Assignment 1 and 2

Copyright Information (bibliographic) Document Type: Book Chapter Title of book: Operations and Supply Chain Management (15 th Edition) Author of book: F. Robert Jacobs, Richard B. Chase Chapter Title: Chapter 1 Introduction Author of Chapter: F. Robert Jacobs, Richard B. Chase Year: 2018 Publisher: McGraw-Hill Education Place of Publishing: United States of America The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted materials. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or reproduction is not to be used for any purpose other than private study, scholarship, or research. If a user makes a request for, or later uses, a photocopy or reproduction for purposes in excess of fair use that user may be liable for copyright infringement. Learning Objectives LO 1-1 Identify the elements of operations and supply chain management (OSCM).

LO 1-2 Know the potential career opportunities in operations and supply chain management.

LO 1-3 Recognize the major concepts that define the operations and supply chain management field.

LO 1-4 Evaluate the efficiency of a firm.

AIRLINES FLIGHT: QUICK BOARDING WITH NO PREASSIGNED SEATS IS A KEY PART OF THE 45-MINUTE TURNAROUND PROCESS. F. Robert Jacobs 2 3 Introduction Chapter 1 INTRODUCTION-THE ELEMENTS OF OSCM Really successful firms have a clear and focused idea of how they intend to make money.

Whether it be high-end products and services custom-tailored to the needs of a single customer or generic and inexpensive commodities bought largely on the basis of cost, competitively producing and distributing these products is a major challenge.

The chapter opening describes the importance of turning planes around quickly at South­ west Airlines. Keeping planes in the air each day is a key factor in the profitability of the company. The process Southwest uses when their planes are on the ground was carefully studied by OSCM (operations and supply chain management) specialists to make it as effi­ cient as possible.

In the context of major business functions, operations and supply chain management involves specialists in product design, purchasing, manufacturing, service operations, logis­ tics, and distribution. These specialists are mixed and matched in many different ways depending on the product or service. For a firm that sells televisions, like Sony, these are the functions responsible for designing televisions, acquiring materials, coordinating equipment resources to convert material to products, moving the product, and exchanging the final prod­ uct with the customer. Some firms are focused on services, such as a hospital. Here the con­ text involves managing resources, including the operating rooms, labs, and hospital beds used to nurse patients back to health. In this context, acquiring materials, moving patients, and coordinating resource use are keys to success. Other firms are more specialized, such as Ama­ zon. Here purchasing, website services, logistics, and distribution need to be carefully coor­ dinated for success. In our increasingly interconnected and interdependent global economy, the process of delivering finished goods, services, and supplies from one place to another is accomplished by means of mind-boggling technological innovation, clever new applications of old ideas, seemingly magical mathematics, powerful software, and old-fashioned concrete, steel, and muscle.

This book is about doing this at low cost while meeting the requirements of demand­ ing customers. Success involves the clever integration of a great operations-related strategy, processes that can deliver the products and services, and analytics that support the ongoing decisions needed to manage the firm. Our goal in this book is to introduce students to basic operations and supply chain concepts so they understand how things should be done and the importance of these functions to the success of the firm.

No matter what your major is in business, understanding OSCM is critical to your success. If you are interested in the study of finance, you will find that all of the concepts are directly applicable. Just convert all of those widgets to their value in the currency of your choice and you will realize it is all about dollars and cents moving, being stored, and appreciating in value due to exchanges. What you study in finance class is exactly the same, but we look at things in very different ways due to the physical nature of goods and the intangible features of services. The topics presented here are critical to a successful study of marketing, too. If the product or service can't be delivered to the customer at an acceptable cost, then no matter how good your marketing, no one may buy it. Lastly, for those accountants keeping score, opera­ tions and supply chain processes generate most of the transactions used to track the financial health of the firm. Understanding why these processes operate the way they do is important to understanding the financial statements of the firm. What Is Operations and Supply Chain Management? is defined as the design, operation, and improvement of the systems that create and deliver the firm's primary products and ser­ vices. Like marketing and finance, OSCM is a functional field of business with clear line management responsibilities. OSCM is concerned with the management of the entire system that produces a product or delivers a service. Producing an item such as the Men's Nylon Sup­ plex Parka, or providing a service such as a cell phone account, involves a complex series of transformation processes. Identify the elements of operations and supply chain management (OSCM).

The design, operation, and improvement of the systems that create and deliver the firm's primary products and services. 4 Section 1 Strategy, Products, and Capacity Courtesy ofL.L.Beon, Inc. KEY IDEA A good starting point for understanding a supply chain is to sketch out the network from start to finish. Exhibit 1.1 shows a supply network for a Men's Nylon Supplex Parka sold on web­ sites such as LL.Bean or Lands' End, We can understand the network by looking at the four color-coded paths. The blue path traces the activities needed to produce the Polartec insulation material used in the parkas. Polartec insulation is purchased in bulk, processed to get the proper finish, and then dyed prior to being checked for consistency-or grading-and color. It is then stored in a warehouse. The red path traces the production of the nylon, Supplex, used in the parkas. Using a petroleum­ based polymer, the nylon is extruded and drawn into a yarnlike material. From here, the green path traces the many steps required to fabricate the clothlike Supplex used to make the parkas. The yellow path shows the Supplex and Polartec material coming together and used to assemble the lightweight and warm parkas. The completed parkas are sent to a warehouse, and then on to the retailer's distribution center. Afterward, the parkas are picked out and packed for shipment to individual customers. Think of the supply network as a pipeline through which material and information flow.

There are key locations in the pipeline where material and information are stored for future use: Polartec is stored near the end of the blue pipeline; Supp lex is stored near the end of the red pipeline. In both cases, fabric is cut prior to merging with the yellow pipeline. At the beginning of the yellow path, bundles of Supplex and Polartec are stored prior to their use in the fabrication of the parkas. At the end of the yellow path are the distribution steps, which involve storing to await orders, picking according to each customer order, packing, and finally shipping to the customer.

Networks such as this can be constructed for any product or service. Typically, each part of the network is controlled by different companies, including the nylon Supplex producer, the Polartec producer, the parka manufacturer, and the catalog sales retailer. All of the material is moved using transportation providers-in this case, ships and trucks. The network also has a global dimension, with each entity potentially located in a different country, For a successful transaction, all of these steps need to be coordinated and operated to keep costs low and to minimize waste. OSCM manages all of these individual processes as effectively as possible. Distinguishing Operations versus Supply Chain Processes Success in today's global markets requires a business strategy that matches the preferences of customers with the realities imposed by complex supply networks. A sustainable strategy that meets the needs of shareholders and employees and preserves the environment is critical.

Concepts related to developing and analyzing this type of strategy are the topic of Section One of this book (see Exhibit 1.2).

In the context of our discussion, the terms operations and supply chain take on special meaning. Operations refers to manufacturing and service processes used to transform the resources employed by a firm into products desired by customers. These processes are cov­ ered in Section Two. For example, a manufacturing process would produce some type of physical product, such as an automobile or a computer. A service process would produce an intangible product, such as a call center that provides information to customers stranded on the highway or a hospital that treats accident victims in an emergency room. Planning the use of these processes involves analyzing capacity, labor, and material needs over time. Ensuring quality and making ongoing improvements to these processes are needed to manage these processes. Concepts related to this are included in Section Two of this book as well. Supply chain refers to processes that move information and material to and from the manu­ facturing and service process of the firm. These include the logistics processes that physically move product and the warehousing and storage processes that position products for quick delivery to the customer. Supply chain in this context refers to providing products and service to plants and warehouses at the input end and also the supply of products and service to the customer on the output end of the supply chain. Details concerning how these supply chain processes work and are analyzed are covered in Section Three.

Section Four of the book is about planning the use of operations and supply chain resources. Starting with a forecast of demand, resources are planned in increasingly shorter increments of time to match supply inputs with the demand-driven outputs of the firm. These planning activities are completed using integrated computer systems that capture the activi­ ties and current status of a firm's resources. Process Steps for Men's Nylon Supplex Parkas Store in Warehouse Create The red path traces the production of the nylon, a raw material for the cloth like Supplex material. This is followed by the green path, where the nylon is made into Supplex. The blue path is the steps needed to make Polartec, the insulating material in the parkas. The yellow path is where the Supplex and Polartec come together and the parkas are assembled. Completed parkas are then distributed to retailers that sell the product. a ;:! - 0. c ~ ::;· ;:!

Q {i Ci;".., ......

(J1 6 Section I Strategy, Products, and Capacity Questions Answered in Each Section of the OSCM II. Manufacturing and Service Processes - How are processes that transform resources into products designed? t I. Strategy, Products, and III. Supply Chain Processes V. Special Topics Capacity How are products moved How are these concepts How does the firm's strategy 1­ through the supply chain? r--­ used in special industries?

impact its products and processes? t IV. Supply and Demand Planning and Control How are OSCM processes managed using computer systems? One or more activities that transform inputs into outputs. The final section of the book shows how these concepts are applied in more specialized types of businesses such as health care and consulting. Part of understanding this material is seeing how the concepts can be directly applied to business processes that are not specifi­ cally covered. In this book, in a relatively generic way, manufacturing, service, sourcing, and logistics processes are studied. How these ideas are applied in the context of a few specific businesses is the motivation of this section.

All managers should understand the basic principles that guide the design of transforma­ tion processes. This includes understanding how different types of processes are organized, how to determine the capacity of a process, how long it should take a process to make a unit, how the quality of a process is monitored, and how information is used to make decisions related to the design and operation of these processes.

The field of operations and supply chain management is ever changing due to the dynamic nature of competing in global business and the constant evolution of information technology.

So while many of the basic concepts have been around for years, their application in new and innovative ways is exciting. Internet technology has made the sharing of reliable real-time information inexpensive. Capturing information directly from the source through such sys­ tems as point-of-sale, radio-frequency identification tags, bar-code scanners, and automatic recognition has shifted the focus to understanding both what all the information is saying and also how good the decisions that can be made using it are. Categorizing Operations and Supply Chain Processes Operations and supply chain can be conveniently categorized, particularly from the view of a producer of consumer products and services, as planning, sourcing, making, deliv­ ering, and returning. Exhibit 1.3 depicts where the processes are used in different parts of a supply chain. The following describes the work involved in each type of process. 1. Planning consists of the processes needed to operate an existing supply chain strategi­ cally. Here a firm must determine how anticipated demand will be met with available resources. A major aspect of planning is developing a set of metrics to monitor the supply chain so that it is efficient and delivers high quality and value to customers. 2. Sourcing involves the selection of suppliers that will deliver the goods and services needed to create the firm's product. A set of pricing, delivery, and pay­ ment processes are needed, along with metrics for monitoring and improving the 7 Introduction Chapter I Supply Chain Process ~ v Making ~ .<::~\:>.

~ ~flv " 7 Sourcing A 1' ~ Planning A 'f _h.

y Delivering ,t. ,. L :>. ' 7 Returning " " relationships between partners of the firm. These processes include receiving ship­ ment, verifying them, transferring them to manufacturing facilities, and authorizing supplier payments. 3. Making is where the major product is produced or the service provided. The step requires scheduling processes for workers and the coordination of material and other critical resources such as equipment to support producing or providing the service.

Metrics that measure speed, quality, and worker productivity are used to monitor these processes. 4. Delivering is also referred to as logistics processes. Carriers are picked to move products to warehouses and customers, coordinate and schedule the movement of goods and information through the supply network, develop and operate a network of warehouses, and run the information systems that manage the receipt of orders from customers and the invoicing systems that collect payments from customers. 5. Returning involves processes for receiving worn-out, defective, and excess products back from customers and support for customers who have problems with delivered products. In the case of services, this may involve all types of follow-up activities required for after-sales support.

To understand the topic, it is important to consider the many different players that need to coordinate work in a typical supply chain. The aforementioned steps of planning, sourcing, making, delivering, and returning are fine for manufacturing and can also be used for the many processes that do not involve the discrete movement and production of parts. In the case of a service firm such as a hospital, for example, supplies are typically delivered on a daily basis from drug and health care suppliers and require coordination between drug companies, local warehouse operations, local delivery services, and hospital receiving. Patients need to be scheduled into the services provided by the hospital, such as operations and blood tests.

Other areas, such as the emergency room, need to be staffed to provide service on demand.

The orchestration of all of these activities is critical to providing quality service at a reason­ able cost. Differences Between Services and Goods There are five essential differences between services and goods. The first is that a service is an intangible process that cannot be weighed or measured, whereas a good is a tangible output of a process that has physical dimensions. This distinction has important business implications, because a service innovation, unlike a product innovation, cannot be patented. KEY IDEA Companies are positioned in different places in the supply chain. Within the context of their position, they all require planning, sourcing, making, delivering, and returning processes. 8 Section 1 Strategy, Products, and Capacity KEY IDEA The things produced by a service are intangible. Service processes tend to be highly variable and time dependent compared to goods-producing processes. Thus, a company with a new concept must expand rapidly before competitors copy its pro­ cedures. Service intangibility also presents a problem for customers because, unlike with a physical product, customers cannot try it out and test it before purchase.

The second is that a service requires some degree of interaction with the customer for it to be a service. The interaction may be brief, but it must exist for the service to be complete.

Where face-to-face service is required, the service facility must be designed to handle the customer's presence. Goods, on the other hand, are generally produced in a facility separate from the customer. They can be made according to a production schedule that is efficient for the company.

The third difference is that services, with the big exception of hard technologies (such as ATMs) and information technologies (such as answering machines and automated Internet exchanges) are inherently heterogeneous-they vary from day to day and even hour to hour as a function of the attitudes of the customers and the servers. Thus, even highly scripted work, such as found in call centers, can produce unpredictable outcomes. Goods, in contrast, can be produced to meet very tight specifications day-in and day-out with essentially zero variability.

In those cases where a defective good is produced, it can be reworked or scrapped.

The fourth difference is that services as a process are perishable and time dependent, and unlike goods, they can't be stored. You cannot "come back last week" for an air flight or a day on campus.

And fifth, the specifications of a service are defined and evaluated as a package offeatures that affect the five senses. These four features are:

Supporting facility (location, decoration, layout, architectural appropriateness, support­ ing equipment) Facilitating goods (variety, consistency, quantity of the physical goods that go with the service; for example, the food items that accompany a meal service) Explicit services (training of service personnel, consistency of service performance, availability and access to the service, and comprehensiveness of the service) Implicit services (attitude of the servers, atmosphere, waiting time, status, privacy and security, and convenience) The Goods-Services Continuum Almost any product offering is a combination of goods and services. In Exhibit 1.4, we show this arrayed along a continuum of "pure goods" to "pure services." The continuum captures the main focus of the business and spans from firms that just produce products to those that only provide services. Pure goods industries have become low-margin commodity busi­ nesses, and in order to differentiate, they are often adding some services. Some examples are The Goods-Services Continuum Pure Goods Core Goods Food products Appliances Chemicals Automobiles Mining Data storage systems Core Services Hotels Airlilles Internet service providers Goods Services 9 Introduction Chapter I providing help with logistical aspects of stocking items, maintaining extensive information databases, and providing consulting advice.

Core goods providers already provide a significant service component as part of their busi­ nesses. For example, automobile manufacturers provide extensive spare parts distribution ser­ vices to support repair centers at dealers.

Core service providers must integrate tangible goods. For example, your cable television company must provide cable hookup and repair services and also high-definition cable boxes.

Pure services, such as those offered by a financial consulting firm, may need little in the way of facilitating goods, but what they do use-such as textbooks, professional references, and spreadsheets-are critical to their performance. Product-Service Bundling '''-·""""''"'"' u"""""'" refers to a company building service activities into its product offerings for its customers. Such services include maintenance, spare part provisioning, train­ ing, and, in some cases, total systems design and R&D. A well-known pioneer in this area is IBM, which treats its business as a service business and views physical goods as a small part of the "business solutions" it provides its customers. Companies that are most successful in implementing this strategy start by drawing together the service aspects of the business under one roof in order to create a consolidated service organization. The service evolves from a focus on enhancing the product's performance to developing systems and product modifica­ tions that support the company's move up the "value stream" into new markets. This type of strategy might not be the best approach for all product companies, however. A recent study found that while firms that offer product-service bundles generate higher revenues, they tend to generate lower profits as a percent of revenues when compared to focused firms. This is because they are often unable to generate revenues or margins high enough to cover the addi­ tional investment needed for service-related costs.

CAREERS IN OSCM Product-service bundling When a firm builds service activities into its product offerings to create additional value for the customer. So what do people who pursue careers in OSCM do? Quite simply, they specialize in manag­ ing the planning, production, and distribution of goods and services. Jobs abound for people who can do this well since every organization is dependent on effective performance of this fundamental activity for its long-term success. It is interesting to contrast entry-level jobs in OSCM to marketing and finance jobs. Many marketing entry-level jobs focus on actually selling products or managing the sales of prod­ ucts. These individuals are out on the front line trying to push product to potential customers.

Often, a significant part of their income will depend on commissions from these sales. Entry­ level finance (and accounting) jobs are frequently in large public accounting firms. These jobs involve working at a desk auditing transactions to ensure the accuracy of financial statements.

Other assignments involve the analysis of transactions to better understand the costs associ­ ated with the business.

Contrast the marketing and finance jobs to OSCM jobs. The operations and supply chain manager is out working with people to figure out the best way to deliver the goods and ser­ vices of the firm. Sure, they work with the marketing folks, but rather than being on the sell­ ing side, they are on the buying side: trying to select the best materials and hiring the greatest talent. They will use the data generated by the finance people and analyze processes to figure out how to deliver that good or service. OSCM jobs are hands-on, working with people and figuring out the best way to do things.

The following are some typical jobs in OSCM:

Plant manager-Oversees the workforce and physical resources (inventory, equipment, and information technology) required to produce the organization's product.

Hospital administrator-Oversees human resource management, staffing, supplies, and finances at a health care facility. // Know the potential career opportunities in operations and supply chain management. ,,,--, \, KEY IDEA ' OSCM jobs focus on delivering the goods on-time and at low cost.

They are interesting, people-oriented jobs. 10 Section I Strategy, Products, and Capacity Branch manager (bank)-Oversees all aspects of financial transactions at a branch.

• Department store manager-Oversees all aspects of staffing and customer service at a store.

Call center manager-Oversees staffing and customer service activities at a call center.

Supply chain manager-Negotiates contracts with vendors and coordinates the flow of material inputs to the production process and the shipping of finished products to customers.

Purchasing manager-Manages the day-to-day aspects of purchasing, such as invoicing and follow-up.

Logistics manager-Oversees the movement of goods throughout the supply chain.

Warehouse/distribution manager-Oversees all aspects of running a warehouse, includ­ ing replenishment, customer order fulfillment, and staffing.

Business process improvement analyst-Applies the tools of lean production to reduce cycle time and eliminate waste in a process.

Quality control manager-Applies techniques of statistical quality control, such as acceptance sampling and control charts, to the firm's products.

Lean improvement manager-Trains organizational members in lean production and continuous improvement methods.

• Project manager-Plans and coordinates staff activities, such as new-product develop­ ment, new-technology deployment, and new-facility location.

• Production control analyst-Plans and schedules day-to-day production.

Facilities manager-Ensures that the building facility design, layout, furniture, and other equipment are operating at peak efficiency. Chief Operating Officer So how far can you go in a career in OSCM? One goal would be to become the chief oper­ ating officer of a company. The chief operating officer (COO) works with the CEO and company president to determine the company's competitive strategy. The COO's ideas are filtered down through the rest of the company. COOs determine an organization's loca­ tion, its facilities, which vendors to use, and the implementation of the hiring policy. Once the key decisions are made, lower-level operations personnel carry them out. Operations personnel work to find solutions and then set about fixing the problems. Managing the supply chain, service, and support are particularly challenging aspects of a chief operating officer's job.

Career opportunities in OSCM are plentiful today as companies strive to improve prof­ itability by improving quality and productivity and reducing costs. The hands-on work of managing people is combined with great opportunities to leverage the latest technologies in getting the job done at companies around the world. No matter what you might do for a final career, your knowledge of OSCM will prove to be a great asset. OSCM AT WORK Operations and Supply Chain Management Professional Societies If you are interested in career opportunities in operations and supply chain management, you can learn more about the field through the following professional societies. These groups provide industry-recognized certification programs and ongoing training for those seeking to work in the field. AP/CS, the Association for Operations Management, Council of Supply Chain Management Professionals (CSCMP), VVVV'ifll ,,,(.!

Institute for Supply Management (ISM), The Project Management Institute (PM!), 11 Introduction Chapter 1 THE MAJOR CONCEPTS THAT DEFINE THE OSCM FIELD Our purpose in this section is not to go through all the details of the history of OSCM; that would require us to recount the entire Industrial Revolution. Rather, the focus is on the major Recognize the major operations-related concepts that have been popular since the 1980s. Exhibit 1.5 will help clar­ concepts that define the ify the dates as you read about the concepts. Where appropriate, how a supposedly new idea operations and supply relates to an older idea is discussed. (We seem to keep rediscovering the past.) chain management field. Manufacturing Strategy Paradigm The late 1970s and early 1980s saw the development of the para­ digm, which emphasized how manufacturing executives could use their factories' capabilities Emphasizes how a as strategic competitive weapons. Central to this thinking was the notion of manufacturing factory's capabilities could be used strategically to trade-offs among such performance measures as low cost, high quality, and high flexibility. gain advantage over a competing company. Lean Manufacturing, JIT, and TQC The 1980s saw a revolution in the management philoso­ phies and technologies by which production is carried out.

production was the major breakthrough in manufacturing philosophy. Pioneered by the Japanese, JIT is an integrated set of activities designed to achieve high-vol­ ume production using minimal inventories of parts that arrive exactly when they are needed. The philosophy-coupled with which aggressively seeks to eliminate causes of production defects-is now a cornerstone in many manufacturers' production practices, and the term is used to refer to the set of concepts.

Of course, the Japanese were not the first to create a highly integrated, efficient production system. In 1913, Henry Ford developed an assembly line to make the Model-T automo­ bile. Ford developed a system for making the Model-T that was constrained only by the capabilities of the workforce and existing technology. Quality was a critical prerequisite for Source: Library of Congress/ [LC-DIG-det-4a27966] Time Line Depicting When Major OSCM Concepts Became Popular Manufacturing strategy developed Late 97(), Just-in-time (JIT) production Earl 98(h pioneered by the Japanese Mi 980;, Service quality and productivity Total Quality Management Ear 199(b (TQM) and Quality Six Sigma Quality Certification programs Mi 19LJ0c, Supply Chain Business Process Late 9LJ(h Management (SCM) Reengineering (BPR) Ear ·:moos Service Science Electronic Commerce Business Analytics Source: F. Robert Jacobs An integrated set of activities designed to achieve high-volume production using minimal inventories of parts that arrive exactly when they are needed. Aggressively seeks to eliminate causes of production defects.

To achieve high customer service with minimum levels of inventory investment. 12 Section 1 Strategy, Products, and Capacity Total quality management Managing the entire organization so it excels in all dimensions of products and services important to the customer.

Business process An approach to improving business processes that seeks to make revolutionary changes as opposed to evolutionary (small) changes. Six A statistical term to describe the quality goal of no more than 3.4 defects out of every million units.

Also refers to a quality improvement philosophy and program. customization The ability to produce a unique product exactly to a particular customer's requirements.

Electronic commerce The use of the Internet as an essential element of business activity. Ford: The line could not run steadily at speed without consistently good components. On-time delivery was also critical for Ford; the desire to keep workers and machines busy with materi­ als flowing constantly made scheduling critical. Product, processes, materials, logistics, and people were well integrated and balanced in the design and operation of the plant. Service Quality and Productivity The unique approach to quality and productivity pioneered by McDonald's has been so suc­ cessful that it stands as a reference point in thinking about how to deliver high-volume stan­ dardized services. Total Quality Management and Quality Certification Another major development was the focus on in the late 1980s and 1990s. Helping the quality movement along was the Baldrige National Quality Award, started in 1987 under the direction of the National Institute of Standards and Technol­ ogy. The Baldrige Award recognizes companies each year for outstanding quality manage­ ment systems.

The ISO 9000 certification standards, created by the International Organization for Stan­ dardization, now play a major role in setting quality standards for global manufacturers.

Many companies require that their vendors meet these standards as a condition for obtaining contracts. Business Process Reengineering The need to become lean to remain competitive in the global economic recession in the 1990s pushed companies to seek innovations in the processes by which they run their operations.

The approach seeks to make revolutionary changes as opposed to evolutionary changes (which are commonly advocated in TQM). It does this by taking a fresh look at what the organization is trying to do in all its business processes, and then eliminating non-value-added steps and computerizing the remaining ones to achieve the desired outcome. Six Sigma Quality Originally developed in the 1980s as part of total quality management, in the 1990s saw a dramatic expansion as an extensive set of diagnostic tools was developed. These tools have been taught to managers as part of "Green and Black Belt Programs" at many cor­ porations. The tools are now applied not only to the well-known manufacturing applications, but also to nonmanufacturing processes such as accounts receivable, sales, and research and development. Six Sigma has been applied to environmental, health, and safety services at companies and is now being utilized in research and development, finance, information sys­ tems, legal, marketing, public affairs, and human resource processes. Supply Chain Management The central idea of supply chain management is to apply a total system approach to managing the flow of information, materials, and services from raw material suppliers through factories and warehouses to the end customer. Trends such as outsourcing and are forcing companies to find flexible ways to meet customer demand. The focus is on optimizing core activities to maximize the speed of response to changes in customer expectations. Electronic Commerce The quick adoption of the Internet and the World Wide Web during the late 1990s was remarkable. The term refers to the use of the Internet as an essential element of business activity. The use of Web pages, forms, and interactive search engines has changed the way people collect information, shop, and communicate. It has changed the way operations managers coordinate and execute production and distribution functions. 13 Introduction Chapter 1 Sustainability and the Triple Bottom Line is the ability to maintain balance in a system. Management must now consider the mandates related to the ongoing economic, employee, and environmental viability of the firm (the Economically, the firm must be profitable. Employee job secu­ rity, positive working conditions, and development opportunities are essential. The need for nonpolluting and non-resource-depleting products and processes presents new challenges to operations and supply managers.

Business Analytics involves the analysis of data to better solve business problems. Not that this is something new: Data has always been used to solve business problems. What is new is the reality that so much more data is now captured and available for decision-making analysis than was available in the past. In addition, mathematical tools are now readily available that can be used to support the decision-making process.

In the past, most analysis involved the generation of stan­ dard and ad hoc reports that summarized the current state of the firm. Software allowed querying and "drill down" analy­ sis to the level of the individual transaction, useful features for understanding what happened in the past. Decision making was typically left to the decision maker based on judgment or simple alerting rules. The new "analytics" movement takes this to a new level using statistical analysis, forecasting to extrapolate what to expect in the future, and even optimiza­ tion, possibly in real time, to support decisions. These math­ ematical results can be used either to support the decision maker or to automate decision making.

Take, for example, an airline manager presented with the task of setting price points for tickets on a flight. Real-time demand data, historic demand patterns, and powerful math- ©Monty Rakusen!Getty Images RF ematical models can now be applied to setting price points for different classes of tickets. As it is closer to the time of depar­ ture for a particular flight, these price points can be adjusted based on how sales are going. These decisions have a major impact on the utilization of air­ craft capacity, which impacts both revenue and costs for the airlines. These decisions can even be made using criteria related to weather conditions, fuel prices, crew schedules, and other flights to maximize the profit of the firm. Current Issues in Operations and Supply Chain Management OSCM is a dynamic field, and issues arising in global enterprise present exciting new chal­ lenges for operations managers. Looking forward to the future, we believe the major chal­ lenges in the field will be as follows: 1. Coordinating the relationships between mutually supportive but separate orga­ nizations. Recently, there has been a dramatic surge in the outsourcing of parts and services as companies seek to minimize costs. Many companies now even outsource major corporate functions, such as information systems, product development and design, engineering services, and distribution. The ability to coordinate these activi­ ties is a significant challenge for today's operations and supply chain manager. 2. Optimizing global supplier, production, and distribution networks. The imple­ mentation of global enterprise resource planning systems, now common in large companies, has challenged managers to use all of this information. Operations and supply chain analytics involves leveraging this information for making decisions related to resources such as inventory, transportation, and production. The ability to meet current resource needs without compromising the ability of future generations to meet their needs. bottom line A business strategy that includes social, economic, and environmental criteria. analytics The use of current business data to solve business problems using mathematical analysis. 14 Section I Strategy, Products, and Capacity 3. Managing customer touch points. As companies strive to cut costs, they often scrimp on the customer support personnel (and training) required to effectively staff service departments, help lines, and checkout counters. This leads to the frustrations we have all experienced, such as being placed in call center limbo seemingly for hours, getting bad advice when finally interacting with a company rep, and so on.

The issue here is to recognize that making resource utilization decisions must capture the implicit costs of lost customers as well as the direct costs of staffing.

4. Raising senior management awareness of OSCM as a significant competitive weapon. Many senior executives entered the organization through finance, strategy, or marketing, built their reputations on work in these areas, and as a result often take OSCM for granted. As we will demonstrate in this book, this can be a critical mis­ take when we realize how profitable companies such as Amazon, Apple, Taco Bell, and Southwest Airlines are. These are companies where executives have creatively used OSCM for competitive advantage. EFFICIENCY, EFFECTIVENESS, AND VALUE Compared with most of the other ways managers try to stimulate growth-technology investments, acquisitions, and major market campaigns, for example-innovations in oper­ Evaluate the efficiency of ations are relatively reliable and low cost. As a business student, you are perfectly posi­ a firm. tioned to come up with innovative operations-related ideas. You understand the big picture of all the processes that generate the costs and support the cash flow essential to the firm's long-term viability.

Through this book, you will become aware of the concepts and tools now being employed by companies around the world as they craft efficient and effective operations. A ratio of the actual output means doing something at the lowest possible cost. Later in the book, we define this more of a process relative to thoroughly, but roughly speaking, the goal of an efficient process is to produce a good or some standard. Also, being provide a service by using the smallest input of resources. In general, these resources are the "efficient" means doing material, labor, equipment, and facilities used in the OSCM processes. something at the lowest possible cost. means doing the right things to create the most value for the company. For example, to be effective at a grocery store it is important to have plenty of operating check-out lines even though they may often stand idle. This is a recognition that the customer's time is Doing the things that will valuable and that they do not like waiting to be served in the check-out line. Often, maximiz­ create the most value for ing effectiveness and efficiency at the same time creates conflict between the two goals. We the customer. see this trade-off every day in our lives. At the check-out lines, being efficient means using the fewest people possible to ring up customers. Being effective, though, means minimizing the amount of time customers need to wait in line.

Related to efficiency and effectiveness is the concept of which can be abstractly The attractiveness of a defined as quality divided by price. Here, quality is the attractiveness of the product, con­ product relative to its price. sidering its features and durability. If you can provide the customer with a better car without changing price, value has gone up.

If you can give the customer a better car at a lower price, value goes way up. A major objective of this book is to show how smart management can achieve high levels of value. How Does Wall Street Evaluate Efficiency? Comparing firms from an operations and supply chain view is important to investors because the relative cost of providing a good or service is essential to high earnings growth. When you think about it, earnings growth is largely a function of the firm's profitability, and profit can be increased through higher sales and/or reduced cost. Highly efficient firms usually shine when demand drops during recession periods because they often can continue to make a profit due to their low-cost structure. These operations-savvy firms may even see a recession as an opportunity to gain market share as their less-efficient competitors struggle to remain in business. 15 Introduction Chapter 1 The Impact of Reducing Raw Material Cost Business Performance before Improvement IBusiness Performance with 5% Reduction in Materials Cost I An interesting relationship between the costs related to OSCM functions and profit is the direct impact of a reduction of cost in one of these functions on the profit margin of the firm.

In Exhibit 1.6, we show data from a company's balance sheet. The balance sheet on the left shows the return on investment (ROI) for the company prior to a reduction in raw material cost. The balance sheet on the right shows the same data, but with a reduction of 5 percent in the cost of raw materials. The cost of raw materials affects the values throughout the supply chain, including the cost of goods sold, inventory value, and total value of assets; therefore, reducing raw material costs by 5 percent leads to nearly a 29 percent increase in profit mar­ gins and a 30 percent increase in the company's ROI. Thus, there is an almost 6: I leverage on every dollar saved by reducing raw materials costs.

A common set of financial indicators that Wall Street tracks to benchmark companies are called management efficiency ratios. is a process in which one company studies the processes of another company (or industry) to identify best practices. You prob­ ably discussed these measures in one of your accounting classes. It is not our purpose to do an in-depth review of this material, but it is important to recognize the significant impact the operations and supply chain processes have on these ratios. A comparison of a few automobile companies using the ratios is shown in Exhibit 1.7.

The following is a brief review of these ratios. Starting from basic financial data for the firm, the simplest efficiency-related measures relate to the productivity of labor employed by the firm. There are two of these ratios:

Net income per employee Revenue (or sales) per employee A Comparison of Automobile Companies Efficiency Measure Toyota (TM) General Motors (GM) Ford (F) Industry When one company studies the processes of another company to identify best practices.

Income per employee $60,266 $50,255 $17,037 $39,170 Revenue (or sales) per employee $738,754 $1,949,113 $770,465 $799,932 Receivables turnover 3.3 6.4 1.6 3.2 Inventory turnover 10.5 9.7 15.3 9.5 Asset turnover 0.6 0.9 0.7 0.7 16 Section 1 Strategy, Products, and Capacity These labor productivity measures are fairly crude since many employees are not directly employed in operations and supply chain-related functions. Also, it is important to recog­ nize that the concepts described in this book are certainly applicable to the other functions in the firm.

A third efficiency ratio measures the number of times receivables are collected, on aver­ age, during the fiscal year. This ratio is called the receivables turnover ratio, and it is calcu­ lated as follows: · bl r. Annual Credit Sales R ecezva e 1 urnover = ----------- [1.1] Average Account Receivable The receivables turnover ratio measures a company's efficiency in collecting its sales on credit. Accounts receivable represent the indirect interest-free loans that the company is pro­ viding to its clients. A higher receivables ratio implies either that the company operates on a cash basis or that its extension of credit and collection methods are efficient. Also, a high ratio reflects a short lapse of time between sales and the collection of cash, while a low number means collection takes longer. The lower the ratio, the longer receivables are being held and the higher the risk of them not being collected.

A ratio that is low by industry standards will generally indicate that the business needs to improve its credit policies and collection procedures. If the ratio is going up, either collec­ tion efforts are improving, sales are rising, or receivables are being reduced. From an opera­ tions and supply chain perspective, the firm may be able to impact this ratio by such things as the speed of delivery of products, accuracy in filling orders, and amount of inspection the customer needs to do. Factors such as the outgoing quality of the product and how customer orders are taken, together with other order-processing activities, may have a huge impact on the receivables turnover ratio. This is particularly true when Internet catalogs are the main interface between the customer and the firm.

Another efficiency ratio is inventory turnover. It measures the average number of times inventory is sold and replaced during the fiscal year. The inventory turnover ratio formula is: Cost of Goods Sold Jnventmy Turnover=---------- [1.2] Average Inventory Value This ratio measures the company's efficiency in turning its inventory into sales. Its purpose is to measure the liquidity or speed of inventory usage. This ratio is generally compared against industry averages. A low inventory turnover ratio is a signal of inefficiency, because inventory ties up capital that could be used for other purposes. It might imply either poor sales or excess inventory relative to sales. A low turnover ratio can indicate poor liquid­ ity, possible overstocking, and obsolescence, but it may also reflect a planned inventory buildup in the case of material shortages or in anticipation of rapidly rising prices. A high inventory turnover ratio implies either strong sales or ineffective buying (the firm may be buying too often and in small quantities, driving up the buying price). A high inventory turnover ratio can indicate better liquidity, but it can also indicate shortages or inadequate inventory levels, which may lead to a loss in business. Generally, a high inventory turnover ratio when compared to competitors' is good. This ratio is controlled to a great extent by operations and supply chain processes. Factors such as order lead times, purchasing prac­ tices, the number of items being stocked, and production and order quantities have a direct impact on the ratio.

The final efficiency ratio considered here is asset turnover. This is the amount of sales generated for every dollar's worth of assets. The formula for the ratio is: r. Revenue (or Sales) A sset 1 urnover =------­ [1.3] Total Assets Asset turnover measures a firm's efficiency at using its assets in generating sales revenue­ the higher the number, the better. It also indicates pricing strategy: Companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset Introduction Chapter 1 17 turnover. This ratio varies significantly by industry, so comparisons between unrelated businesses are not useful. To a great extent, the asset turnover ratio is similar to the receivables turnover and the inventory turnover ratio since all three involve the investment in assets. Asset turnover is more general and includes the plants, warehouses, equipment, and other assets owned by the firm. Since many of these facilities are needed to support the operations and supply chain activities, the ratio can be significantly impacted by investments in technology and outsourcing, for example.

These ratios can be calculated from data in a firm's annual financial state­ ments and are readily available on the Internet from websites such as AOL Finance (http://www.aol.com/stock-quotes/). Ford Fiestas on the assembly line at the Ford factory in Cologne. Germany ©Oliver Berg!dpa!Corbis EXAMPLE 1.1: Comparing the Management Efficiency of Companies in the Same Industry Using Wall Street Measures Building on the data in Exhibit 1.7, compare the Japanese automobile manufacturer Honda to Toyota, General Motors, and Ford. Specifically address the following questions: 1. How does Honda (stock symbol HMC) differ relative to income per employee, rev­ enue per employee, receivables turnover, inventory turnover, and asset turnover? 2. Speculate on why Honda's Wall Street efficiency measures are different from the other automobile companies'. Be sure to consider the fact that Honda is a smaller company compared to the others. SOLUTION The first step is to get comparable data on Honda. One Website that has these data is, again, www.aol.com/stock-quotes/. Hyperlink to this site using your browser and then enter HMC in the "Get Quote" block. Then, from the menu find Key Ratios, select Efficiency Ratios. Check to see that you have the correct data.

Example data for Honda on the date this chapter was written were as follows:

Income per employee 30,203 Revenue per employee 585,647 Receivables turnover 4.9 Inventory turnover 6.3 Asset turnover 0.8 Next, we need to try to understand the data. It is probably good to start with asset turnover, because this is the most comprehensive measure. Notice that GM is the highest in the group.

Recall that GM recently went bankrupt and was recapitalized, which could explain the higher asset turnover. Honda, though, is fine compared to the industry average on this measure. On net income per employee, revenue per employee and inventory turn, we see that Honda appears, for the most part, to be stronger than Ford, but weaker than Toyota and Gen­ eral Motors. Ford is strongest in inventory turn. This is surprising because we might expect Toyota to be strong here, given its reputation in managing inventory. It is interesting to see how Ford is weakest in receivables turnover, which may relate to the amount of credit it is giving customers in order to sell vehicles. 18 Section I Strategy, Products, and Capacity Concept Connections t.© 1-1 IClentifM the elements of! operations anCI supplM chain management (OSGM).

Summary • Processes are used to implement the strategy of the firm. Key Terms Operations and supply chain management (OSCM) The design, operation, and improvement of the systems that create and deliver the firm's primary products and services. Process One or more activities that transform inputs into outputs. • Analytics are used to support the ongoing decisions needed to manage the firm. Product -service bundling When a firm builds service activities into its product offerings to create additional value for the customer. t.© 1-2 Know the potential career opportunities in operations ana supplM chain management. Summary • OSCM people specialize in managing the production • COOs determine an organization's location, its facili­ of goods and services. ties, which vendors to use, and how the hiring policy • OSCM jobs are hands-on and require working with will be implemented.

others and figuring out the best way to do things.

• The chief operating officer (COO) works with the CEO and company president to determine the com­ pany's competitive strategy. l.l.© 1-3 Recognize the major concepts that Clefine tfie operations ana supplM c:llain management fielCI. Summary Many of the concepts that form the OSCM field have their origins in the Industrial Revolution in the 1800s.

These concepts include: Key Terms Manufacturing strategy Emphasizes how a factory's capabilities could be used strategically to gain advantage over a competing company. Just-in-time (JIT) An integrated set of activities designed to achieve high-volume production using minimal inven­ tories of parts that arrive exactly when they are needed. Total quality control (TQC) Aggressively seeks to elimi­ nate causes of production defects.

Lean manufacturing To achieve high customer service with minimum levels of inventory investment.

Total quality management (TQM) Managing the entire organization so it excels in all dimensions of products and services important to the customer.

The focus of this book is on popular concepts developed since the 1980s. Business process reengineering (BPR) An approach to improving business processes that seeks to make revolu­ tionary changes as opposed to evolutionary (small) changes. Six Sigma A statistical term to describe the quality goal of no more than 3.4 defects out of every million units. Also refers to a quality improvement philosophy and program. Mass customization The ability to produce a unique product exactly to a particular customer's requirements. Electronic commerce The use of the Internet as an essential element of business activity. Sustainability The ability to meet current resource needs without compromising the ability of future gen­ erations to meet their needs. Introduction Chapter I 19 Triple bottom line A business strategy that includes Business analytics The use of current business data to social, economic, and environmental criteria. solve business problems using mathematical analysis. I!('!) 11-4 Evaluate tile efficien~ o~ a firm. " Summary Criteria that relate to how well the firm is doing include:

• Efficiency • Effectiveness • Value created in its products and services Key Terms Efficiency A ratio of the actual output of a process rela­ tive to some standard. Also, being "efficient" means doing something at the lowest possible cost. Effectiveness Doing the things that will create the most value for the customer. Efficiency Measures: ~ ~ - Value The attractiveness of a product relative to its price.

Benchmarking When one company studies the pro­ cesses of another company to identify best practices.

Income per employee Revenue (or sales) per employee [1.1] Receivables turnover = Annual credit sal~s Average accounts receivable [1.2] Cost of goods sold Inventory turnover = ----. -'-----­ Average inventory value [1.3] A Revenue (or sales) sset turnover = 'T1ota 1assets Discussion Questions L01-1 1. Using Exhibit 1.3 as a model, describe the source-make-deliver-return relationships in the following systems: a. An airline b. An automobile manufacturer c. A hospital d. An insurance company 2. Define the service package of your college or university. What is its strongest element? Its weakest one? 3. What service industry has impressed you the most with its innovativeness? 4. What is product-service bundling, and what are the benefits to customers? 5. What is the difference between a service and a good? L01-2 6. Look at the job postings at www.apics.org and evaluate the opportunities for an OSCM major with several years of experience. L01-3 7. Recent outsourcing of parts and services that had previously been produced internally is addressed by which current issue facing operation management today? 8. What factors account for the resurgence of interest in OSCM today? 20 Section 1 Strategy, Products, and Capacity 9. As the field of OSCM has advanced, new concepts have been applied to help companies compete in a number of ways, including the advertisement of the firm's products or ser­ vices. One recent concept to gain the attention of companies is promoting sustainability.

Discuss how you have seen the idea of sustainability used by companies to advertise their goods or services. L01-4 10. Some people tend to use the terms effectiveness and efficiency interchangeably, though we've seen they are different concepts. But is there any relationship at all between them? Can a firm be effective but inefficient? Very efficient but essentially ineffective? Both? Neither? 11. Two of the efficiency ratios mentioned in the chapter are the receivable turnover ratio and the inventory turnover ratio. While they are two completely separate measures, they are very similar in one way. What is the common thread between these two? Objective Questions L01-1 1. What are the three elements that require integration to be successful in operations and sup­ ply chain management? (Answer in Appendix D) 2. Operations and supply chain management is concerned with the design and management of the entire system that has what function? L01-2 3. Match the following OSCMjob titles with the appropriate duties and responsibilities. __ Plant manager A. Plans and coordinates staff activities such as new product development and new facility location. -- Supply chain manager B. Oversees the movement of goods throughout the supply chain. -- Project manager C. Oversees the workforce and resources required to produce the firm's products. -- Business process D. Negotiates contracts with vendors and coordinates improvement analyst the flow of material inputs to the production process. -- Logistics manager E. Applies the tools of lean production to reduce cycle time and eliminate waste in a process.

4. What high-level position manager is responsible for working with the CEO and company president to determine the company's competitive strategy? L01-3 5. Order the following major concepts that have helped define the OSCM field on a time line.

Use 1 for the earliest concept to be introduced, and 5 for the most recent.

__ Supply chain management -- Manufacturing strategy -- Business analytics -- Total quality management -- Electronic commerce 6. Which major OSCM concept can be described as an integrated set of activities designed to achieve high-volume production using minimal inventories of parts that arrive at worksta­ tions exactly when they are needed? 7. Operations and supply chain leverages the vast amount of data in enter­ prise resource planning systems to make decisions related to managing resources. 8. Which current issue in OSCM relates to the ability of a firm to maintain balance in a sys­ tem, considering the ongoing economic, employee, and environmental viability of the firm? Introduction Chapter 1 21 L01-4 9. Consider the following financial data from the past year for Midwest Outdoor Equipment Corporation. (Answers in Appendix D) Gross income $25,240,000 Total sales 24,324,000 Tota I credit sales 18,785,000 Net income 2,975,000 Cost of goods sold 12,600,000 Total assets 10,550,000 Average inventory 2,875,000 Average receivables 3.445,000 a. Compute the receivable turnover ratio.

b. Compute the inventory turnover ratio. c. Compute the asset turnover ratio. 10. A manufacturing company has entered into a new contract with a major supplier of raw materials used in the manufacturing process. Under the new arrangement, called vendor managed inventory, the supplier manages its raw material inventory inside the manufac­ turer's plant, and only bills the manufacturer when the manufacturer consumes the raw material. How is this likely to affect the manufacturer's inventory turnover ratio? 11. What is the name of the process in which one company studies the processes of another firm in order to identify best practices? 12. A company has recently implemented an automated online billing and payment process­ ing system for orders it ships to customers. As a result, it has reduced the average number of days between billing a customer and receiving payment by 10 days. How will this affect the receivables turnover ratio? Analytics Exercise: Comparing Companies Using Wall Street Efficiency Measures (LO 1-4) The idea behind this exercise is for the class to generate data comparing companies in many different industries.

These data will be used to compare these industries from an operations and supply chain view to better understand differences. Be prepared for a lively class discussion for this session.

Step 1: Pick an industry you find interesting. This may be driven by a company by which you would like to be employed or by some other factor. Within the industry, identify three companies that compete with one another. To find the data for this exercise two sites are suggested http://www.aol.com/stock-quotes/ and http://www.msn.

com/money/. These sites are updated frequently, and the data needed should be available for most companies listed on the United States stock exchanges.

Step 2: Collect data related to each company. At a minimum, try to find the income per employee, revenue per employee, receivables turnover, inventory turnover, and asset turnover for each company. It may be necessary to calculate the income per employee and revenue per employee ratios by taking the financial data and dividing by the number of company employees. For the other data, look for "efficiency ratios" on the Website.

Step 3: Compare the companies based on what you have found. Which company appears to have the most productive employees? Which company has the best operations and supply chain processes? Which com­ pany is most efficient in its use of credit? Which com­ pany makes the best use of its facility and equipment assets? Step 4: What insights can you draw from your analy­ sis? What could your companies learn from benchmark­ ing each other? 22 Section 1 Strategy, Products, and Capacity Practice Exam Name the term defined m each of the following statements. 1. The pipelinelike movement of the materials and infor­ mation needed to produce a good or service. 2. A strategy that meets the needs of shareholders and employees and that preserves the environment. 3. The processes needed to determine the set of future actions required to operate an existing supply chain. 4. The selection of suppliers. 5. A type of process where a major product is produced or a service provided. 6. A type of process that moves products to warehouses or customers. 7. Processes that involve the receiving of worn-out, defective, and excess products back from customers and support for customers who have problems. 8. A type of business where the major product is intan­ gible, meaning it cannot be weighed or measured. 9. Refers to when a company builds service activities into its product offerings. 10. Means doing something at the lowest possible cost. 11. Means doing the right things to create the most value for the company. 12. Abstractly defined as quality divided by price. 13. A philosophy that aggressively seeks to eliminate causes of production defects. 14. An approach that seeks to make revolutionary changes as opposed to evolutionary changes (which is advocated by total quality management). 15. An approach that combines TQM and JIT. 16. Tools that are taught to managers in "Green and Black Belt Programs." 17. A program to apply the latest concepts in informa­ tion technology to improve service productivity. llup;i;iu!llu;i pm11u;iw;illimuw ;>:JU;>FJS ;>:J!AJ:JS "LI i\1nunb uwli!S X!S ·91 llupnpu1nuuw uu;i1 ·~1 llup:i:iu!liu:i:iJ SS;J:JOJd SS;JU!Sng ·pr lU:lW:lllllUlllU Al!lllnb JlllOJ, ·n ;lUJUA ·z1 SS:lU:lA!P:ljJ'.3 ·11 A:JU:l!J!Jl'.3 'Ol llunpunq :l:J!AJ;>s-pnpOJd '6 :l:J!Al:lS '8 llu!um1;i~ ·l i\J;iA!PG ·9 llup1uw ·~ llu!:Jmos ·p llu!uuu1d '£ i\ll:i1m1s :iun ruonoq :iJd!JJ. ·z J{JOMJ:iu (u!utp) fi:Jddns ·1 mux3 :lJ!PllJd 01 sJa,usuv