USING OPERATIONS TO

CREATE VALUE

By
Shreyanshu Parhi
Assistant Professor (Operations Management)
LEARNING GOALS

➢ Describe the role of operations in an organization and its historical evolution over time.
➢ Describe the process view of operations in terms of inputs, processes, outputs, information flows,
suppliers, and customers.
➢ Describe the supply chain view of operations in terms of linkages between core and support
processes.
➢ Define an operations strategy and its linkage to corporate strategy and market analysis.
➢ Identify nine competitive priorities used in operations strategy and explain how a consistent pattern
of decisions can develop organizational capabilities.
➢ Identify the latest trends in operations management and understand how, given these trends, firms
can address the challenges facing operations and supply chain managers in a firm.

Prepared by Shreyanshu Parhi

Assistant Professor (Operations Management)
WHAT IS OPERATIONS MANAGEMENT?
• Operations: The part of a business organization that is responsible for producing goods or
services.
• Operations Management: The systematic design, direction, and control of processes that
transform inputs into services and products for internal, as well as external, customers.
• A process is any activity or group of activities that takes one or more inputs, transforms them,
and provides one or more outputs for its customers.
• For organizational purposes, processes tend to be clustered together into operations.
• An operation is a group of resources performing all or part of one or more processes.
• Processes can be linked together to form a supply chain, which is the interrelated series of
processes within a firm and across different firms that produce a service or product to the
satisfaction of customers.
• Supply chain management is the synchronization of a firm’s processes with those of its suppliers
and customers to match the flow of materials, services, and information with customer demand.

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Assistant Professor (Operations Management)
GOOD OR SERVICE?

• Goods are physical items that include raw materials, parts, subassemblies, and final products.
✓ Automobile
✓ Computer
✓ Oven
✓ Shampoo
• Services are activities that provide some combination of time, location, form or psychological
value.
✓ Air travel
✓ Education
✓ Haircut
✓ Legal counsel

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Assistant Professor (Operations Management)
SUPPLY CHAIN

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Assistant Professor (Operations Management)
INTEGRATION BETWEEN BUSINESS FUNCTIONAL AREAS

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Assistant Professor (Operations Management)
 FUNCTION OVERLAP

➢ Finance & operations

 Budgeting
 Economic analysis of investment
proposals
 Provision of funds
➢ Marketing & operations
 Demand data
 Product and service design
 Competitor analysis
 Lead time data

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Assistant Professor (Operations Management)
 HOW PROCESSES WORK

Control = The comparison of feedback Feedback = Measurements taken at various

against previously established standards to points in the transformation process
determine if corrective action is needed.
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Assistant Professor (Operations Management)
PEOCESS MANAGEMENT: HOW PROCESSES WORK
• Process - one or more actions that transform inputs into outputs

• Every process and every person in the organization has customers

✓ External customers
✓ Internal customers
• Every process and every person in the organization relies on suppliers
✓ External suppliers
✓ Internal suppliers

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Assistant Professor (Operations Management)
SUPPLY & DEMAND

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Assistant Professor (Operations Management)
PROCESS VARIATION
SCOPE OF OPERATIONS MANAGEMENT

The scope of operations management ranges across the organization.

• The operations function includes many interrelated activities such as:

✓ Forecasting
✓ Capacity planning
✓ Facilities and layout
✓ Scheduling
✓ Managing inventories
✓ Assuring quality
✓ Motivating employees
✓ Deciding where to locate facilities
✓ And more . . .
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Assistant Professor (Operations Management)
SERVICE AND MANUFACTURING PROCESSES
• Two major types of processes are (1) service and (2) manufacturing.
• Service processes pervade the business world and have a prominent place in discussion of operations
management.
• Manufacturing processes are also important; without them the products would not exist. In addition,
manufacturing gives rise to service opportunities.
• Manufacturing processes convert materials into goods that have a physical form call products. For
example, an assembly line produces a 370 Z sports car.
• The transformation processes change the materials on one or more of the following dimensions:
Physical properties; Shape; Size (e.g., length, breadth, and height of a rectangular block of wood);
Surface finish; Joining parts and materials.
• If a process does not change the properties of materials on at least one of these five dimensions, it is
considered a service (or nonmanufacturing) process.
• Service processes tend to produce intangible, perishable outputs. For example, car loan from bank.
• Service processes tend to have a higher degree of customer contact. Customers may take an active
role in the process itself. For Instance, shopping in a supermarket.
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Assistant Professor (Operations Management)
MANUFACTURING Vs. SERVICE
• Manufacturing and service are often different in terms of what is done but quite similar in terms of
how it is done?
➢ Degree of customer contact: Service have a greater degree of contacts with customers.
➢ Uniformity of input: Service have a higher degree of variability inputs as compared to
manufacturing.
➢ Labor content of jobs: Service have a greater degree of labor content.
➢ Uniformity of output
➢ Measurement of productivity: Difficult for service jobs due to high variations in inputs.
➢ Production and delivery
➢ Quality assurance: More challenging for services due to higher variations in input and delivery and
consumption occur at same time.
➢ Amount of inventory: Service have less inventory than manufacturing operations, so inventory
costs are lower than manufacturing.
➢ Evaluation of work: Manufacturing jobs are well documented and paid.
➢ Ability to patent design: Product designs are more likely to get patent than service designs.
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Assistant Professor (Operations Management)
CONTINUUM OF CHARACTERISTICS OF MANUFACTURING AND
SERVICE PROCESSES

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Assistant Professor (Operations Management)
GOODS-SERVICE CONTINUUM
Products are typically neither purely service- or purely goods-based.

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Assistant Professor (Operations Management)
THE SUPPLY CHAIN VIEW

• Each activity in a process should add value to the preceding activities; waste and unnecessary
cost should be eliminated.
• The concept of supply chains reinforces the link between processes and performance, which
includes a firm’s internal processes as well as those of its external customers and suppliers.
• It also focuses attention on the two main types of processes in the supply chain, namely, (1) core
processes and (2) support processes.
• A core process is a set of activities that delivers value to external customers.
• A support process provides vital resources and inputs to the core processes and is essential to the
management of the business.

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Assistant Professor (Operations Management)
SUPPLY CHAIN LINKAGES

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Assistant Professor (Operations Management)
CORE PROCESS

• Supplier Relationship Process: Employees select the suppliers of services, materials, and
information and facilitate efficient flow of items into the firm. Working effectively with suppliers
add significant value to the services or products. Example, negotiating fair prices, scheduling on-
time deliveries.
• New Service/Product Development Process: Employees in the new service/product development
process design and develop new services or products. The services or products may be developed
to external customer specifications or conceived from inputs received from the market.
• Order Fulfillment Process: The order fulfillment process includes the activities required to
produce and deliver the service or product to the external customer.
• Customer Relationship Process: Employees involved in the process identify, attract, and build
relationships with external customers and facilitate the placement of orders by customers.
Traditional functions, such as marketing and sales, may be a part of this process.

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Assistant Professor (Operations Management)
SUPPLY CHAIN PROCESS EXAMPLES

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Assistant Professor (Operations Management)
OM DECISION MAKING
• Most operations decisions involve many alternatives that can have quite different impacts on
costs or profits
• Typical operations decisions include:
✓ What: What resources are needed, and in what amounts?
✓ When: When will each resource be needed? When should the work be scheduled? When should
materials and other supplies be ordered?
✓ Where: Where will the work be done?
✓ How: How will he product or service be designed? How will the work be done? How will
resources be allocated?
✓ Who: Who will do the work?

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Assistant Professor (Operations Management)
METRICS AND TRADE-OFFS

 Performance metrics  Analysis of trade-offs

 All managers use metrics to manage  A trade-off is giving up one thing in
and control operations return for something else
➢ Profits ➢ Carrying more inventory (an
➢ Costs expense) in order to achieve a
➢ Quality greater level of customer service
➢ Productivity
➢ Flexibility
➢ Inventories
➢ Schedules
➢ Forecast accuracy

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Assistant Professor (Operations Management)
OPERATIONS STRATEGY
• The means by which operations implements the firm’s corporate strategy and helps to build a
customer-driven firm.
• It links long-term and short-term operations decisions to corporate strategy and develops the
capabilities the firm needs to be competitive.
• The firm’s operations strategy must be driven by the needs of its customers.
• Developing a customer-driven operations strategy is a process that begins with corporate strategy,
coordinates the firm’s overall goals with its core processes.
• Corporate strategy provides the resources to develop the firm’s core competencies and core
processes, and it identifies the strategy the firm will employ in international markets.
• Based on corporate strategy, a market analysis categorizes the firm’s customers, identifies their
needs, and assesses competitors’ strengths which is used to develop competitive priorities.
• Competitive priorities are important to the design of existing and new services or products, the
processes that will deliver them, and the operations strategy will develop the firm’s capabilities to
fulfill them.

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Assistant Professor (Operations Management)
CORPORATE STRATEGY
• Corporate strategy provides an overall direction that serves as the framework for carrying out all
the organization’s functions.
• It specifies the businesses the company will pursue, isolates new opportunities and threats in the
environment, and identifies growth objectives.
• Developing a corporate strategy involves four considerations:
✓ environmental scanning: monitoring and adjusting to changes in the business environment.
✓ identifying and developing the firm’s core competencies.
✓ developing the firm’s core processes.
✓ developing the firm’s global strategies.

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Assistant Professor (Operations Management)
CORPORATE STRATEGY AND OPERATIONS MANAGEMENT
DECISIONS

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Assistant Professor (Operations Management)
DEVELOPING CORE COMPETENCIES

• Core competencies are the unique resources and strengths that an organization’s management
considers when formulating strategy.
• They reflect the collective learning of the organization, especially in how to coordinate processes
and integrate technologies?
• Workforce: A well-trained and flexible workforce allows organizations to respond to market needs
in a timely fashion.
• Facilities: Having well-located facilities (offices, stores, and plants) is a primary advantage
because of the long lead time needed to build new ones. Also, flexible facilities that can handle a
variety of services or products at different levels of volume provide a competitive advantage.
• Market and Financial Know-How: An organization that can easily attract capital from stock
sales, market and distribute its services or products, has a competitive edge.
• Systems and Technology: Organizations with expertise in information systems have an edge in
industries that are data intensive, such as banking.

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Assistant Professor (Operations Management)
DEVELOPING GLOBAL STRATEGIES
• A global strategy include buying foreign services or parts, combating threats from foreign
competitors, or planning ways to enter markets beyond traditional national boundaries.
• Two effective global strategies are (1) strategic alliances and (2) locating abroad.
• A strategic alliance is an agreement with another firm in which each firm maintains its autonomy,
while gaining new opportunities. One form of strategic alliance is the collaborative effort, which
often arises when one firm has core competencies that another needs but is unwilling (or unable) to
duplicate.
• Another form of strategic alliance is technology licensing in which one company licenses its
service or production methods to another.

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Assistant Professor (Operations Management)
MARKET ANALYSIS
• Understanding what the customers want and how to provide it?
• A market analysis divides the firm’s customers into market segments and then identifies the
needs of each segment.
✓ Market Segmentation: It is the process of identifying groups of customers with enough in
common to warrant the design and provision of services or products that the group wants and
needs. To identify market segments, the analyst must determine the characteristics that clearly
differentiate each segment.
✓ Needs Assessment: Identifies the needs of each segment and assesses how well competitors are
addressing those needs. Each market segment’s needs is related to the service or product. Market
needs include both tangible and intangible attributes. Needs grouped as follows;
1. Service or Product Needs: Attributes of the service or product, such as price, quality, and
degree of customization.
2. Delivery System Needs: Attributes of the processes and the supporting systems, and resources
needed to deliver the service or product.
3. Volume Needs: Attributes of the demand for the service or product, such as high or low volume,
degree of variability in volume, and degree of predictability in volume.

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Assistant Professor (Operations Management)
COMPETITIVE PRIORITIES AND CAPABILITIES

• Competitive Priorities:
✓ The critical dimensions that a process or supply chain must possess to satisfy its internal or
external customers, both now and in the future.
✓ Competitive priorities are planned for processes and the supply chain created from them.
✓ They must be present to maintain or build market share or to allow other internal processes to be
successful.
✓ Not all competitive priorities are critical for a given process; management selects those that are
most important.
• Competitive Capabilities:
• The cost, quality, time, and flexibility dimensions that a process or supply chain possesses and is
able to deliver.
• When the capability falls short of the priority attached to it, management must find ways to either
close the gap or revise the priority.

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Assistant Professor (Operations Management)
COMPETITIVE PRIORITIES AND CAPABILTIES

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Assistant Professor (Operations Management)
COMPETITIVE PRIORITIES AND CAPABILITIES

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Assistant Professor (Operations Management)
COMPETITIVE PRIORITIES AND CAPABILITIES

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Assistant Professor (Operations Management)
COMPETITIVE PRIORITIES: DELIVERY
AND DEVELOPMENT SPEED

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Assistant Professor (Operations Management)
ORDER WINNERS AND QUALIFIERS
• Order Winners:
✓ A criterion customers use to differentiate the services or products of one firm from those of
another.
✓ Order winners can include price (which is supported by low-cost operations) and other dimensions
of quality, time, and flexibility.
✓ Order winners also include criteria not directly related to the firm’s operations, such as after-sale
support, technical support, and reputation.
✓ It may take good performance on a subset of the order-winner criteria, cutting across operational as
well as nonoperational criteria, to make a sale.
• Order Qualifiers:
✓ Minimum level required from a set of criteria for a firm to do business in a particular market
segment.
✓ Fulfilling the order qualifier will not ensure competitive success; it will only position the firm to
compete in the market.

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Assistant Professor (Operations Management)
ORDER WINNER AND QUALIFIER Vs COMPETITIVE
PRIORITY

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Assistant Professor (Operations Management)
ADDRESSING THE TRENDS AND CHALLENGES IN
OPERATIONS MANAGEMENT
• Productivity Improvement:
• Productivity is a basic measure of performance for economies, industries, firms, and processes.
• Improving productivity is a major trend in operations management because all firms face pressures
to improve their processes and supply chains so as to compete.
• Productivity is the value of outputs (services and products) produced divided by the values of
input resources (wages, cost of equipment, etc.) used:
Output
Productivity =
Input

• Labor productivity, which is an index of the output per person or per hour worked.
• Similar measures may be used for machine productivity, where the is the number of machines.
• Multifactor productivity is an index of the output provided by more than one of the resources
used in production.

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Assistant Professor (Operations Management)
WHY PRODUCTIVITY MATTERS?
• High productivity is linked to higher standards of living
✓ As an economy replaces manufacturing jobs with lower productivity service jobs, it is more
difficult to maintain high standards of living
• Higher productivity relative to the competition leads to competitive advantage in the marketplace
✓ Pricing and profit effects
• For an industry, high relative productivity makes it less likely it will be supplanted by foreign
industry

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Assistant Professor (Operations Management)
 PRODUCTIVITY MEASURES

Output
Productivity =
Input

Output Ouput Output

Partial Measures ; ;
Single Input Labor Capital

Output Ouput Output

Multifactor Measures ; ;
Multiple Inputs Labor +Machine Labor +Capital +Energy

Goods or services produced
Total Measure

All inputs used to produce them

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Assistant Professor (Operations Management)
PRODUCTIVITY GROWTH

Current productivity- Previous productivity

Productivity Growth = 100%
Previous productivity

Example: Labor productivity on the ABC assembly line was 25 units per hour in 2014. In 2015,
labor productivity was 23 units per hour. What was the productivity growth from 2014 to 2015?

23 - 25
Productivity Growth = 100% = −8%
25


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Assistant Professor (Operations Management)
EXAMPLE
• Calculate the productivity for the following operations:
✓ Three employees process 600 insurance policies in a week. They work 8 hours per day, 5 days per
week.

Policies processed
Labor productivity =
Employee hours

600 policies
=
40 hours
(3 employees)( )
employee

policies
=5
hour

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Assistant Professor (Operations Management)
EXAMPLE
• Calculate the productivity for the following operations:
✓ A team of workers makes 400 units of a product, which is sold in the market for $10 each. The
accounting department reports that for this job the actual costs are $400 for labor, $1,000 for
materials, and $300 for overhead.

Value of output
Multifactor productivity =
Labor cost + Materials cost + Overhead cost

(400 units)($10/unit) $4,000

= = = 2.35
$400 + $1,000 + $300 $1,700
• DECISION POINT
✓ We want multifactor productivity to be as high as possible.
✓ These measures must be compared with performance levels in prior periods and with future goals.
If they do not live up to expectations, the process should be investigated for improvement
opportunities.

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Assistant Professor (Operations Management)
APPLICATION
Blank This Year Last Year Year Before Last
Factory unit sales 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,000
Sales of manufactured products ($) $49,363 $40,831 —
Total manufacturing cost of sales ($) $39,000 $33,000 —

• Calculate the year-to-date labor productivity:

Blank This Year Last Year Year Before Last

factory unit sales divided by
Factory unit sales 2,762,103 2,475,738 divided by 2,175,447
2,762,103 divided by 2,475,738 2,175,447 divided by
employment = 24.66/hr = 21.91/hr = $18.91/hr
Employment 112,000112ur 113,000 equals 21.91
113,000 115,000 equals $18.91
per hour per hour

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Assistant Professor (Operations Management)
APPLICATION

• Calculate the multifactor productivity:

Blank This Year Last Year

sales of manufacturing
Sales products
of mfg products $49,363 divided by $39,000
$49,363 $40,831 divided by $33,000
$40,831
divided byTotal
totalmfg
manufacturing equals 1.27 = 1.27 equals$33,000
1.24 = 1.24
cost $39,000
cost

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Assistant Professor (Operations Management)
SERVICE SECTOR PRODUCTIVITY
• Service sector productivity is difficult to measure and manage because
✓ It involves intellectual activities.
✓ It has a high degree of variability.
• A useful measure related to productivity is process yield
✓ Where products are involved
➢ Ratio of output of good product to the quantity of raw material input
• Where services are involved, process yield measurement is often dependent on the particular
process:
✓ Ratio of cars rented to cars available for a given day.
✓ Ratio of student acceptances to the total number of students approved for admission.

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Assistant Professor (Operations Management)
IMPROVING PRODUCTIVITY

• Develop productivity measures for all operations

• Determine critical (bottleneck) operations
• Develop methods for productivity improvements
• Establish reasonable goals
• Make it clear that management supports and encourages productivity improvement
• Measure and publicize improvements
• Don’t confuse productivity with efficiency (Efficiency is a narrow concept while productivity is
broader that focuses on effective use of resources.) For Instance, for a an efficiency perspective of
a hand mower for lawn focus on best way to use hand mower however, productivity focus shifts
towards the possibility of using a hand mower.

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Assistant Professor (Operations Management)
INDUSTRIAL REVOLUTIONS

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Assistant Professor (Operations Management)
FOURTH INDUSTRIAL REVOLUTION (INDUSTRY 4.0)

• The fourth industrial revolution (Industry 4.0) is the ongoing automation of traditional
manufacturing and industrial practices, using modern smart technology.
• Communications between integrated machines that can monitor to diagnose and solve problems
without human intervention leads to increase in productivity at lowered costs.
• The term Industry 4.0 was first used at a Hannover fair in Germany in 2011, and it represents the
fourth industrial revolution.
• Industry 4.0 technologies are categorized into four groups:
• Smart Manufacturing Technologies
• Smart Products Technologies
• Smart Supply Technologies
• Base Technologies e.g. IoT

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Assistant Professor (Operations Management)
INTERNET OF THINGS (IoT)
• The interconnectivity of objects embedded with software sensors, and actuators that enable these
objects to collect and exchange data over a network without requiring human intervention.
• OM Applications:
✓ Product design and development
✓ Health care
✓ Preventive maintenance
✓ Inventory management
✓ Logistics
✓ City management
• Concerns and Barriers:
✓ Technology
✓ Privacy and Security

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Assistant Professor (Operations Management)
THE IDEA OF OPERATIONS MANAGEMENT

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Assistant Professor (Operations Management)
SOLVED EXAMPLES

• Student tuition at Boehring University is $150 per semester credit hour. The state supplements
school revenue by $100 per semester credit hour. Average class size for a typical 3-credit course is
50 students. Labor costs are $4,000 per class, material costs are $20 per student per class, and
overhead costs are $25,000 per class.
✓ What is the multifactor productivity ratio for this course process?
✓ If instructors work an average of 14 hours per week for 16 weeks for each 3-credit class of 50
students, what is the labor productivity ratio?

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Assistant Professor (Operations Management)
SOLUTION
• Multifactor productivity is the ratio of the value of output to the value of input resources.

$150 tuition +
50 student 3 credit hours $100 state support
Value of output =
class student credit hour
$37,500
=
class
Value of inputs = Labor + Materials + Overhead
$20 students
= $4,000 + ( × 50 ) + $25,000
student class
$30,000
=
class $37,500
Output
Multifactor productivity = = class = 1.25
Input $30,000
class
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Assistant Professor (Operations Management)
SOLUTION

• Labor productivity is the ratio of the value of output to labor hours. The value of output is the same
as in part (a).

14 hours 16 weeks
Labor hours of input =
week class

224 hours
=
class
$37,500
Output class
Labor productivity = =
Input 224 hours
class
$167.41
=
hour

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Assistant Professor (Operations Management)
SOLVED EXAMPLES

• Natalie Attire makes fashionable garments. During a particular week employees worked 360 hours
to produce a batch of 132 garments, of which 52 were “seconds” (meaning that they were flawed).
Seconds are sold for $90 each at Attire’s Factory Outlet Store. The remaining 80 garments are sold
to retail distribution at $200 each.
✓ What is the labor productivity ratio of this manufacturing process?

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Assistant Professor (Operations Management)
SOLUTION

90
Value of output = (52 defective × )
defective
200
+ (80 garments × )
garment
= $20,680

Labor hours of input = 360 hours

Output $20,680
Labor productivity = =
Input 360 hours

= $57.44 in sales per hour

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Assistant Professor (Operations Management)
 Prepared by Shreyanshu Parhi
Assistant Professor (Operations Management)