Chapter 1

 The Nature of Operations

Chapter 1: The Nature of Operations 1

Introduction

Chapter 1: The Nature of Operations 2

 McDonald’s Corp

 Facing increased competition

 Smarter and more demanding customers
 Less brand loyal
 Switched to hamburger bun that does not
require toasting.
 Customers prefer taste of new bun
 Saves time and money

Chapter 1: The Nature of Operations 3

Olympic Flame
 10,000 runners
 15,000 miles through 42 states in 84 days
 Two years of planning
 Must plan for no-show runners and rush
hour traffic
 Cost of this operation in the neighborhood
of $20 million

Chapter 1: The Nature of Operations 4

Kmart Versus Wal-Mart

 Both chains started in 1962

 In 1987, Kmart had 2,223 stores to Wal-
Mart’s 1,198.
 Kmart’s sales were $25.63 billion to Wal-
Mart’s $15.96 billion
 By 1991, Wal-Mart’s sales exceeded
Kmarts
 Kmart still had more stores

Chapter 1: The Nature of Operations 5

Kmart Versus Wal-Mart continued

 In year ending January 1996, Wal-

Mart’s sales were $93.6 billion to
Kmart’s $34.6 billion.
 During this time Kmart emphasized
marketing and merchandising (such as
national TV ad campaigns).
 Wal-Mart was investing millions in its
operations to lower cost.
Chapter 1: The Nature of Operations 6
Kmart Versus Wal-Mart
continued
 Wal-Mart developed sophisticated
distribution system that integrated its
computer system with its distribution
system.
 Kmart’s employees lacked skills needed to
plan and control inventory.
 Period from 1987 to 1995 Kmart's market
share declined from 34.5 percent to 22.7
percent.
 Wal-Mart's increased from 20.1 percent to
41.6 percent
Chapter 1: The Nature of Operations 7
Kmart Versus Wal-Mart continued
 Fast forward to 2004
 Kmart appears to have adopted a new
strategy
 Merge with Sears, Roebuck & Co.
 Potential synergies between Kmart’s
convenient locations and Sears’ strong
brands

Chapter 1: The Nature of Operations 8

Diversity and Importance of
Operations
 Improvements in operations can
simultaneously lower costs and improve
customer satisfaction.
 Improving operations often dependent on
advances in technology.
 Can obtain competitive advantage by
improving operations.
 Diversity of operations

Chapter 1: The Nature of Operations 9

Operations

 Heart of every organization

 Operations are the tasks that create
value

Chapter 1: The Nature of Operations 10

The Production System

Chapter 1: The Nature of Operations 11

Systems Perspective

 Inputs
 Transformation System
 Alter
 Transport
 Store
 Inspect
 Outputs
 Environment

Chapter 1: The Nature of Operations 12

Inputs
 Inputs include facilities, labor, capital,
equipment, raw materials, and
supplies.
 A less obvious input is knowledge of
how to transform the inputs into
outputs.

Chapter 1: The Nature of Operations 13

Transformation System
 The part of the system that adds value
to the inputs.
 Four major ways
 Alter – physical change
 Transport - relocate
 Store - protect
 Inspect – better understanding

Chapter 1: The Nature of Operations 14

Outputs
 Two types of outputs commonly result
from a production system
 Services (abstract or nonphysical)
 Products (physical goods)

Chapter 1: The Nature of Operations 15

Chapter 1: The Nature of 16
Operations
Facilitating Good Concept
 Often confusion in trying to classify
organization as manufacturer or service
 Facilitating good concept avoids this ambiguity
 All organizations defined as service
 The tangible part of the service is defined as
facilitating good
 Pure services

Chapter 1: The Nature of Operations 17

The Range From Services to Products

Chapter 1: The Nature of Operations 18

Classification and Evolution of Economic
Offerings

Chapter 1: The Nature of Operations 19

 Comparison of Alternative
Economic Offerings
Economic Commodities Goods Services Experiences
Offering

Value added by Extracting Producing Delivering Staging

Form of output Fungible Tangible Intangible Memorable

Key Natural Standardized Customized Personalized

characteristics

Buyer Market User Client Guest

Chapter 1: The Nature of Operations 20

Chapter 1: The Nature of 21
Operations
Operations Activities

 Strategy  Inventory
 Output Planning Management
 Capacity Planning  Materials
Requirements
 Facility Location
Planning
 Facility Layout
 Scheduling
 Aggregate Planning
 Quality Control

Chapter 1: The Nature of Operations 22

Functional View of Organizations
 Three Core Functions
 Operations
 Marketing
 Finance/Accounting
 Other Important Functional Activities
 Human Resource Management
 Information Systems
 Engineering

Chapter 1: The Nature of Operations 23

Chapter in Perspective
 Two alternative ways for organizing
work activities
 Functional approach, companies
organize activities on the basis of the
type of work performed
 Organizing activities on the basis of
specific value-creating processes.

Chapter 1: The Nature of Operations 24

Process View of Organizations

An Evolution

Chapter 1: The Nature of Operations 25

Traditional Functional Organization

Chapter 1: The Nature of Operations 26

Value Chain Approach

Chapter 1: The Nature of Operations 27