978-0134728391 Chapter 7 Part 1

Chapter 7: Operations Management and Quality

Chapter Overview

All goods and services production systems have their own unique production processes. These

processes provide utility by adding customer value. Companies with different business strategies

are best served by having different operations capabilities. Even very similar and competing

businesses can produce output and manage quality with completely different production systems.

This chapter is dedicated to the study of operations and quality within both the manufacturing

and service sectors. It explains the meaning of the term production (or operations) and describes

the three kinds of utility that operations processes provide. It explains how companies with

identifies the activities involved in operations control. Finally, it looks at the activities and

underlying objectives involved in total quality management and explains how a supply chain

strategy differs from traditional strategies for coordinating operations among firms.

Learning Objectives

7-1. Explain the meaning of operations and discuss the growth in the services and goods

7-2. Identify the three kinds of utility created by operations and the characteristics that

distinguish service operations from goods production.

7-4. Identify the major factors that are considered in operations planning.

7-6. Discuss the two key activities required for operations control.

7-8. Explain how a supply chain strategy differs from traditional strategies for coordinating

operations among firms.

LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE

Activity

Description

Time Limit

1. Ice-Breaker: Are You

Getting What You Paid

For?

Students discuss perceptions of service

quality.

25 min.

2. Up for Debate: Do You

Really Have to Be on Time

for That Meeting in Cairo?

Students are divided into teams to discuss

the advantages of punctuality and the types

of job fields that require punctuality.

20 min.

CHAPTER OUTLINE

Learning Objective 7-1:

Explain the meaning of operations and describe the three kinds of utility that operations

processes help create.

What Does Operations Mean Today?

Service operations (or service production) provide tangible and intangible services; firms that

Growth in the Services and Goods Sectors

Historically, agriculture was the dominant sector in the early years of the United States.

Thereafter, manufacturing grew, becoming the economic backbone from the nineteenth century

into the mid-twentieth century. Services then began a rapid climb in economic importance in

terms of both number of employees and percentage of gross domestic product (GDP)—the value

of all goods and services produced by the economy, excluding foreign income. The service

sector’s greater percentage of GDP has hovered above 65 percent while the smaller 11 percent of

the workforce in goods-producing jobs produced 32 percent of the national income.

KEY TEACHING TIP

Remind students that operations refers to all the activities involved in making products—goods

and services—for customers.

QUICK QUESTION

What is the difference between service operations and goods operations?

Use In-Class Activity 1: Ice-Breaker: Are You Getting What You Paid For?

Learning Objective 7-2:

Identify the characteristics that distinguish service operations from goods production.

Creating Value Through Operations

Both services and goods provide consumers with utility, which is the ability of a product to

satisfy a human want or need, thus adding customer value—in terms of form, time, and place.

Form utility is created merely through transforming raw materials into finished goods. Time

utility is created when marketers make products available when consumers want them. Place

utility is created when products are made available where they are convenient for consumers.

Operations (production) management is the systematic direction and control of the processes

that transform resources into finished services and goods that create value for and provide

benefits to customers. Operations (production) managers are responsible for ensuring that

operations activities create value and provide benefits to customers.

A. Differences Between Service and Goods Manufacturing

Both service and manufacturing operations transform raw materials into finished products. In

service operations, finished products are not things, but are people with needs met and

possessions serviced. Four aspects of service operations can make such operations more

complicated than simple goods production:

1. Interacting with Customers. Manufacturing operations focus on physical goods,

whereas service operations are a combination of goods and services.

2. Services Can Be Intangible and Unstorable. Intangibility refers to the untouchable

3. Customers’ Presence in the Operations Process. Service operations often acknowledge

4. Intangibles Count for Service Quality. Customers use different measures to judge

services and goods because services include intangibles, not just physical objects. Quality

of work and quality of service are not necessarily the same thing.

B. Operations Processes

An operations process is a set of methods and technologies used in the production of goods

and services.

1. Goods Production Processes: Make-to–Order versus Make-to-Stock Processes. A

2. Service Production Processes: Extent of Customer Contact. In high-contact systems,

such as a city metro system, the customer must be a part of the service. Managers must

therefore be concerned with issues of cleanliness, punctuality, and usability of ticket

kiosks. In low-contact systems, such as a mail sorting office, customers do not have to

be present while the service transaction is being performed.

KEY TEACHING TIPS

 Make sure that students understand that utility refers to the ability of a product to satisfy a

want or need in terms of form, time, and place. Production adds customer value by

providing utility.

 Reinforce that goods are produced; services are performed.

 Remind students that operations processes are methods and technologies used to produce

a good or service.

 Remind students that in a low-contact system, the service buyer doesn’t have to be

present during the transaction; in a high-contact system, customers are part of the system.

QUICK QUESTIONS

 What are examples of form, time, and place utility?

 Think of the last restaurant you patronized. Would you be more likely to complain about

the quality of the food or the quality of the service?

 What is the intangible and unstorable nature of services?

 What are some examples of products produced in a make-to-order system? In a make-to–

stock system?

HOMEWORK

Interview a Manager

Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials

as homework. This assignment asks students to interview a manager to access firsthand

information involved in planning a service operation.

At-Home Completion Time: 1 to 2 hours

Learning Objective 7-3:

Explain how companies with different business strategies are best served by having

different operations capabilities.

1. Business Strategy Determines Operations Capabilities. Operations capability refers

2. Expanding into Additional Capabilities. Over time, excellent firms learn how to

achieve more than just one competence.

Learning Objective 7-4:

Identify the major factors that are considered in operations planning.

Operations Planning

Managers from many departments contribute to the firm’s decisions about operations

management; this is a process of logical steps upon which the success of the firm depends. The

overall business plan provides guidance for long-term operations plans.

A. Capacity Planning

The amount of a product that a company can produce under normal working conditions is its

capacity. A firm’s capacity depends on how many people it employs and the number and

size of its facilities. Operations wants to match capacity to demand.

B. Location Planning

Facility location affects production costs and flexibility. Depending on the site of its

facility, a company may either be capable of producing a low-cost product or may

find itself at a relative cost disadvantage. Goods production can be located where the

economics work most favorably; services, though, must be located near customers.

C. Layout Planning

Layout, the physical location or floor plan, determines whether firms can respond quickly

and efficiently to customer requests for additional or different products or find themselves

unable to match competitors’ speed and convenience.

1. Process Layouts. In a process layout, equipment and people are grouped according to

2. Product Layouts. In a product layout, one type of product is produced in a fixed

sequence and is arranged according to its production requirements. It is efficient for

3. Fixed-Position Layouts. A fixed-position layout is necessary when, because of size,

shape, or any other reason, managers cannot move the service to another production

facility.

E. Methods Planning

1. Improving Process Flows. A process flowchart is helpful in identifying the

2. Improving Customer Service. Customer service can be improved at various

stages along the process flowchart.

KEY TEACHING TIPS

 Reinforce that operations planning includes capacity planning, location planning,

layout planning, quality planning, and methods planning.

 Make sure students understand that capacity refers to the amount of a product a

company can produce under normal conditions.

QUICK QUESTIONS

 In process layouts, equipment and people are grouped according to function. What is an

example of a goods production system that uses a process layout?

 Product layouts make one product in a fixed sequence and are arranged according to their

production requirements. What is an example of a goods production system that uses a

product layout?

 Methods improvement focuses on procedures that can reduce waste and inefficiency

within an organization. What are some ways in which waste could be reduced and

inefficiency enhanced where you work?

Learning Objective 7-5:

Discuss the information contained in four kinds of operations schedules—the master

operations schedule, detailed schedule, staff schedule, and project schedule.

Operations Scheduling

Operations scheduling involves developing timetables for acquiring the resources needed for

production.

A. The Master Production Schedule

A top-level master production schedule shows which products will be produced and when, in

upcoming time periods.

B. Detailed Schedules

A detailed schedule indicates daily work assignments with start and stop times for

assigned jobs at each workstation.

C. Staff Schedules and Computer-Based Scheduling

Staff schedules specify assigned working times in upcoming days for each employee on each

work shift, and considers employees’ needs and the company’s efficiency and costs,

D. Project Scheduling

1. The Gantt Graphical Method: Named after its developer, Henry Gantt, a Gantt chart

2. Project Scheduling with PERT charts break down large projects into steps to be

performed and specify the time required to perform each one; PERT also shows the

necessary sequence among activities, from start to finish, and identifies the critical path,

the most time-consuming set of activities, for completing the project.

KEY TEACHING TIPS

 Reinforce that the master operations schedule shows which products will be produced

and when, as well as how much labor, material, and equipment resources are needed.

 Make sure students understand the difference between detailed schedules and staff

schedules.

QUICK QUESTION

 How does an organization benefit from PERT scheduling?

Use In-Class Activity 2: Up for Debate: Do You Really Have to Be on Time for That

Meeting in Cairo?

Learning Objective 7-6:

Discuss the two key activities required for operations control.

Operations Control

Operations control requires managers to monitor performance by comparing results with

detailed plans and schedules. If employees do not meet schedules or quality standards, managers

can take corrective action. Follow-up, checking to ensure that production decisions are being

implemented, is a key and ongoing facet of operations. Operations control includes materials

management and quality control. Both activities ensure that schedules are met and products

delivered, both in quantity and in quality.

A. Materials Management

Materials management is the process by which managers plan, organize, and control the flow

of materials from sources of supply through distribution of finished goods.

1. Materials Management Activities for Physical Goods: Once a product has been

designed, successful materials flows depend on five activities:

Supplier selection means finding and choosing suppliers of services and materials.

2. Lean Production Systems: Just-in-Time Operations

Lean production systems are designed for smooth production flows that avoid

3. Inventory Management is Crucial for Producing Services

For many service firms, too, the materials stakes are high. The most important

B. Quality Control

Quality control means taking action to ensure that operations produce products that meet

specific quality standards.

KEY TEACHING TIPS

 Reinforce that lean production systems are designed to avoid inefficiencies, eliminate

unnecessary inventories, and improve production processes.

 Point out that operations control requires managers to monitor performance by

comparing results with detailed plans and schedules and then making any necessary

changes.

 Make sure students understand that materials management is the process by which

managers plan, organize, and control the flow of materials from sources of supply

through distribution of finished goods.

QUICK QUESTIONS

 What are some ways in which managers carry out the following materials management

activities: supplier selection, purchasing, transportation, warehousing, and inventory

control?

 How might quality control be carried out at a bank? How might quality control be carried

out at a fast-food restaurant?

 What is the difference between controlling quality and building quality into a product or

service?

Learning Objective 7-7:

Identify the activities and underlying objectives involved in total quality management.

Quality Improvement and Total Quality Management

It is not enough to control quality by inspecting products and monitoring service operations as

they occur. Businesses must also consider building quality into products and services.

A. The Quality-Productivity Connection

It’s no secret that quality and productivity are watchwords in today’s competitive environment.

Productivity is a measure of economic performance: It compares how much we produce with the

B. Managing for Quality

Total Quality Management (TQM) includes all of the activities necessary for getting quality

goods and services into the marketplace; this process involves all parts of the business, including

customers, suppliers, and employees. To bring all the interests of the stakeholders together, TQM

involves evaluating costs of poor quality, identifying the sources causing unsatisfactory quality,

assigning responsibility for corrections, and ensuring that those responsible take steps for

improving quality.

1. The Cost of Poor Quality

2. Quality Ownership: Taking Responsibility for Quality. With TQM, employees and

suppliers ultimately accept quality ownership—the idea that quality belongs to each

person who creates it while performing a job.

C. Tools for TQM

Hundreds of tools have proven useful for quality improvement, ranging from statistical

analysis of production data, to satisfaction surveys of customers, to competitive product

analysis—a process by which a company analyzes a competitor’s products to identify

desirable improvements. Five of the most commonly used tools for TQM are:

1. Value-Added Analysis. Value-added analysis refers to the evaluation of all work

2. Quality Improvement Teams. Quality improvement teams are groups of employees

3. Getting Closer to the Customer. Customers are the driving force for all business

activity; the most successful firms keep close to their customers and know what

4. The ISO Series. ISO 9000 is a certification program attesting that a firm or laboratory

has met the quality-management requirements set by the International Organization for

5. Business Process Reengineering. Business process reengineering focuses on

productivity and quality and entails rethinking each step in a process by starting over

from scratch. Reengineering involves the redesign of business processes to achieve

improvements in cost, quality, service, and speed.

KEY TEACHING TIPS

 Remind students that competitive product analysis is a process by which a company

analyzes a competitor’s products to identify desirable improvements.

 Students often forget that quality improvement teams are comprised of groups of

employees from various parts of the organization.

 Remind students that ISO 14000 guarantees that a company has an environmental

management system, a plan documenting improved use of resources and pollution

management.

 Remind students that business process reengineering involves focusing on improving a

business process by rethinking each of its steps by starting from scratch.

QUICK QUESTIONS

 What do companies try to achieve with value-added analysis?

 What are some examples of ―internal‖ customers? What does ―getting closer to the

customer‖ mean?

 What does it mean when a company is ISO 9000 certified?

 Who is responsible for ensuring TQM within an organization?