Chapter 15 – Operations Management
CHAPTER
15
OPERATIONS
MANAGEMENT
LEARNING OUTCOMES
After reading this chapter, students should be able to:
15-1. Define operations management and explain its role.
15-2. Define the nature and purpose of value chain management.
15-3. Describe how value chain management is done.
15-4. Describe contemporary issues in managing operations.
Management Myth
MYTH: In the future of manufacturing, robots will replace almost all workers.
TRUTH: Robots are more likely to assist people in doing their jobs rather than replace them
completely.
Teaching Tips:
Challenge students to think of the workplace in the future where robots are doing menial jobs,
freeing people to focus on more complex work that demands creativity and flexibility. What
types of jobs and industries are robots particularly well-suited to? Reflect on how production has
changed since the Industrial Revolution when responding to this question.
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Chapter 15 – Operations Management
I. WHY IS OPERATIONS MANAGEMENT IMPORTANT TO ORGANIZATIONS?
A. What is Operations Management?
1. Operations management refers to the design, operation, and control of the
transformation process that converts such resources as labor and raw materials into
goods and services that are sold to customers. (See Exhibit 15-1.)
2. Why is operations management so important to organizations and managers?
a) It encompasses processes in all organizations—services as well as
manufacturing.
b) It’s important in effectively and efficiently managing productivity.
c) It plays a strategic role in an organization’s competitive success.
B. How Do Service and Manufacturing Firms Differ?
1. Transformation process—an operations system that creates value by transforming
inputs into finished goods and service outputs.
a) Manufacturing organizations produce physical goods.
b) Service organizations produce nonphysical outputs in the form of services.
2. The economies of developed countries are dominated by the creation and sales of
services.
a) Most of the world’s industrialized nations are predominantly service
economies.
b) In the United States, nearly 78 percent of all private sector jobs are now in
service industries.
C. How Do Businesses Improve Productivity?
1. Improving productivity has become a major goal in virtually every organization.
a) For countries, high productivity can lead to economic growth and
development.
b) For individual organizations, increased productivity lowers costs and allows
firms to offer more competitive prices.
2. Increasing productivity is key to global competitiveness.
3. Organizations that hope to succeed globally are looking for ways to improve
productivity.
4. Productivity is a composite of people and operations variables.
a) W. Edwards Deming believed that managers, not workers, were the primary
source of increased productivity.
b) The truly effective organization will maximize productivity by successfully
integrating people into the overall operations system.
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D. What Role Does Operations Management Play in a Company’s Strategy?
1. After the success that U.S. manufacturers experienced during World War II,
manufacturing activities in the United States were taken for granted.
2. Meanwhile, managers in Japan, Germany, and other countries took the opportunity to
develop modern, computer-based, and technologically advanced facilities.
a) U.S. manufacturers discovered that foreign goods were being made not only
less expensively but also with better quality.
b) Today, successful manufacturers recognize the crucial role that operations
management plays as part of the overall organizational strategy to establish and
maintain global leadership.
From the Past to the Present
William Edwards Deming was an American statistician, professor, author, lecturer, and
consultant. He is widely credited with improving production in the United States during World
War II, although he’s probably best known for his work in Japan. From 1950 onward, he taught
Japanese top managers how to improve product design, product quality, testing, and sales,
primarily through applying statistical methods. His philosophy was quite simple: focus on
increasing quality and reducing costs through continually improving how employees’ work is
done and by approaching manufacturing in an orderly, systematic, and logical way.
Putting that philosophy into practice required following Deming’s 14 points for improving
management’s productivity.
Discuss This:
Why are (1) continual improvement and (2) thinking of manufacturing as a system so
important to managing operations?
Explain why these 14 principles are still appropriate today.
Teaching Tips:
Younger business students may have never heard of Edward Deming and do not understand the
contributions his 14 points made to manufacturing companies in the U.S and the rest of the
world. However, when they are asked to answer the questions above, they will probably see
these ideas are commonplace in organizations’ operation processes. It may be instructive to
show a short video clip of Deming going through some of his 14 points (there are several videos
of Deming available on YouTube).
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Chapter 15 – Operations Management
II. WHAT IS VALUE CHAIN MANAGEMENT AND WHY IS IT IMPORTANT?
A. Introduction
1. The concepts of value chain management are transforming operations management
strategies and turning organizations around the world into finely tuned models of
efficiency and effectiveness.
B. What is Value Chain Management?
1. Every organization needs customers if it’s going to survive and prosper.
2. Customers want some type of value from the goods and services they purchase or
use, and these end users determine what has value.
3. Value is the performance characteristics, features and attributes, or any other aspects
of goods and services for which customers are willing to give up resources (usually
money).
4. How is value provided to customers?
a) Through the transformation of raw materials and other resources into some
product or service that end users need or desire—in the form they want, when
they want it.
5. The value chain is the entire series of organizational work activities that add value at
each step, beginning with the processing of raw materials and ending with a finished
product in the hands of end users.
6. Value chain management—the process of managing the entire sequence of
integrated activities and information about product flows along the entire value
chain.
a) Value chain management is externally oriented and focuses on both incoming
materials and outgoing products and services.
(1) Value chain management is effectiveness oriented and aims to create the
highest value for customers.
b) Supply chain management is internally oriented and focuses on the efficient
flow of incoming materials to the organization.
(1) Supply chain management is efficiency oriented (its goal is to reduce costs
and make the organization more productive).
7. Who has the power in the value chain?
a) Ultimately, customers are the ones with power.
b) They’re the ones who define what value is and how it’s created and provided.
8. Using value chain management, managers seek to find that unique combination in
which customers are offered solutions that truly meet their needs and at a price that
can’t be matched by competitors.
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C. What are the Goals of Value Chain Management?
1. A good value chain is one in which a sequence of participants work together as a
team, each adding some component of value such as faster assembly, more accurate
information, or better customer response and service to the overall process.
2. The better the collaboration among various chain participants, the better the
customer solutions.
a) When value is created for customers and their needs and desires are satisfied,
everyone along the chain benefits.
D. How Does Value Chain Management Benefit Businesses?
1. A survey of manufacturers noted four primary benefits of value chain management:
a) Improved procurement
b) Improved logistics
c) Improved product development
d) Enhanced customer order management
III.HOW IS VALUE CHAIN MANAGEMENT DONE?
A. Introduction
1. New solutions may be needed for the contemporary workplace in the form of a new
business model or a strategic design for how a company intends to profit from its
broad array of strategies, processes, and activities.
2. Example – IKEA
B. What are the Requirements for Successful Value Chain Management?
1. What does successful value chain management require? (See Exhibit 15-2.)
a) There are six main requirements listed below.
2. Coordination and collaboration.
a) Comprehensive and seamless integration among all members of the chain is
absolutely necessary.
b) All partners in the value chain must identify things that they may not value but
that customers do.
c) Sharing of information and analysis requires open communication among the
various value chain partners.
3. Technology investment.
a) Successful value chain management isn’t possible without a significant
investment in information technology.
b) What types of technology are important?
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(1) The key tools include supporting enterprise resource planning software
(ERP) system that links all of an organization’s activities, sophisticated
work planning and scheduling software, customer relationship management
systems, business intelligence capabilities, and e-business connections with
trading network partners.
(2) Example, Dell Computer manages its supplier relationships almost
exclusively online.
4. Organizational processes.
a) Organizational processes—the way organizational work is done.
b) Core competencies—the organization’s unique skills, capabilities, and
resources.
c) Non-value-adding activities should be eliminated.
1 Where can internal knowledge be leveraged to improve flow of material and
information?
(1) How can we better configure our product to satisfy both customers and
suppliers?
(2) How can the flow of material and information be improved?
(3) How can we improve customer service?
d) Three important conclusions about how organizational processes must change.
(1) Better demand forecasting is necessary and possible because of closer ties
with customers and suppliers.
(a) Example, Walmart and Pfizer Consumer Healthcare collaborated to
improve product demand forecast information. Their mutual efforts led
to a $6.5 million increase in Walmart’s sales of Listerine.
(2) Selected functions may need to be done collaboratively with other partners
in the value chain.
(a) Example, Saint-Gobain Performance Plastics.
(3) New measures are needed for evaluating the performance of various
activities along the value chain.
(a) Managers need a better picture of how well value is being created and
delivered to customers.
(b) Example, Nestle USA—redesigned its measurement system to focus
on one consistent set of factors, including accuracy of demand forecasts
and production plans, on-time delivery, and customer service levels.
5. Leadership.
a) Successful value chain management isn’t possible without strong and
committed leadership.
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(1) Managers must make a serious commitment to identifying what value is,
how that value can best be provided, and how successful those efforts have
been.
b) It’s important that leaders outline expectations for what’s involved in the
organization’s pursuit of value chain management.
(1) This should start with a vision or mission statement that expresses the
organization’s commitment to identifying, capturing, and providing the
highest possible value to customers.
(2) Being clear about expectations also extends to partners.
6. Employees/human resources.
a) Three main human resources requirements for value chain management are
flexible approaches to job design, an effective hiring process, and ongoing
training.
(1) Flexibility is the key description of job design in a value chain
management organization.
(a) Jobs need to be designed around work processes that link all functions
involved in creating and providing value to customers.
(b) Focus needs to be on how each activity performed by an employee can
best contribute to the creation and delivery of customer value.
(2) Flexible jobs require employees who are flexible.
(a) The organization’s hiring process must be designed to identify those
employees who have the ability to quickly learn and adapt.
(3) The need for flexibility also requires that there be a significant investment
in continual and ongoing employee training.
(a) Managers must see to it that employees have the knowledge and tools
they need to do their jobs.
(b) Example, Alenia Marconi System, based in Portsmouth, England.
7. Organizational culture and attitudes.
a) Having cultural attitudes that include sharing, collaborating, openness,
flexibility, mutual respect, and trust.
(1) These attitudes encompass not only the internal partners in the value chain
but external partners as well.
(2) This can be done with lots of face time and telephone calls like American
Standard does or via cyberspace like Dell.
(a) Both approaches reflect each company’s commitment to developing
long-lasting, mutually beneficial, and trusting relationships that best
meet customers’ needs.
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Chapter 15 – Operations Management
A Question of Ethics
In this ethical dilemma, suppose that you went to a popular shopping area where parking was
extremely limited and the store owner had instituted “customers only” parking and you were
lucky enough to find an open space. Then suppose that once you finished your business at that
store—having spent a fair amount of money— you had other shopping to do in the same vicinity
so you left your car in that same “customers only” parking space. You believed that what you did
was okay since you “paid” for that spot with your purchase. But your significant other disagreed
saying that since you had finished your business at that store, your car should be moved.
Discuss This:
What is the “question of ethics” here? Why is it a “question of ethics?”
What about the other stakeholders in this situation and how might this one seemingly simple
decision affect them?
Teaching Tips:
To encourage discussion, split the class into two halves and have each take one side of the
argument: to leave the car in customer parking, or to move the car. There is no right or wrong
answer. At the end of the exercise,it may be beneficial to have a short discussion on individual
differences and dealing with different views in the workplace. And encourage students not to
park in faculty parking – that is always wrong!
C. What are the Obstacles of Value Chain Management?
1. Exhibit 15-3 highlights the obstacles of value chain management.
2. Organizational barriers.
a) Refusal or reluctance to share information, unwillingness to accept change, and
security issues.
b) Reluctance or refusal of employees to accept change can impede efforts toward
successful implementation of value chain management.
c) Because value chain management relies heavily on a substantial information
technology infrastructure, system security and Internet security breaches are
issues that need to be addressed.
3. Cultural attitudes.
a) Unsupportive cultural attitudes—especially trust and control—also can be
obstacles to value chain management.
b) There must be mutual respect for, and honesty about, each partner’s activities
all along the chain.
c) But too much trust can also be a problem.
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(1) Many organizations are vulnerable to theft of intellectual property—
proprietary information that’s critical to a firm’s efficient and effective
operation.
d) Another cultural attitude that can be an obstacle to successful value chain
management is the belief that when an organization collaborates with external
and internal partners, it no longer controls its own destiny.
4. Required capabilities.
a) Capabilities that value chain partners must have include extreme coordination
and collaboration, the ability to configure products to satisfy customers and
suppliers, and the ability to educate internal and external partners.
b) These are essential to capturing and maximizing the value of the value chain,
but often are difficult to achieve.
5. People.
a) Without unwavering commitment and willingness of an organization’s
members to make it work, value chain management isn’t going to be
successful.
b) Value chain management takes an incredible amount of time and energy on the
part of an organization’s employees.
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