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Chapter 1

Operations and Competitiveness

Operations Management -- 5th Edition Operations Management 5th Edition
Roberta Russell & Bernard W. Taylor, III

Lecture outline
What do operations managers do? Operations function Evolution of operations management Operations management and ebusiness Globalization and competitiveness Primary topics in operations management Learning objectives for this course

What Do Operations Managers Do?

What is operations?

a function or system that transforms inputs into outputs of greater value a series of activities along a value chain extending from supplier to customer activities that do not add value are superfluous and should be eliminated design, operation, and improvement of productive systems

What is a transformation process?

What is operations management?

Transformation Process
Physical: as in manufacturing operations Locational: as in transportation operations Exchange: as in retail operations Physiological: as in health care Psychological: as in entertainment Informational: as in communication

Operations as a Transformation Process

INPUT Material Machines Labor Management Capital


OUTPUT Goods Services


Operations Function
Operations Marketing Finance and accounting Human resources Outside suppliers

How is operations relevant to my major?

Accounting Information Technology Management
As an auditor you must understand the fundamentals of operations management. IT is a tool, and theres no better place to apply it than in operations. We use so many things you learn in an operations class scheduling, lean production, theory of constraints, and tons of quality tools.

How is operations relevant to my major?




Its all about processes. I live by flowcharts and Pareto analysis. How can you do a good job marketing a product if youre unsure of its quality or delivery status? Most of our capital budgeting requests are from operations, and most of our cost savings, too.

Evolution of Operations Management

Craft production

process of handcrafting products or services for individual customers dividing a job into a series of small tasks each performed by a different worker standardization of parts initially as replacement parts; enabled mass production

Division of labor

Interchangeable parts

Evolution of Operations Management (cont.)

Scientific management

systematic analysis of work methods high-volume production of a standardized product for a mass market adaptation of mass production that prizes quality and flexibility

Mass production

Lean production

Historical Events in Operations Management



1769 1776 1790 1911 1911 1912 1913

James Watt Adam Smith Eli Whitney Frederick W. Taylor Frank and Lillian Gilbreth Henry Gantt Henry Ford

Steam engine Division of labor Revolution Interchangeable parts Principles of scientific Scientific Management management Time and motion studies Activity scheduling chart Moving assembly line

Historical Events in Operations Management

Human Relations

Hawthorne studies Motivation theories

1930 1940s 1950s 1960s 1947 1951 1950s

Elton Mayo Abraham Maslow Frederick Herzberg Douglas McGregor George Dantzig Remington Rand Operations research groups Joseph Orlicky, IBM and others

Operations Research

Linear programming Digital computer Simulation, waiting line theory, decision theory, PERT/CPM MRP, EDI, EFT, CIM

1960s, 1970s

Historical Events in Operations Management


Events/Concepts Dates Originator

1970s 1980s 1990s 1990s Taiichi Ohno (Toyota) W. Edwards Deming, Joseph Juran Wickham Skinner, Robert Hayes Michael Hammer, James Champy

JIT (just-in-time) Revolution TQM (total quality management) Strategy and operations Business process reengineering

Historical Events in Operations Management



Dates Originator
Numerous countries and companies ARPANET, Tim Berners-Lee SAP, i2 Technologies, ORACLE, PeopleSoft Amazon, Yahoo, eBay, and others

Internet Revolution

WTO, European Union, 1990s and other trade 2000s agreements Internet, WWW, ERP, 1990s supply chain management



Continuum from Goods to Services

Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff, Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.

Operations Management and EBusiness

Business Consumer


B2B Commerceone.com

B2C Amazon.com


C2B Priceline.com

C2C eBay.com

Categories of E-Commerce

An Integrated Value Chain

Value chain: set of activities that create and deliver products to customer




Flow of information (customer order) Flow of information (customer order) Flow of product (order fulfillment)

Impact of E-Business on Operations Management

Benefits of E-Business
Comparison shopping by customers Direct contact with customers Business processes conducted online

Impact on Operations
Customer expectations escalate; quality must be maintained and costs lowered No more guessing about demand is necessary; inventory costs go down; product and service design improves; build to-order products and services is made possible Transaction costs are lower; customer support costs decrease; eprocurement saves big bucks

Impact of E-Business on Operations Management (cont.)

Benefits of E-Business Impact on Operations Access to customers Demand increases; order fulfillment and logistics become major issues; worldwide production moves overseas Middlemen are eliminated Access to suppliers worldwide
Logistics change from delivering to a store or distribution center to delivering to individual homes; consumer demand is more erratic and unpredictable than business demand Outsourcing increases; more alliances and partnerships among firms are formed; supply is less certain; global supply chain issues arise

Impact of E-Business on Operations Management (cont.)

Benefits of E-Business Online auctions and emarketplaces Better and faster decision making Impact on Operations
Competitive bidding lowers cost of materials; supply needs can be found in one location More timely information is available with immediate access by all stakeholders in decisionmaking process; customer orders and product designs can be clarified electronically; electronic meetings can be held; collaborative planning is facilitated

Impact of E-Business on Operations Management (cont.)

Benefits of E-Business IT synergy Impact on Operations
Productivity increases as information can be shared more efficiently internally and between trading partners Order fulfillment, logistics, warehousing, transportation and delivery become focus of operations management; risk is spread out; trade barriers fall

Expanded supply chains

Globalization and Competitiveness

Favorable cost Access to international markets Response to changes in demand Reliable sources of supply 14 major trade agreements in 1990s World Trade Compared to World GDP Trade Growth OECD Countries, 2001 Peak: 26% in 2000 Source: Real GDP and Statistics 2003,ofWorld Trade Organization, 03, International Trade

Globalization and Competitiveness (cont.)

Germany: $26.18 Germany: $26.18

USA: $21.33 USA: $21.33

Taiwan: $5.41 Taiwan: $5.41

Mexico: $2.38 Mexico: $2.38

Hourly Wage Rates for Selected Countries Source: International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing, Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003.

China: $0.50 China: $0.50

Globalization and Competitiveness (cont.)

Trade with China: Percent of each countrys trade Source: Share of China in Exports and Imports of Major Traders, 2000 and 2002, International Trade Statistics 2003, World Trade Organization, www.wto.org

Risks of Globalization
Cultural differences Supply chain logistics Safety, security, and stability Quality problems Corporate image Loss of capabilities

Competitiveness and Productivity


degree to which a nation can produce goods and services that meet the test of international markets ratio of output to input sales made, products produced, customers served, meals delivered, or calls answered labor hours, investment in equipment, material usage, or square footage




Competitiveness and Productivity (cont.)

Measures of Productivity

Changes in Productivity for Select Countries

Internet-enabled Internet-enabled productivity productivity

-- Dot com bust Dot com bust -- 9/11 terrorist attacks 9/11 terrorist attacks

Source: International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002, Bureau of Labor Statistics, U.S. Department of Labor, September 2003. U.S. figures for 20022003 from Major Sector Productivity and Costs Index, Bureau of Labor Statistics, U.S. Department of Labor, March 2004

Productivity Increase
Become efficient

output increases with little or no increase in input both output and input grow with output growing more rapidly output increases while input decreases output remains the same and input is reduced both output and input decrease, with input decreasing at a faster rate


Achieve breakthroughs



Competitiveness and Productivity

Breakthrough Breakthrough Performance Performance

More Efficient More Efficient

Retrench Retrench

Productivity as a Function of Inputs and Outputs, 20012002 Source: International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002, Bureau of Labor Statistics, U.S. Department of Labor, September 2003

Global Competitiveness Ranking

1. Finland 2. United States 3. Sweden 4. Denmark 5. Taiwan 6. Singapore 7. Switzerland 8. Iceland 9. Norway 10.Australia

Source: Global Competitiveness Report 20032004, World Economic Forum, January 2004, www.weforum.org

OperationsOriented Barriers to Entry

Economies of Scale Capital Investment Access to Supply and Distribution Channels Learning Curve

Primary Topics in Operations Management

Primary Topics in Operations Management (cont.)

Operations Strategy
Strategy: Chapter 2

Maintaining an operations strategy to support firms competitive advantage Focusing on quality in operational decision making Designing quality products and services Setting up process so that it works smoothly and efficiently

Quality: Chapters 3 and 4

Product and Services: Chapter 5

Processes, Technologies, and Capacity: Chapter 6

Operations Strategy (cont.)

Facilities: Chapter 7

Setting up facility so that it works smoothly and efficiently Designing jobs and work to produce quality products Managing complex projects

Human Resources: Chapter 8

Project Management: Chapter 9

Supply Chain Management

Supply Chain: Chapter 10

Managing supply chain Predicting customer demand How much to produce and when to produce it How much to order and when to order

Forecasting: Chapter 11

Aggregate Planning: Chapter 12

Inventory Management: Chapter 13

Supply Chain Management (cont.)

Resource Planning: Chapter 14

Planning capacity and other resources Designing efficient production lines Job and task assignments Minimizing waiting time of customers and products

Lean Production: Chapter 15

Scheduling: Chapter 16

Waiting Lines: Chapter 17

Learning Objectives of this Course

Gain an appreciation of strategic importance of operations in a global business environment Understand how operations relates to other business functions Develop a working knowledge of concepts and methods related to designing and managing operations Develop a skill set for quality and process improvement