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Chapter
1
Using Operations to Create Value
DISCUSSION QUESTIONS
1. Answering this question demonstrates that processes underlie all of our jobs. What might
2. Amazon.com offers a very broad range of services and products at competitive prices. Its
competitive priorities would include fast delivery time, on-time delivery, customization,
3. The hospital’s commitment to provide attention to patients arriving to the emergency
unit in less than 15 minutes and never to turn away patients who need to be hospitalized
4. FedEx traditionally has competed on the basis of fast, dependable delivery. Before the
boom in Internet applications, many businesses relied on FedEx to get things to other
5. Technology Management. To identify a market segment, we need to determine
answers to questions such as: Which colleges and departments currently offer the
Using Operations to Create Value
1-2
6. It is often not a good idea for a company to try to excel in all of the competitive
priorities because it is generally impossible to do so. Mediocrity is a predictable
7. Core processes should link to a firm’s core competencies. Core processes are those
processes that provide the firm the best competitive advantage. Essential to the
8. Wendy’s assembles hamburgers to order. When materials are held at the stage just
before final assembly, they can be used to complete a wide variety of different
sandwiches. Because no finished-goods stock exists, when customers say, fiHold the
9. Grandmother’s Chicken.
a. Kathryn Shoemaker’s strategic plans include the following:
❑
Product and service plans: Should the new location offer a new mix?
❑
Competitive priorities: If the product mix and service mix are different at the new
location, the thrust could be on low volumes and high quality.
Using Operations to Create Value ⚫ CHAPTER 1 ⚫
1-3
b. Attitudes toward nutrition could change the demand for chicken. Competitors such
as Boston Market may be planning to move to Uniontown or even Middlesburg.
10. Wild West, is recognizable as US WEST, which was bought out by Qwest in a
hostile takeover in June, 2000. But many other fiBaby Bells” are in a similar
position.
a. Strategic plans include reducing overhead, reengineering operations, and investing in
b. One environmental issue is whether communication, like health care, will be viewed
c. Wild West’s distinctive competency is in connecting people (or machines) for the
11. Although the answers may vary depending on the finiche” elements of the business, the
Using Operations to Create Value
1-4
PROBLEMS
Addressing the Trends and Challenges in Operations Management
1. Boehring University
a. Value of output:
students credit-hours $200 tuition $100 state support
75 3 $67,500 class
class student credit-hours
+
=
Value of input: labor + material + overhead
$25
$6500 75 students $30,000
student $38,375 class
class
+ +
=
Multifactor Productivity ratio:
Productivity
Output $67,500 1.76
Input $38,375
= = =
Compared to Solved problem 1, multifactor productivity has increased from
1.25 to 1.76.
b. Value of output is the same as in part a:
$67,500 class
2. Suds and Duds Laundry
a. Labor productivity
Week
Number of
Workers
Input
(Labor-hours)
Output
(Shirts)
Output/Input
Ratio
1
2
24
68
2.83 shirts/hour
2
2
46
130
2.83 shirts/hour
3
3
62
152
2.45 shirts/hour
4
3
51
125
2.45 shirts/hour
5
2
45
131
2.91 shirts/hour
b. Output per person does not vary much whether it is Sud, Dud, or Jud working.
Using Operations to Create Value ⚫ CHAPTER 1 ⚫
1-5
3. White Tiger Electronics compact disc players
Value of Output: $300
4. Symtecks
The output of a process is valued at $100 per unit. The cost of labor is $50 per hour
including benefits. The accounting department provided the following information
about the process for the past four weeks:
Week 1
Week 2
Week 3
Week 4
Units Produced
1124
1310
1092
981
Total Value
112,400
131,000
109,200
98,100
Labor ($)
12,735
14,842
10,603
9526
Labor (hrs)
254.7
296.8
212.1
190.5
Material ($)
21,041
24,523
20,442
18,364
Overhead ($)
8,992
10,480
8,736
7,848
Multifactor Productivity
2.63
2.63
2.75
2.75
Labor Productivity
4.41 units/hr
4.41units/hr
5.15 units/hr
5.15 units/hr
a. Use the multifactor productivity ratio to see whether recent process
improvements had any effect and, if so, when the effect was noticeable.
Value of output
1124units $100 $112,400 =
Input
Using Operations to Create Value
1-6
Week 1 Productivity
Output $112,400 2.628
Input $42,768
= = =
Output $131,000 2.628
b. Has labor productivity changed? Use the labor productivity ratio to support your
answer.
Labor-hours of input: Labor $50/hour
Labor costs
Week 1 = $12,735/$50 = 254.7
Productivity ratio:
Labor Productivity
Output
Input
=
Week 1 = Labor Productivity
Output 1124 4.4130/ hour
Input 254.7 hours
= = =
Output 1310 4.413/ hour
Using Operations to Create Value ⚫ CHAPTER 1 ⚫
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5. Alyssa’s Custom Cakes
a.
5 Birthday cakes x $50 per cake = $250
2 Wedding cakes x $150 per cake = $300
3 Specialty cakes x $100 per cake = $300
Total monthly revenue = $850
Multifactor productivity ratio = output/input
1.25 = $850/x
Solve for x = $850/1.25 = $680
Total costs = $680
Average cost per cake = $680/10 = $68/cake
b. Labor productivity
c. Based on labor productivity, Alyssa should try to sell specialty cakes the most.
6. Big Black Bird Company
The Big Black Bird Company problem is based on a product made by Raven
Industries. None of the numbers are representative of actual costs or volume.
a. Multifactor Productivity
Original Situation:
Value of output:
2500 000 uniforms $200
( ) =$500,
Value of input:
2500 000 uniforms $120
( ) =$300,
1.67
b. Labor Productivity
Original Situation:
Value of output (from part a) is: $500,000
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c. Gross profits
Original Situation:
$500, $300, $200,000 000 000− =
7. Mack’s Guitar Company
a. Labor productivity = output/input
Output = 100 guitars x 80% completion rate x price/guitar
= 80 guitars/ month x $250/guitar = $20,000
b. Option 1. Increase sales price by 10%
Output = 100 guitars x 80% completion rate x ($250 x 1.1) = $22,000
Input
Labor is same as in part (a) = $10,000
Material is same as in part (a) = $4,000
Using Operations to Create Value ⚫ CHAPTER 1 ⚫
1-9
8. Mariah Enterprises Productivity of Process Alpha and Process Beta
Excel used to perform all calculations
Process
Alpha
Beta
Total Value of Output
$17,150
$16,450
Total Cost of Labor
$2,600
$3,000
Total Cost of Materials
$5,500
$4,900
Total Cost of Overhead
$6,000
$5,000
Labor Productivity
$6.596
$5.483
unit $/ labor $
Multifactor Productivity
$1.216
$1.275
unit $/ total $
While process beta generates more dollars of output per dollar invested in input, it
doesn’t use labor as efficiently as process alpha.
9. Morning Brew Coffee Shop
Excel used to perform all calculations
a. Current labor and multifactor productivity
Currently
Regular
Coffee
Cappuccino
Vienna
coffee
total
Output in dollars
$700.00
$300.00
$600.00
$1,600.00
Labor cost
$320.00
Material cost
$175.00
$75.00
$187.50
$437.50
Equipment cost
$125.00
Overhead cost
$225.00
Profit
$492.50
Using Operations to Create Value
1-10
Labor Productivity
5.0000
Multifactor Productivity
1.4447
After adding new product
After Adding
New Product
Regular
Coffee
Cappuccino
Vienna
coffee
Eiskaffee
total
Output in dollars
$700.00
$300.00
$600.00
$375.00
$1,975.00
Labor cost
$320.00
Material cost
$175.00
$75.00
$187.50
$112.50
$550.00
Equipment cost
$200.00
Overhead cost
$350.00
Profit
$555.00
Labor Productivity
6.1719
Multifactor Productivity
1.3908
Change in Labor Productivity
23.438%
Change in Multifactor Productivity
-3.727%
b. The units of Eiskaffee that would have to be sold to ensure that the multifactor
productivity increases from its current level may be calculated as follows:
4447.1
5.1$5.1307$
0.5$1600$
4447.1
350200))5.1($)25.1($150)75($.100)5($.350(320$
)5($)4($150)3($100)2($350
4447.1
coscoscoscos
$
=
+
+
=
++++++
+++
=
+++
=
x
x
x
x
tOverheadtEquipmenttMaterialtLabor
insoldCoffee
input
output
Using Operations to Create Value ⚫ CHAPTER 1 ⚫
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Calculation confirmed in Excel:
After Adding New
Product
Regular
Coffee
Cappuccino
Vienna
coffee
Eiskaffee
total
Output in dollars
$700.00
$300.00
$600.00
$510.00
$2,110.00
Labor cost
$320.00
Material cost
$175.00
$75.00
$187.50
$153.00
$590.50
Equipment cost
$200.00
Overhead cost
$350.00
Profit
$649.50
Labor Productivity
6.5938
Multifactor Productivity
1.4447
Change in Labor Productivity
31.875%
Change in Multifactor Productivity
0.001%
CASE: CHAD’S CREATIVE CONCEPTS*
A. Synopsis
This case describes a small furniture manufacturing company that has gained a
reputation for creative designs and quality by focusing on producing custom-designed
furniture. As its reputation grew it began to sell some standard furniture pieces to retail
outlets. The overall growth in sales volume and the diversification into the production
of standard furniture pieces have caused a number of issues to arise concerning both
the internal manufacturing operations and its relationship to the other functional
areas of the company.
B. Purpose
This case is designed to be used as either a ficold-call” case for class discussion or
an assigned homework reading. Major points to be brought out in the discussion
include:
1. The range of decisions that are made in designing and operating processes
2. The impact that these operating decisions have on the organization as a whole, such
as on marketing and finance
3. The impact that decisions made in other functional areas of the organization have on
the operating function
4. The need to go beyond the fifunctional silo” mentality and manage in an integrative
manner
* This case was prepared by Dr. Brooke Saladin, Wake Forest University, as a basis for classroom
discussion.
Using Operations to Create Value
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C. Analysis
Question 1: What types of decisions must Chad Thomas make daily for his company’s
operations to run effectively? Over the long run?
The students should be able to discuss a number of short-term-oriented decisions
that are facing Chad Thomas. These should include:
a. How to set priorities and schedule different orders. Chad is receiving orders for both
custom-made, low-volume furniture pieces and higher-volume, standard pieces.
Sales have increased, but the amount of equipment and the production capacity of
the company have not. Different orders with different manufacturing requirements
are now competing for the same productive capacity.
b. What orders to accept and how long of a lead time to plan for in promising a delivery
date.
c. What type of work policies should be maintained for his employees? Decisions such
as the number and type of employees to employ, the number of hours to work per
day, and the amount of overtime to allow are all work policy decisions that impact
the available capacity level.
d. The allocation of resources, equipment, labor, and money to each product line.
e. The level of inventory to maintain at various stages of the production process for
both the custom and standard furniture lines (i.e., raw material, WIP, finished
goods). These decisions are linked to the longer-term, total inventory-investment
decision.
Examples of longer-term decisions that face Chad Thomas include:
a. Amount of money to tie up in the total inventory investment.
b. The type of equipment to invest in to support efficient production. At what point
should more specialized equipment be purchased to manufacture high-volume,
standard furniture pieces more efficiently?
c. What should be the overall workforce level to maintain, and what should be the
proper mix of skills and capabilities?
d. How should the facilities be laid out to accommodate the two different product
lines? This gets the students into a whole range of capacity and equipment
allocation decisions including size, type, and configuration.
In these decisions it is important that the students see the significance of consistency of
both strategic and operating decisions across functional areas.
Using Operations to Create Value ⚫ CHAPTER 1 ⚫
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Question 2: How did sales and marketing affect operations when they began to sell standard
pieces to retail outlets?
Standard furniture pieces compete on a different set of competitive priorities than
custom-designed pieces. Timely delivery and low costs are much more important than
Question 3: How has the move to producing standard furniture pieces affected the company’s
financial structure?
Inventory investment and operating costs are rising because of the frequent changeovers
to accommodate the two different product lines and their scheduling conflicts.
Question 4: What might Chad Thomas have done differently to help avoid some of these
problems he now faces?
Chad needs to address issues relating to functional areas. Make sure the student is able
to identify decisions that relate to more than one functional area. Examples include the
following:
Operations Function
1. Monitoring capacity and utilization of facilities
2. Formulating inventory policies—dollars, items, and unit levels
Using Operations to Create Value
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Distribution/Logistics
1. Managing distribution and pipeline inventory
2. Comparing cost and advantages of various transportation modes
3. Meeting delivery lead times
Three possible avenues that students may focus on are: Thomas might have
a. Established a plan for a more controlled growth. Part of this plan would be the
development of the appropriate infrastructure to manage a controlled growth as to
D. Recommendations
This case is not designed to be a decision-making case per se but rather a vehicle to
get students thinking about the types and the integrated nature of decisions that
operations managers face. The students may, indeed, have suggestions as to what should
be done to help out Chad Thomas. These recommendations will more than likely follow
the alternatives already discussed. As recommendations are provided by students, make
sure you push them to understand the implications of their recommendations with
respect to the company as a whole and the other functional areas.
E. Teaching Strategy
This case can be effectively discussed in 20 to 30 minutes by following the discussion
questions provided at the end. The questions are interconnected and somewhat
redundant on purpose to reinforce the interrelatedness of decisions made in various
functional areas of the company. The intent is to have the students understand the range
of decisions that face managers in the operating function and to realize that different
types of products competing in different markets place different demands on the
operating function. Therefore, productive systems will take on a variety of
configurations.
Exhibit TN.1 lays out a sample table to be written on the board displaying important
issues in the class discussion. Each column can be used to compare and contrast the
differences in the requirements imposed by custom versus standard furniture for each
area.
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EXHIBIT TN.1
Board Plan
Important Issues
Custom Furniture
Standard Furniture
Marketing
Quality level and quality control
Process equipment
Process flow
Production scheduling system
Purchasing
Type of inventory and inventory
control system
Type of engineering
Type of labor and supervision
needed
Wage/reward system
Layout
Using Operations to Create Value
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CASE: BSB, INC.: Pizza Wars Come to Campus
A. Synopsis
BSB, Inc. presents the situation where launching a pizza service at a food service
operation on a college campus turns out to be very successful. As the manager of the
food service operation is contemplating an expansion of the service, an announcement
by the university that a new food court will soon be opening in the new student union
causes some concern. The new food court will contain, for the first time on campus,
other food service companies, including a new Pizza Hut kiosk. This causes the manager
of BSB, Inc. to reevaluate the competitive environment and her own competitive
priorities.
B. Purpose
BSB, Inc. provides the students an opportunity to discuss a number of strategically
focused issues to include the following:
1. Mission statements: Mission statements describe the fundamental purpose for which
2. Comparison of competitive priorities: When the pizza service was launched a
year ago, the competitive priorities were to expand the product line to offer
3. The impact changing competitive priorities has on operating decisions: Students
need to discuss the potential impact that different competitive priorities have on
4. Product life cycles: Demand for pizza on campus has leveled off. Why? Has it
reached its mature, steady state? What will be the impact of new competition? What
can be done to reposition pizza into a growth stage? These are questions that should
be asked of students to get them to think about pizza’s product life cycle.
C. Analysis
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A good analysis of the situation can be performed by going through the five questions at
the end of the case. The following is what you can expect from a first-year MBA student
given the case as a take-home assignment to read and to respond to the questions at the
end.
Question 1: Does BSB, Inc. enjoy any competitive advantages or distinctive competencies?
BSB’s competitive advantage is close proximity to the customers. Though 43 percent of
meals are eaten off campus, 57 percent of meals are still eaten at BSB’s facilities. For
Question 2: Initially, how did Renee Kershaw choose to compete with her pizza operations?
What were her competitive priorities?
Initially, Kershaw chose to compete on delivery service and price. She used quick
delivery as a key selling point. In addition, without a reasonable price, she could not
Question 3: What impact will the new food court have on Kershaw’s pizza operations? What
competitive priorities might she choose to focus on now?
The new food court introduces new competition that has the same on-campus advantage
as BSB. In addition, these companies can also provide products at reasonable prices, but
unlike BSB, they have brand names. Her direct competitor, Pizza Hut, can probably
Using Operations to Create Value
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Question 4: If Kershaw were to change the competitive priorities for the pizza operation, what
are the gaps between the priorities and capabilities of her process? How might this
impact her operating processes and capacity decisions?
An increase in product variety will affect both service and cost. Kershaw probably
cannot have as many premade pizzas ready to throw into the oven. She will also need to
Question 5: Can you outline a service strategy for Kershaw’s operation on campus?
If she chooses to stay in the pizza business, delivery will remain important. Food, most
likely pizza, delivered from off campus, is a significant competitor. These competitive
companies likely offer many pizza combinations. Therefore, BSB will need to increase
variety to remain competitive. The key to this strategy is to maintain quality and to
innovate on product offerings. Kershaw must use her proximity to the customer to
maintain her competitive advantage in determining their pizza delivery needs.
Using Operations to Create Value ⚫ CHAPTER 1 ⚫
1-19
D. Teaching Strategy
This case is best assigned as a take-home assignment. Have the students focus on
responding to the questions at the end of the case. Tell them to pay particular attention to
the last question. The first four questions all lead up to the last one where students
should describe a service strategy for pizza operations of BSB, Inc. Tell students you
want them to settle on a specific strategy they can support.
In class, start with the first question and cycle through to the final question, which
describes their service strategies. It is helpful to try to get two or three different strategies
on the board to compare and contrast approaches. It is important that students see that
there are a number of good alternative strategies and not just one best one.
A thorough discussion of this case will take 45 minutes to an hour, especially
if alternative strategies are discussed.
