations. Most firms choose one or two objectives to focus on, so that the strategic decisions made in operations can be aligned with and support these focused objectives.

Suppose we start with the idea of competing through a quality objective. Delivering quality means satisfying customer requirements. This assumes that marketing has identi- fied a particular target market, and that operations understands these customers’ specific requirements. Operations processes must be capable of meeting those requirements. If competing through quality is the objective, strategic decisions related to product or ser- vice design, operations, and the supply chain must support customers’ expectations for quality. For example, in a manufacturing company quality is improved by taking pre- ventative measures in training workers, design of the process, and eliminating rework and non-value-added activities. Customers who require quality expect a very low level of defects.