Download - Edited Krajewski Chapter 1

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2007 Pearson Education

Operat ions as a

Compet i t iveWeapon

Chapter 1 Year ExpectedDemand

CashFlow

0 80,000 ($150,000)

1 90,000 $90,000

2 100,000 $150,000

3 110,000 $210,000

4 120,000 $270,000

5 130,000 $300,000


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HowOperations As a Competitive Weaponf i ts the Operat ions Management

Phi losophy

Operations As a CompetitiveWeapon

Operations StrategyProject Management Process StrategyProcess Analysis

Process Performance and QualityConstraint Management

Process LayoutLean Systems

Supply Chain StrategyLocation

Inventory ManagementForecasting

Sales and Operations PlanningResource Planning

Scheduling


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FedEx

What make the firm to be

successful?


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FedEx

Fast

On-time deliveries (reliable)

Relatively low cost

Technology in shipment tracking


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From the case,

What is the worldwide phenomenon thathas change the business operations?

What impact does it have to business likeFedEx?


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Inputs

Transformation Processes

(Adding value) Outputs

Operations Management is

The systematic design, direction and control

of processes that transform inputs into

services and products for internal, as well as

external, customers.

? ?


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INPUTMaterialMachinesLaborManagementCapital

TRANSFORMATIONPROCESS

OUTPUTGoodsServices

Feedback

Operat ions as a

Transformat ion

Process


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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

Transformat ion

Process


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Operat ions Management

as a Func t ion


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Processes

Processes should add value.

Processes can be broken down into

sub-processes, which in turn can be brokendown further.

Any process that is part of a larger process is

considered a nested process.Each process and each nested process has

inputs and outputs.


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Nested Processes

Advert isement Design and Planning Process

Creative design pro cess

Receive wo rk request As semb le team Prepare several design s Receive inputs fromAccoun t Execut ive

Prepare f inal concept Revise con cept perclients inputs

Media plannin g pro cess

Receive work requ est Prepare several med iaplans

Receive inpu ts fromAcc oun t Execut ive

Prepare final plan Revise plan per clientsinputs


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Process View

of an Ad Agency

Accou nt ing process

Product ion process Prepare ad for pub lication

and deliver to media

outlets

Advert isement

design and

p lann ing process Create the ad to the

needs of the client

and p repare a plan

for media exposure

Output interface

process

Commu nicate withclient, get needs, and

coordinate progress

Inpu

tsOutputs


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External vs . In ternal

Customers

External Customers are those who purchasethe goods and services.

Internal Customers are those who receivethe output of others within the firm. They arepart of the transformation process.

Inputs fromotherprocesses

Transformation Processes(Adding value)

Outputs toInternal orto Externalcustomers

Example of external and internal customer in

Manufacturing or service company?


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Service Processes and

Manu factu r ing Processes

Manufacturing processes change materialsin one or more of the following dimensions:

Physical properties

Shape

Fixed dimensions

Surface finish

Joining parts and materials

If a process isnt doing at least one of these, then it is

a service (non-manufacturing) process.


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Manufactur ing

and Service

Goods Production Tangible

Can be inventoried Low customer contact

Capital Intensive

Quality easily

measured

Service Production

Intangible

Cant be inventoried

High customer contact

Labor Intensive

Quality hard to measure

Most firms provide both goods and services.


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Value Chains

Value chains are an interrelated series ofprocesses that produce a service or product

to the satisfaction of customers.Value chains may have core processes or support

processes.

Core processes deliver value to external

customers.Support processes provide vital inputs for

the core processes.


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Core Processes

1. Customer relationship processes Identify, attract, and build relationships with external

customers and facilitate the placement of orders.

2. New service/product development processes Design and develop new services or products from

inputs received from external customer specifications.

3. Order fulfillment processes The activities required to produce and deliver the service

or product to the external customers.4. Supplier relationship processes

Select suppliers of services, materials and informationand facilitate the timely and efficient flow of these itemsinto the firm.


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Support Processes

In ternal Value-Chain L inkages

Firms have many processes that support the core processes.

Ex

terna

lsupp

liers E

xtern

alc

ustom

ers

Suppor t proc esses

Suppl ier

re lat ionship

process

Order

fu l f i l lment

process

New service/

product

development

process

Customer

relat ionship

process


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Suppo rt processes

Example:

Capital acquisition

Recruitment & Hiring

Budgeting

Information System


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Prog ress ive Insurance

Grew from $1.3 billion to $11 in 13 years.

How did they do it?

Operational Innovation (Designing new processes)

Immediate Response Claims Handling (24 hours a day).

Streamlined claims processing, from 7-10 days to 9 hours.

Web site for agents only.

Web site for customer information, inquiries and routine

processing.

Agents quickly go to scene of accident.


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Operat ions as a Set o f

Decis ions

(1) Recognize and clearly define the problem.

(2) Collect the information needed to analyze

possible alternatives.

(3) Choose the most attractive alternative.(4) Implement the chosen alternative.

Basic Decision-making Steps


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Operat ions as a Set o f

Decis ions

Strategic Decisions Tactical Decisions

Development of new

capabilities Maintenance of existingcapabilities

Design of newprocesses

Development andorganization of valuechains

Key performancemeasures

Process improvement

and performancemeasures Management and

planning of projects Generation of production

and staffing plans Inventory management Resource scheduling


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Product iv i ty

Productivity is the value of outputs(services and products) produced,

divided by the value of input resources(wages, costs of equipment, etc.)

OutputProductivity = Input


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Product iv i ty Calculat ion

Examp le 1.1

1. Single factorThree employees process 600 insurancepolicies in a week. They work 8 hours per day,

5 days per week. Calculate the productivity inpolicies per hour.

Labor productivity =Policies ProcessedEmployee Hours

600 Policies(3 Employees) (40 hours/employee)= = 5 policies/hr


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Product iv i ty Calculat ion

Examp le 1.1cont inued

2. MultifactorA team of workers makes 400 units of a product,valued by its standard cost of $10 each (beforemarkups for other expenses and profit). Theaccounting department reports that the actual costsare $400 for labor, $1,000 for materials, and $300 foroverhead. Calculate the productivity.

Multifactor productivity =Quality at standard cost

Labor cost + Materials Cost + Overhead cost

(400 units) ($10/unit)

$400 + $1000 + $300= = 2.35

$4,000

1,700=

These figures must be compared with performance levels in priorperiods and with future goals.


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Appl icat ion

Calculate the year-to-date labor productivity:

Calculate the multifactor productivity:


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Global Compet it ion

Businesses accept the fact that, to prosper, theymust view customers, suppliers, facility locations, andcompetitors in global terms.

Most products today are composites of materials andservices from all over the world.

Forces that created increased global competition:

Improved Transportation and Information Technologies

Loosened regulations on Financial Institutions Increased Demand for Imported Services and Goods

Reduced Import Quotas and other Trade Barriers

Comparative Cost Advantages


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Test you Globalizat ion

knowledge

Select your answer from the following: Countries: Germany, Japan, U.S., Singapore, Ireland, Finland, Norway,

Belgium, China, Brazil;

Industries: Automotive, Pharmaceutical, Retail, Textile, Biomedical,Electronics;

1. Which country pays the highest wage rate?2. Which country has the best infrastructure for Internet access?3. Which industry is the most competitive?4. Which international event celebrated annually sends the largest number

of people traveling?


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ANSWERS

1. Which country pays the highest wage rate? - Norway

2. Which country has the best infrastructure for Internet access? -Singapore

3. Which industry is the most competitive? - Pharmaceuticals4. Which international event celebrated annually sends the largest

number of people traveling?Chinese New Year


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Globalizat ion and

Compet i t iveness (con t.)

Hourly Compensation Costs for Production Workers

Source: U.S. Bureau of Labor Statistics, 2005.

Global izat ion and


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Global izat ion and

Compet i t iveness

(cont.)

World Population DistributionSource: U.S. Census Bureau, 2006.


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Globalizat ion and


Trade in Goods as % of GDP

(sum of merchandise exports and imports divided by GDP, valued in U.S. dollars)


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Produc t iv ity and

Compet i t iveness

Competitiveness degree to which a nation can produce goods

and services that meet the test of internationalmarkets

Productivity ratio of output to input

Output sales made, products produced, customers

served, meals delivered, or calls answered

Input labor hours, investment in equipment, material

usage, or square footage


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Produc t iv ity and


Average Annual Growth Rates in Productivity, 1995-2005.Source: Bureau of Labor Statistics. A Chartbook of

International Labor Comparisons. January 2007, p. 28.


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Produc t iv ity and


Average Annual Growth Rates in Output and Input, 1995-2005

Source: Bureau of Labor Statistics. A Chartbook of InternationalLabor Comparisons, January 2007, p. 26.

Dramatic Increase inOutput w/ Decrease in

Labor Hours


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Global Compet it ion

Disadvantages

May have to relinquish proprietarytechnology.

Political risks.

Alienate U.S. customers by sending jobsoverseas.

Lower skill levels in some areas.

Difficulty with cross-functional coordination.

Harder to produce products and services thatcan compete.


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Other Chal lenges in

Operat ions Management

Rapid technological change

Ethical issues across cultures

Increasing diversity of the workforce

Environmental impact issues


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Add ress ing the Challenges

in Operat ions Management

Managing Processes

Process Strategy

Process Performance& Quality

Constraint Management

Process Layout

Lean Systems

Process Analysis

Using Operationsto Compete

Operations As aCompetitive Weapon

Operations Strategy

Project Management

Managing Value Chains

Supply Chain Strategy

Inventory Management

Location

Forecasting

Sales & OperationsPlanning

Scheduling

Resource Planning


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Solved Prob lem 1

a. Multifactor productivity is the ratio of the value ofoutput to the value of input resources


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b. Labor productivity is the ratio of the value ofoutput to labor hours:

Solved Prob lem 1


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Solved Prob lem 2


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Decision Making

Supp lement A


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Break-Even Analysis

Break-even analysis is used to compareprocesses by finding the volume at which twodifferent processes have equal total costs.

Break-even point is the volume at whichtotal revenues equal total costs.

Variable costs (c) are costs that vary

directly with the volume of output.Fixed costs (F) are those costs that remain

constant with changes in output level.


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Q is the volume of customers or units,

c is the unit variable cost, Fis fixed

costs and pis the revenue per unit

cQis the total variable cost.

Total cost =F+ cQ

Total revenue =pQ

Break-even is wherepQ= F+ cQ(Total revenue = Total cost)

Break-Even Analysis


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Break-Even Analysis can tell you

If a forecast sales volume is sufficientto break even (no profit or no loss)

How low variable cost per unit must beto break even given current prices andsales forecast.

How low the fixed cost need to be tobreak even.

How price levels affect the break-evenvolume.

B k E A l i


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Break-Even Analys is:

Example

Fixed cost = cf= $2,000Variable cost = cv = $5 per raft

Price =p = $10 per raft

Break-even point is

v = = = 400 raftscf

p - cv200010 - 5


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Exercise

A hospital is considering a new procedure to be offeredat $200 per patient. The fixed cost per year would be

$100,000, with total variable costs of $100 per patient.

What is the break-even quantity for this service?


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Exercise - Answer

Q = F / (p - c)= 100,000 / (200-100) = 1,000 patient s

B k E A l i


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Break-Even Analysis :

Graph

Totalcost

line

Totalrevenue

line

Break-even point400 Units

$3,000

$2,000

$1,000


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Two Processes andMake-or-Buy Decisions

Breakeven analysis can be used to choosebetween two processes or between aninternal process and buying those services or

materials.The solution finds the point at which the total

costs of each of the two alternatives are

equal.The forecast volume is then applied to see

which alternative has the lowest cost for thatvolume.


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Breakeven for

Two Processes

Example A .3

Whichprocess to

be used ?


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Q=FmF

b

cbc

m

Q=12,000 2,400

2.0 1.5

Breakeven for

Two Processes

Example A .3


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Q=FmFb

cbcm

Q= 19,200 saladsBreakeven forTwo Processes

Example A .3

Company believe demand will


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More examplesProcess Select ion

If demand Below 2,667, choose process ?If demand Above 2,667, choose process ?

$2,000 + $5v = $10,000 + $2v

$3v = $8,000

v = 2,667 rafts

Process A Process B


far exceed BE point, thus

contemplating larger initial

investment (higher degree of

automation), thus, VC is

reduced



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More examplesProcess Select ion

If demand Below 2,667, choose process AIf demand Above 2,667, choose process B

$2,000 + $5v = $10,000 + $2v

$3v = $8,000

v = 2,667 rafts

Process A Process B


far exceed BE point, thus

contemplating larger initial

investment (higher degree of

automation), thus, VC is

reduced


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Process

Select ion:

Graph

Example 4.2

| | | |1000 2000 3000 4000 Units

$20,000

$15,000

$10,000

$5,000

Total cost ofprocess A

Total cost ofprocess B

Chooseprocess A

Chooseprocess B

Point of indifference = 2,667 Units


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Exercise 1

A company is evaluating which of two alternativesshould be used to produce a product that will sell forRM35.00 per unit. The following cost information

describes the two alternatives

Process A Fixed Cost: RM500,000

Variable Cost per Unit: RM25.00

Process B Fixed Cost:RM750,000Variable Cost per Unit: RM23.00

What is the break-even volume for Process A and B ?

DR.AZMAWANI ABD RAHMAN


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solut ion

Process A = 50,000 units

Process B = 62,500 units


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A company is evaluating which of two alternatives should be used toproduce a product that will sell for RM35.00 per unit. Thefollowing cost information describes the two alternatives

Process A Fixed Cost: RM500,000Variable Cost per Unit: RM25.00Process B Fixed Cost:RM750,000


If total demand (volume) is 120,000 units, then the company should

a. select Process A with a profit of $940,000 to maximize profitb. select Process B with a profit of $450,000 to maximize profitc. select Process A with a profit of $700,000 to maximize profitd. select Process B with a profit of $690,000 to maximize profit

Exercise 2



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A company is evaluating which of two alternatives should be used toproduce a product that will sell for RM35.00 per unit. Thefollowing cost information describes the two alternatives

Process A Fixed Cost: RM500,000Variable Cost per Unit: RM25.00Process B Fixed Cost:RM750,000


If total demand (volume) is 120,000 units, then the company should

a. select Process A with a profit of $940,000 to maximize profitb. select Process B with a profit of $450,000 to maximize profitc. select Process A with a profit of $700,000 to maximize profitd. select Process B with a profit of $690,000 to maximize profit

solution



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Application A.2

Fm Fb

cb cm=Q =

$300,000 $0

$9

$7=150,000


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Decision Theory

Decision theory is a general approach to decisionmaking when the outcomes associated with alternativesare often in doubt.

A manager makes choices using the following process:1. List the feasible alternatives2. List the chance events(states of nature).3. Calculate the payofffor each alternative

in each event.

4. Estimate the probabi l i tyof each event.(The total probabilities must add up to 1.)

5. Select the decis ion ruleto evaluate thealternatives.


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Decision Rules

Decision Making Under Uncertainty is when you areunable to estimate the probabilities of events. Maximin: The best of the worst. A pessimistic approach.

Maximax: The best of the best. An optimistic approach.

MinimaxRegret: Minimizing your regret (also pessimistic)

Laplace: The alternative with the best weighted payoff usingassumed probabilities.

Decision Making Under Riskis when one is able toestimate the probabilities of the events. ExpectedValue: The alternative with the highest weighted

payoff using predicted probabilities.

MaxiMin Decision


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Alternatives Low High

Small facility 200 270Large facility 160 800Do nothing 0 0

Events(Uncertain Demand)

MaxiMin DecisionExample A.6 a.

1. Look at the payoffs for each alternative and identify thelowest payoff for each.

2. Choose the alternative that has the highest of these.(the maximum of the minimums)

MaxiMax Decision


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MaxiMax DecisionExample A.6 b.

1. Look at the payoffs for each alternative and identify thehighest payoff for each.

2. Choose the alternative that has the highest of these.(the maximum of the maximums)

Laplace


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Laplace(Assumed equal probabilities)

Example A.6 c.

Alternatives Low High(0.5) (0.5)

Small facility 200 270Large facility 160 800

Do nothing 0 0

Events

200*0.5 + 270*0.5 = 235

160*0.5 + 800*0.5 = 480

Multiply each payoff by the probability ofoccurrence of its associated event.

Select the alternative with the highest weighted payoff.

MiniMax Regret


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MiniMax Regret

Example A.6 d.




Look at each payoff and ask yourself, If I end up here, do

I have any regrets?

Your regret, if any, is the difference between that payoffand what you could have had by choosing a differentalternative, given the same state of nature (event).

MiniMax Regret


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MiniMax RegretExample A.6 d. continued




If you chose a small

facility and demand islow, you have zeroregret.

If you chose a large facility and

demand is low, you have a regret of40. (The difference between the 160you got and the 200 you could havehad.)

MiniMax Regret


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MiniMax Regret

Example A.6 d. continued






Events

MaxRegret53040

800

Regret MatrixBuilding a large

facility offers the

least regret.

Expected Value


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pDecision Making under Risk

Example A.7

Alternatives Low High(0.4) (0.6)

Small facility 200 270Large facility 160 800

Do nothing 0 0

Events

200*0.4 + 270*0.6 = 242

160*0.4 + 800*0.6 = 544

Multiply each payoff by the probability ofoccurrence of its associated event.

Select the alternative with the highest weighted payoff.


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Application A.4


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Application A.4

840 840 = 0

840 370 = 470

840

25 = 830

1150 440 = 710

1150 220 = 930

1150

1150 = 0 670

(-25) = 695

670 670 = 0

670 190 = 480 710

930

830

What is the minimax regret solution?


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Fletcher Arrow

Cooper Barrel

Wainwright - Wagon


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Application A.5

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