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Operations Management An Integrated Approach

5th EDIT ION

R. Dan Reid Nada R. Sanders

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Library of Congress Cataloging-in-Publication Data

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

Sanders.—5th ed. 1 online resource.

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

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

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

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

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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iii

P R E F A C E

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

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

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

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

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

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

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iv • PREFACE

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

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

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

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

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

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

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PREFACE • v

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

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

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

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

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

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

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

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vi • PREFACE

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

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

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

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

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

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

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

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

LINKS TO PRACTICE The Bama Companies

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

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PREFACE • vii

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

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

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

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

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

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

On-line Case: Cruise International, Inc.

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

To access the Web site:

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

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

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

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

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OM

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

After completing this chapter you should be able to

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

OM

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viii • PREFACE

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

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

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

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

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

Before You Go On

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

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

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

• Solution

Total productivity 5 output input

5 $14,280 $16,528

5 0.864

(See student companion site for Excel template.)

• Problem 2 Bluegill has just purchased a new sanding machine that pro- cesses 17 chairs in 8 hours. What is the productivity of the sand- ing machine?

• Before You Begin: In this problem you are being asked for machine productivity, which is a partial productivity measure.

• Solution

Machine productivity 5 number of chairs processing time

5 17 chairs 8 hours

5 2.125 chairs/hour

Online Resources Companion Website www.wiley.com/college/reid

• Take interactive practice quizzes to assess your knowledge and help you study in a dynamic way • Review PowerPoint slides or print slides for notetaking • Access the Virtual Company: Cruise International, Inc. • Find links to Company Tours for this chapter Th e Boeing Company

Sensenich Propeller Manufacturing Company • Find links for Additional Web Resources for this chapter Th e Association for Manufacturing Excellence, www.ame.org

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PREFACE • ix

Our supporting material has been designed to make learning OM easier for students and teaching OM easier for faculty.

Book Companion Site www.wiley.com/college/reid An extensive Web site has been developed in support of Operations Management. The site is available at www.wiley.com/college/reid, and offers a range of information for instructors and students. The Web site includes the following resources:

• Virtual Company Cases: Interactive cases for hands-on experience. • Company Tours: Web links to the plant tours of various companies are provided,

along with a brief description of the tour and discussion questions for students to consider aft er viewing the tour.

• Web Links: Direct links to related Web sites are provided.

For Instructors • Instructor’s Manual: Includes a suggested course outline, teaching tips and strat-

egies, war stories, answers to all end-of-chapter material, brief description of the additional resources referenced in the Interactive Learning box, additional in- class exercises, and tips on integrating the theory of constraints.

• Solutions Manual: A complete set of detailed solutions is provided for all problems. • Virtual Company Cases Instructor’s Materials: Include accompanying Instruc-

tor’s Manual with answers to exercises and Excel solutions. • Test Bank: A comprehensive Test Bank comprised of approximately 1700 ques-

tions that consist of multiple choice, true-false, essay questions, and open-ended problems for each chapter. Th e Test Bank is also available in a computerized ver- sion that allows instructors to customize their exams.

• PowerPoint Lecture Slides: PowerPoint Slides are available for use in class. Full- color slides highlight key fi gures from the text as well as many additional lecture outlines, concepts, and diagrams. Together, these provide a versatile opportunity to add high-quality visual support to lectures.

• Operations Management Video Series: Th e comprehensive video package, includ- ing clips from the Baldridge Video Series and Wiley’s own Student OM Videos, off ers video selections that tie directly to the theme of operations management and bring to life many of the examples used in the text. Videos can be viewed on the Companion Site or within WileyPLUS.

For Students • Supplemental Chapters: Th e supplement chapters include Supplement A:

Spreadsheet Modeling: An Introduction; Supplement B: Introduction to Optimi- zation; Supplement B; Waiting Line Models; Supplement D: Master Scheduling and Rough-cut Capacity Planning.

• Excel Spreadsheets: Templates are provided so that students can model and solve problems presented in the textbook. A spreadsheet icon appears next to those examples and problems in the textbook that have an accompanying Excel template available on the student Web site. Step-by-step directions are provided. Directions prompt students as they work through each spreadsheet. Expected outcomes and questions are also given.

TEACHING AND LEARNING RESOURCES

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x • PREFACE

• Quantitative Survival Guide. (978-0-471-67877-9) Th is provides chapter-by-chapter review of the math necessary to understand and solve the problems in each chapter and includes extra practice problems. Th is resource is also available within WileyPLUS.

WileyPLUS WileyPLUS is an innovative, research-based online environment for effective teaching and learning.

WileyPLUS builds students’ confidence because it takes the guesswork out of studying by providing students with a clear roadmap: what to do, how to do it, if they did it right. This interactive approach focuses on:

CONFIDENCE Research shows that students experience a great deal of anxiety over studying. That’s why we provide a structured learning environment that helps stu- dents focus on what to do, along with the support of immediate resources.

MOTIVATION To increase and sustain motivation throughout the semester, Wiley- PLUS helps students learn how to do it at a pace that’s right for them. Our integrated resources—available 24/7—function like a personal tutor, directly addressing each student’s demonstrated needs with specific problem-solving techniques.

SUCCESS WileyPLUS helps to assure that each study session has a positive outcome by putting students in control. Through instant feedback and study objective reports, students know if they did it right, and where to focus next, so they achieve the stron- gest results.

With WileyPLUS, our efficacy research shows that students improve their outcomes by as much as one letter grade. WileyPLUS helps students take more initiative, so you’ll have greater impact on their achievement in the classroom and beyond.

What do students receive with WileyPLUS?

• Th e complete digital textbook, saving students up to 60% off the cost of a printed text.

• Question assistance, including links to relevant sections in the online digital textbook.

• Immediate feedback and proof of progress, 24/7. • Integrated, multi-media resources—including virtual cases, videos, demonstra-

tion problems the Quantitative Survival Guide, and much more—that provide multiple study paths and encourage more active learning.

What do instructors receive with WileyPLUS?

• Reliable resources that reinforce course goals inside and outside of the classroom. • Th e ability to easily identify those students who are failing behind. • Media-rich course materials and assessment content including—Instructor’s

Manual, Test Bank, PowerPoint®Slides, Solutions Manual, Computerized Test Bank, Lecture Quizzes, Decision Sciences Weekly Updates, and much more.

www.wileyplus.com. Learn More.

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PREFACE • xi

ACKNOWLEDGMENTS The development of this fifth edition of Operations Management benefited greatly from the comments and suggestions of colleagues who teach operations management courses. We would like to acknowledge the contributions made by the following individuals:

Charles Foley, Columbus State Community College Nicholas C. Georgantzas, Professor, Management Systems and Director, System Dynamics Consultancy, Fordham University Business Schools Gregory A. Graman, Ph.D., Associate Professor of Operations and Supply Chain Management, Michigan Technological University Roger Dean lles, Instructor, Department of Marketing and Supply Chain Management, Fogelman

College of Business and Economics, The University of Memphis Tony R. Johns, Associate Professor, Administrative Science, Clarion University of Pennsylvania Anita Lee-Post, Associate Professor, Decision Science and Information Systems Area, Gatton College of Business and Economics, University of Kentucky Douglas Schneiderheinze, Instructor, Economics, Lewis and Clark Community College

Reviewers of the third edition include:

Dennis Agboh, Morgan State University; Karen Eboch, Bowling Green State University; Greg Graman, Michigan Tech University; GG Hegde University of Pittsburgh; Seung-Lae Kim, Drexel University;

John Kros, East Carolina University; Anita Lee-Post, University of Kentucky; David, Little High Point University; Robert Vokurka, Texas A&M University; John Wang, Montclair State University.

Reviewers of the fourth edition include:

Yossi Aviv, Washington University in St. Louis; Kevin Caskey, The State University of New York at New Paltz; Scott T. Crino, United States Military Academy; Phillip C. Fry, Boise State University; Thomas F. Gattiker, Boise State University; Christian Grandzol, Bloomsburg University; Samuel Hazen, Tarleton State University; James He, Fairfield University; John Jensen, University of Southern Maine; Mark Kesh, University of Texas

at El Paso; Anita Lee-Post, University of Kentucky; Winston T. Lin, The State University of New York at Buffalo; Jaideep Motwani, Grand Valley State University; Fariborz Y. Partovi, Drexel University; Tamara Reid, Seattle University; Dmitriy Shaltayev, Christopher Newport University; Marilyn Smith, Winthrop University; Robert J. Vokurka, Texas A&M University–Corpus Christi; Pamaela J. Zelbst, Sam Houston State University.

Ajay Aggarwal, Millsaps College; Nezih Altay, University of Richmond; Suad Alway, Chicago State University; Robert Amundsen, New York Institute of Technology; Gordon Bagot, California State University, Los Angeles; Cliff Barber, California Polytechnic State University, San Luis Obispo; Hooshang Beheshti, Radford University; Prashanth Bharadwaj, Indiana University of Pennsylvania; Joe Biggs, California Polytechnic State University; Debra

Bishop, Drake University; Vincent Calluzzo, Iona College; James Campbell, University of Missouri– St. Louis; Kevin Caskey, SUNY New Paltz; Sohail Chaudhry, Villanova University; Chin-Sheng Chen, Florida International University; Kathy Dhanda, University of Portland; Barb Downey, University of Missouri–Columbia; Joe Felan, University of Arkansas at Little Rock; Wade Ferguson, Western Kentucky University; Teresa Friel, Butler University;

Reviewers of the second edition include:

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xii • PREFACE

The first edition was reviewed by:

David Alexander, Angelo State University; Stephen L. Allen, Truman State University; Jerry Allison, University of Central Oklahoma; Suad Alwan, Chicago State University; Tony Arreola-Risa, Texas A&M University; Gordon F. Bagot, California State University–Los Angeles; Brent Bandy, University of Wisconsin–Oshkosh; Joseph R. Biggs, California Polytechnic State University at San Luis Obispo; Jean-Marie Bourjolly, Concordia University; Ken Boyer, DePaul University; Karen L. Brown, Southwest Missouri State University; Linda D. Brown, Middle Tennessee State University; James F. Campbell, University of Missouri–St. Louis; Cem Canel, University of North Carolina at Wilmington; Chin- Sheng Chen, Florida International University; Louis Chin, Bentley College; Sidhartha R. Das, George Mason University; Greg Dobson, University of Rochester; Ceasar Douglas, Grand Valley State University; Shad Dowlatshahi, University of Missouri–Kansas City; L. Paul Dreyfus, Athens State University; Lisa Ferguson, Hofstra University; Mark Gershon, Temple University; William Giauque, Brigham Young University; Greg Graman, Wright State University; Jatinder N.D. Gupta, Ball State University; Peter Haug, Western Washington University; Daniel Heiser, DePaul University; Ted Helmer, F. Theodore Helmer and Associates, Inc.; Lew Hofmann, The College of New Jersey; Lisa Houts,

California State University–Fresno; Tim C. Ireland, Oklahoma State University; Peter T. Ittig, University of Massachusetts–Boston; Jayanth Jayaram, University of Oregon; Robert E. Johnson, University of Connecticut; Mehdi Kaighobadi, Florida Atlantic University; Yunus Kathawala, Eastern Illinois University; Basheer Khumawala, University of Houston; Thomas A. Kratzer, Malone College; Ashok Kumar, Grand Valley State University; Cynthia Lawless, Baylor University; Raymond P. Lutz, University of Texas at Dallas; Satish Mehra, University of Memphis; Brad C. Meyer, Drake University; Abdel-Aziz M. Mohamed, California State University–Northridge; Charles L. Munson, Washington State University; Kenneth E. Murphy, Florida International University; Jay Nathan, St. Johns University; Harvey N. Nye, University of Central Oklahoma; Susan E. Pariseau, Merrimack College; Carl J. Poch, Northern Illinois University; Claudia H. Pragman, Minnesota State University; Willard Price, University of the Pacific; Feraidoon Raafat, San Diego State University; William D. Raffield, University of St. Thomas; Ranga Ramasesh, Texas Christian University; Paul H. Randolph, Texas Tech University; Robert M. Saltzman, San Francisco State University; George O. Schneller IV, Baruch College–City University of New York; A. Kimbrough Sherman, Loyola College in Maryland; William R. Sherrard, San Diego State

Daniel Heiser, DePaul University; Lewis Hofmann, The College of New Jersey; Lisa Houts, California State University, Fullerton; Tony Inman, Louisiana Tech University; Richard Insinga, SUNY Oneonta; Tim Ireland, Oklahoma State University; Mehdi Kaighobadi, Florida Atlantic University; Hale Kaynak, The University of Texas–Pan American; William Coty Keller, St. Josephs College; Robert Kenmore, Keller Graduate School of Management; Jennifer Kohn, Montclair State University; Dennis Krumwiede, Idaho State University; Kevin Lewis, University of Wyoming; Ardeshir Lohrasbi, University of Illinois at Springfield; Chris McDermott, Rensselaer Polytechnic Institute; John Miller, Mercer University; Ajay Mishra, SUNY Binghamton; Ken Murphy, Florida International University; Abraham Nahm, University of Wisconsin– Eau Claire; Len Nass, New Jersey City University; Joao Neves, The College of New Jersey; Susan Norman, Northern Arizona University; Muhammad Obeidat, Southern Polytechnic State University; Barbara Osyk,

The University of Akron; Taeho Park, San Jose State University; Eddy Patuwo, Kent State University; Carl Poch, Northern Illinois University; Leonard Presby, William Paterson University; Will Price, University of the Pacific; Randy Rosenberger, Juniata College; George Schneller, Baruch College-CUNY; Kaushik Sengupta, Hofstra University; LW Schell, Nicholls States University; William Sherrard, San Diego State University; Samia Siha, Kennesaw State University; Susan Slotnick, Cleveland State University; Ramesh Soni, Indiana University of Pennsylvania; Ted Stafford, University of Alabama in Huntsville; Peter Sutanto, Prairie View A&M University; Fataneh Taghaboni- Dutta, University of Michigan-Flint; Nabil Tamimi, University of Scranton; John Visich, Bryant College; Tom Wilder, California State University, Chico; Peter Zhang, Georgia State University; Faye X. Zhu, Rowan University.

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PREFACE • xiii

University; Chwen Sheu, Kansas State University; Sue Perrott Siferd, Arizona State University; Samia M. Siha, Kennesaw State University; Natalie Simpson, State University of New York–Buffalo; Barbara Smith; Niagara College; Victor E. Sower, Sam Houston State University; Linda L. Stanley, Our Lady of the Lake University; Donna H. Stewart, University of Wisconsin–Stout; Manouchehr Tabatabaei, University of Tampa; Nabil Tamimi, University of Scranton; Larry Taube, University of North Carolina–Greensboro; Giri K. Tayi, State University of New York at Albany;

Charles J. Teplitz, University of San Diego; Timothy L. Urban, The University of Tulsa; Michael L. Vineyard, Memphis State University; John Visich, University of Houston; Robert Vokurka, Texas A&M University; George Walker, Sam Houston State University; John Wang, Montclair State University; Theresa Wells, University of Wisconsin–Eau Claire; T.J. Wharton, Oakland University; Barbara Withers, University of San Diego; Steven A. Yourstone, University of New Mexico.

SPECIAL THANKS We would also like to personally thank and acknowledge the work of our supple- ments authors, who worked diligently to create a variety of support materials for both instructors and students.

We would also like to express our appreciation to Mark Sullivan, AIA, NCARB, of Mark Sullivan Architects, and Susan O’Hara, RN, MPH, of O’Hara HealthCare Consultants, who generously contributed a simulation showing the before and after designs of an ambulatory surgery unit. A working example of the Extend simulation they used to optimize the design of the renovated facility is available on the Web site. For more information on their work, please visit www.marksullivanarchitects.com or www.oharahealthcare.com.

We would like to offer special acknowledgment to the publishing team at Wiley for their creativity, talent, and hard work. Their great personalities and team spirit have made working on the book a pleasure. Special thanks go to Lisé Johnson, Executive Editor; Jennifer Manias, Content Editor; Kelly Simmons, Marketing Manager; and, Valerie Vargas, Senior Production Editor, for all their efforts. We could not have done it without you.

Other Wiley staff who contributed to the text and media include: Elena Santa Maria, Senior Media Specialist; Allison Morris, Senior Product Designer; Madeline Lesure, Senior Designer; Sheena Goldstein, Photo Editor; and, Melissa Solarz, Edi- torial Assistant. We would also like to thank David Krahl of Imagine That, Inc. for developing the Extend simulations.

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xiv • RUNNING HEAD

xiv

A B O U T T H E A U T H O R S

R. Dan Reid is Associate Pro- fessor Emeritus of Operations Management at the Whittemore School of Business and Eco- nomics at the University of New Hampshire. He holds a Ph.D. in Operations Management from The Ohio State University, an M.B.A. from Angelo State Uni- versity, and a B.A. in Business Management from the Univer- sity of Maryland. During the past twenty years, he has taught at The Ohio State Uni- versity, Ohio University, Bowling Green State Uni- versity, Otterbein College, and the University of New Hampshire.

Dr. Reid’s research publications have appeared in numerous journals such as the Production and Inven- tory Management Journal, Mid-American Journal of Business, Cornell Hotel and Restaurant Administra- tion Quarterly, Hospitality Research and Education Journal, Target, and the OM Review. His research interests include manufacturing planning and control systems, quality in services, purchasing, and supply chain management. He has worked for, or consulted with, organizations in the telecommunications, con- sumer electronics, defense, hospitality, and capital equipment industries. Dr. Reid has served as Program Chair and President of the Northeast Region of the Decision Sciences Institute (NEDSI) and as Associate Program Chair and Proceedings Editor of the First International DSI Conference, and held numerous positions within DSI. He has been the Program Chair and Chair of the Operations Management Division of the Academy of Management. Dr. Reid has also served as President of the Granite State Chapter of the American Production and Inventory Control Society. He has been a board member of the Operations Man- agement Association and the Manchester Manufac- turing Management Center. Dr. Reid is a past Editor of the OM Review.

Dr. Reid has designed and taught courses for under- graduates, graduates, and executives on topics such as resource management, manufacturing management, introduction to operations management, purchasing management, and manufacturing planning and control systems. In 2002 Dr. Reid received a University of New Hampshire Excellence in Teaching Award.

Nada R. Sanders is Professor and Iacocca Chair at Lehigh University. She holds a Ph.D. in Operations Management from The Ohio State University, an M.B.A. from The Ohio State University, and a B.S. degree in Mechanical Engineering from Franklin University. She has taught for more than twenty years at a variety of academic institutions including The Ohio State Univer- sity, Capital University, Wright

State University, and Texas Christian University, in addi- tion to lecturing to various industry groups. She has designed and taught classes for undergraduates, gradu- ates, and executives on topics such as operations manage- ment, operations strategy, forecasting, and supply chain management. She has received a number of teaching awards and is a Fellow of the Decision Sciences Institute.

Dr. Sanders has extensive research experience and has published in numerous journals such as Decisions Sciences, Journal of Operations Management, Sloan Management Review, Omega, Interfaces, Journal of Behavioral Decision Making, Journal of Applied Busi- ness Research, and Production & Inventory Manage- ment Journal. She has authored chapters in books and encyclopedias such as the Forecasting Principles Hand- book (Kluwer Academic Publishers), Encyclopedia of Production and Manufacturing Management (Kluwer Academic Publishers), and the Encyclopedia of Electri- cal and Electronics Engineering (John Wiley & Sons). Dr. Sanders has served as Vice President of Decision Sciences Institute (DSI), President of the Midwest Decision Sciences Institute, and has held numerous other positions within the Institute. In addition to DSI, Dr. Sanders is active in the Production Operations Management Society (POMS), APICS, INFORMS, Council of Supply Chain Management Professions (CSCMP), and the International Institute of Forecast- ers IIF). She has served on review boards and/or as a reviewer for numerous journals including Decision Sci- ences, Journal of Business Logistics, Production Opera- tions Management, International Journal of Production Research, Omega, and others. In addition, Dr. Sanders has worked and/or consulted for companies in the tele- communications, pharmaceutical, steel, automotive, warehousing, retail, and publishing industries, and is frequently called upon to serve as an expert witness.

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xv

C H A P T E R 1 Introduction to Operations Management 1 WHAT IS OPERATIONS MANAGEMENT? 2

Links to Practice: The E-tailers 4 DIFFERENCES BETWEEN MANUFACTURING AND SERVICE

ORGANIZATIONS 5 Links to Practice: U.S. Postal Service 6

OPERATIONS MANAGEMENT DECISIONS 7 Links to Practice: Texas Instruments Incorporated 9

PLAN OF THIS BOOK 10 HISTORICAL DEVELOPMENT 11

Why OM? 11 Historical Milestones 11 Th e Industrial Revolution 12 Scientifi c Management 13 Th e Human Relations Movement 14 Management Science 14 Th e Computer Age 15 Just-in-Time 15 Total Quality Management 15 Business Process Reengineering 16 Flexibility 16 Time-Based Competition 16 Supply Chain Management 16 Links to Practice: The Publishing Industry 17 Global Marketplace 18 Sustainability and Green Operations 18 Electronic Commerce 18 Outsourcing and Flattening of the World 19

TODAY’S OM ENVIRONMENT 20 OPERATIONS MANAGEMENT IN PRACTICE 21 WITHIN OM: HOW IT ALL FITS TOGETHER 21 OM ACROSS THE ORGANIZATION 22 THE SUPPLY CHAIN LINK 24 THE SUSTAINABILITY LINK 24 Chapter Highlights 25 Key Terms 25 Discussion Questions 25 CASE: HIGHTONE ELECTRONICS, INC. 26 CASE: CREATURE CARE ANIMAL CLINIC (A) 26 INTERACTIVE CASE: VIRTUAL COMPANY 27 INTERNET CHALLENGE 28 ONLINE RESOURCES 28 Selected Bibliography 28

C O N T E N T S

C H A P T E R 2 Operations Strategy and Competitiveness 29 THE ROLE OF OPERATIONS STRATEGY 31

Th e Importance of Operations Strategy 31 DEVELOPING A BUSINESS STRATEGY 32

Mission 32 Environmental Scanning 33 Core Competencies 35 Putting It Together 36 Links to Practice: Dell Computer Corporation 36

DEVELOPING AN OPERATIONS STRATEGY 37 Competitive Priorities 37 Links to Practice: Southwest Airlines Company 38 Links to Practice: FedEx Corporation 40 Th e Need for Trade-Off s 40 Order Winners and Qualifi ers 41 Translating Competitive Priorities into Production

Requirements 42 STRATEGIC ROLE OF TECHNOLOGY 43

Types of Technologies 43 Technology as a Tool for Competitive Advantage 44

PRODUCTIVITY 44 Measuring Productivity 44 Interpreting Productivity Measures 47 Productivity and Competitiveness 47 Productivity and the Service Sector 48

OPERATIONS STRATEGY WITHIN OM: HOW IT ALL FITS TOGETHER 48

OPERATIONS STRATEGY ACROSS THE ORGANIZATION 49

THE SUPPLY CHAIN LINK 49 THE SUSTAINABILITY LINK 50 Chapter Highlights 50 Key Terms 51 Formula Review 51 Solved Problems 51 Discussion Questions 52 Problems 52 CASE: PRIME BANK OF MASSACHUSETTS 53 CASE: BOSEMAN OIL AND PETROLEUM (BOP) 54 INTERACTIVE CASE: VIRTUAL COMPANY 54 INTERNET CHALLENGE 55 ONLINE RESOURCES 55 Selected Bibliography 56

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xvi • CONTENTS

C H A P T E R 3 Product Design and Process Selection 57 PRODUCT DESIGN 59

Design of Services versus Goods 59 THE PRODUCT DESIGN PROCESS 60

Idea Development 60 Links to Practice: IBM Corporation 61 Product Screening 62 Preliminary Design and Testing 64 Final Design 64

FACTORS IMPACTING PRODUCT DESIGN 65 Design for Manufacture 65 Product Life Cycle 66 Concurrent Engineering 67 Remanufacturing 68

PROCESS SELECTION 68 Types of Processes 68

DESIGNING PROCESSES 72 PROCESS PERFORMANCE METRICS 74 LINKING PRODUCT DESIGN AND PROCESS

SELECTION 77 Product Design Decisions 78 Links to Practice: The Babcock & Wilcox Company 78 Competitive Priorities 79 Facility Layout 79 Product and Service Strategy 81 Degree of Vertical Integration 81

TECHNOLOGY DECISIONS 82 Information Technology 82 Links to Practice: Using GPS Technology in Product

Advertising 83 Automation 83 Links to Practice: Performing Robotic Surgery 85 e-Manufacturing 86

DESIGNING SERVICES 87 How Are Services Diff erent from Manufacturing? 87 How Are Services Classifi ed? 88 Th e Service Package 89 Diff ering Service Designs 90

PRODUCT DESIGN AND PROCESS SELECTION WITHIN OM: HOW IT ALL FITS TOGETHER 91

PRODUCT DESIGN AND PROCESS SELECTION ACROSS THE ORGANIZATION 92

THE SUPPLY CHAIN LINK 93 THE SUSTAINABILITY LINK 93 Chapter Highlights 94 Key Terms 94

Formula Review 95 Solved Problems 95 Discussion Questions 97 Problems 97 CASE: BIDDY’S BAKERY (BB) 99 CASE: CREATURE CARE ANIMAL CLINIC (B) 100 INTERACTIVE CASE: VIRTUAL COMPANY 100 INTERNET CHALLENGE 101 ONLINE RESOURCES 101 Selected Bibliography 101

C H A P T E R 4 Supply Chain Management 103 WHAT IS A SUPPLY CHAIN? 104 COMPONENTS OF A SUPPLY CHAIN FOR A

MANUFACTURER 106 External Suppliers 106 Internal Functions 108 External Distributors 108

THE BULLWHIP EFFECT 108 Causes of the Bullwhip Eff ect 109 Counteracting the Bullwhip Eff ect 110

SUPPLY CHAINS FOR SERVICE ORGANIZATIONS 110 Internal Operations 111 Th e External Distributors 112

MAJOR ISSUES AFFECTING SUPPLY CHAIN MANAGEMENT 112 Information Technology 112 E-Commerce 112 Business-to-Business (B2B) E-Commerce 113 Th e Evolution of B2B Commerce 113 Th e Benefi ts of B2B E-Commerce 114 Business-to-Consumer (B2C) E-Commerce 114 Consumer Expectations and Competition Resulting

from E-Commerce 115 Links to Practice: Lands’ End, Inc. 115 Globalization 116 Government Regulations and E-Commerce 118 Green Supply Chain Management 118 Infrastructure Issues 121 Product Proliferation 122

THE ROLE OF PURCHASING 122 Th e Traditional Purchasing Process 122 Th e E-purchasing Process 124

SOURCING ISSUES 127 Insourcing versus Outsourcing Decisions 128 Developing Supplier Relationships 130

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CONTENTS • xvii

How Many Suppliers? 130 Developing Partnerships 131 Links to Practice: The Bama Companies 132 Critical Factors in Successful Partnering 133 Links to Practice: Sweetheart Cup Company/

Georgia-Pacifi c Corporation 133 Benefi ts of Partnering 135 Ethics in Supply Management 136

SUPPLY CHAIN DISTRIBUTION 137 Th e Role of Warehouses 137 Links to Practice: Fingerhut Direct Marketing, Inc. 138 Crossdocking 139 Links to Practice: FedEx Freight 139 Radio Frequency Identifi cation Technology (RFID) 141 Th ird-Party Service Providers 142

IMPLEMENTING SUPPLY CHAIN MANAGEMENT 143 Strategies for Leveraging Supply Chain

Management 144 SUPPLY CHAIN PERFORMANCE METRICS 145 TRENDS IN SUPPLY CHAIN MANAGEMENT 147 SUPPLY CHAIN MANAGEMENT WIHTIN OM:

HOW IT ALL FITS TOGETHER 149 SCM ACROSS THE ORGANIZATION 149 THE SUPPLY CHAIN LINK 150 THE SUSTAINABILITY LINK 150 Chapter Highlights 151 Key Terms 152 Formula Review 152 Solved Problems 152 Discussion Questions 153 Problems 154 CASE: ELECTRONIC POCKET CALENDARS SUPPLY CHAIN

MANAGEMENT GAME 155 CASE: SUPPLY CHAIN MANAGEMENT AT DURHAM INTER-

NATIONAL MANUFACTURING COMPANY (DIMCO) 157 INTERACTIVE CASE: VIRTUAL COMPANY 158 INTERNET CHALLENGE 158 ONLINE RESOURCES 159 Selected Bibliography 159

C H A P T E R 5 Total Quality Management 161 DEFINING QUALITY 162

Diff erences between Manufacturing and Service Organizations 163

Links to Practice: General Electric Company/Motorola, Inc. 164

COST OF QUALITY 165 THE EVOLUTION OF TOTAL QUALITY MANAGEMENT