Workers in Louis Vuitton's Pégase teams are less specialized than before, working on a broader set of individual jobs and as part of a team. They swap tasks and team roles while making different kinds of bags, allowing production to switch quickly from one design to another. Take a look around the next time you are in a service establishment or in a production facility. How much productivity could be gained by following similar ideas?

Check the Mayo Clinic tips in the box. How good are you, right now as a student, at satisfying both work and nonwork demands? The chances are that present behavior is a good predictor of how you'll do in the future. What are the lessons of a frank self-assessment? Do you have the strength and energy to do well at work and also have a healthy home life? Also make use of the end-of-chapter Self-Assessment feature to further check on your personal numeracy, a critical life and career skill.

Visual Chapter Overview

19 Operations and Services Management

As the opening example of Louis Vuitton suggests, organizations today operate in a world that places a premium on productivity, technology utilization, quality, customer service, and speed. Businesses large and small are struggling and innovating as they try to succeed in a world of intense competition, continued globalization of markets and business activities, and rapid technological change. Just how top executives approach these challenges differs from one organization to the next, but they all focus on moving services and products into the hands of customers in ways that create loyalty and profits.

At BMW, where customers are foremost, a major thrust is on continuous innovation. CEO Norbert Reithofer says: "We push change through the organization to ensure its strength. There are always better solutions." One of those solutions is state-of-the-art manufacturing: the firm's facilities produce 1.3 million customized vehicles a year. And when Ann Taylor stores were struggling to reassert its women's clothing brand and market position, newly appointed CEO Kay Krill started with a 54-point action plan. It covered everything from processes to products to marketing. Although criticized for identifying so many things to address, she said: "There were 54 things we needed to fix. We fixed every one of them. All 54 were important to me."^[1066]

The core issues in operations and services management boil down to how "productivity" and "competitive advantage" are achieved. This focuses management attention on the various processes and activities that turn resources—in the form of people, materials, equipment, and capital—into finished goods and services.

The foundation of any transformation process is technology–the combination of knowledge, skills, equipment, and work methods used to transform resource inputs into organizational outputs. It is the way tasks are accomplished using tools, machines, techniques, and human know-how. The availability of appropriate technology is a cornerstone of productivity, and the nature of the core technologies in use is an important element in competitive advantage.

• Technology is the combination of knowledge, skills, equipment, and work methods used to transform inputs into outputs.

Manufacturing Technology

When you think manufacturing, the first thing that might come to mind is an automobile assembly line. It is a good example, but are you aware of how much that assembly line has changed in the new workplace? Picture this scene from Ford's assembly plant in northeastern Brazil.^[1072]

Instrument panels made by Visteon in one part of the factory are carried on overhead conveyors to be lowered neatly into car bodies passing underneath. The plant makes three models—Ford's Fiesta hatchback, Fiesta Saloon and EcoSport utility vehicle—each to various specifications, all passing together along the same assembly line, all receiving components for Ford itself and from 13 suppliers inside the final assembly building and a further 11 suppliers in other parts of the 4.7m square meter site.

"Henry Ford of Heart Surgery" Saves Lives with Economies of Scale

Would you believe that a hospital can thrive by increasing productivity through old-fashioned economies of scale? The principle is being proven in India by heart surgeon Dr. Devi Shetty, formerly Mother Theresa's cardiologist. Dr. Shetty has shown that by increasing volume for delicate procedures, costs go down while maintaining quality. "Japanese companies reinvented the process of making cars," he says, "that's what we are doing in health care." Not only do his teams of specialized surgeons perform more operations, the sophisticated testing equipment is used up to five times more in a day than in U.S. hospitals. The Wall Street Journal calls Dr. Shetty the "Henry Ford of Heart Surgery."

This is a high-tech and ultra-modern management version of mass production where a manufacturing organization produces a large number of uniform products in an assembly-line system. Workers are highly dependent on one another as the product passes from stage to stage until completion. Equipment may be sophisticated as in the Ford example, and workers often follow detailed instructions while performing simplified jobs.

• Mass production manufactures a large number of uniform products with an assembly-line system.

There are two other common manufacturing technologies, small-batch production and continuous-process production.^[1073] In small-batch production, such as in a racing bicycle shop, a variety of custom products are tailor-made to order. Each item or batch of items is made somewhat differently to fit customer specifications. The equipment used may not be elaborate, but a high level of worker skill is often needed. Organizations using continuous-process production continuously feed raw materials—such as liquids, solids, and gases—through a highly automated production system with largely computerized controls. Such systems are equipment-intensive, but they can often be operated by a relatively small labor force. Classic examples are oil refineries and power plants.

Appropriate use and innovation in manufacturing technology can be a major source of competitive advantage for today's manufacturers. In fact, operations like the Ford plant in Brazil have to be continually updating to stay up with and hopefully ahead of the competition.^[1074] As you consider what is happening in manufacturing technologies, the following trends are among the most evident.^[1075]

• Small-batch production manufactures a variety of products crafted to fit customer specifications.

• In continuous-process production, raw materials are continuously transformed by an automated system.

• There is increased use of robotics, where computer-controlled machines perform physically repetitive work with consistency and efficiency. If you visit any automobile manufacturer today, chances are that robotics is a major feature of the operations.

• There is increased use of flexible manufacturing systems that allow automated operations to quickly shift from one task or product type to another. The goal is to combine flexibility with efficiency, allowing what is sometimes called mass customization–efficient mass production of products meeting specific customer requirements.

• There is increased use of cellular layouts that place machines doing different work together, so that the movement of materials from one to the other is as efficient as possible. Cellular layouts also accommodate more teamwork on the part of machine operators.

• There is increased use of computer-integrated manufacturing (CIM), in which product designs, process plans, and manufacturing are driven from a common computer platform. Such CIM approaches are now integrated with the Internet, so that customer purchasing trends in retail locations can be spotted and immediately integrated into production schedules at a manufacturing location.

• There is increased focus on lean production that continuously innovates and employs best practices to keep simplifying processes, reducing costs, and increasing production efficiencies."^[1076]

• There is increased attention to design for disassembly. The goal here is to design and manufacture products in ways that consider how their component parts will be recycled at the end of their lives.

• There is increased value to be found in remanufacturing. Instead of putting things together, remanufacturing takes used items apart and rebuilds them as products to be used again. One estimate is that using remanufactured materials saves up to 30% on costs.

Service Technology

When you think of services, think of the airlines you travel on. What counts for you as a customer? Most likely your customer experience begins with the company's website and how efficient and easy it might be to use. It continues with the process of check-in and how well and efficiently you are treated. It continues further during boarding and then in-flight as the pilots and flight attendants take care of you. And it doesn't end until you arrive safely, hopefully on time, and are able to retrieve all of your check-in bags in a timely manner. At each point in this process things can go wrong or right, with consequences for your satisfaction and loyalty to the airline.

It is in the latter sense that something called the service-profit chain becomes important in service organizations. You can think of it as the activities involved in the direct link between an organization's service providers and customers or clients. When the service-profit chain is well managed and executed from an operations perspective, it should result in satisfied and loyal customers for the organization, and, ideally, it should do so with an efficient and productive use of the organization's resources.

• The service-profit chain consists of all activities involved in the direct link between an organization's service providers and customers or clients.

As in manufacturing settings, the nature of the service organization's core technology is an important input to the service-profit chain.^[1077] In health care, education, and related services, intensive technology focuses the efforts of many people with special expertise on the needs of patients, students, or clients. In banks, real estate firms, insurance companies, employment agencies, and others like them, mediating technology links together parties seeking a mutually beneficial exchange of values—typically a buyer and a seller. And, long-linked technology can function like mass production, where a client is passed from point to point for various aspects of service delivery.

• Intensive technology focuses the efforts and talents of many people to serve clients.

• Mediating technology links people together in a beneficial exchange of values.

• In long-linked technology a client moves from point to point during service delivery.

Note

✓ Learning Check

Study Question 1

What are the essentials of operations management?

Be sure you can ✓ define operations management ✓ state the productivity equation ✓ define competitive advantage ✓ list alternative types of manufacturing and service technologies ✓ discuss several trends in manufacturing technologies

No Frills Airline Thrives by Cutting Costs

Ryanair's CEO Michael O'Leary argues that the way to profit while running an airline is to keep cutting costs with "imagination and passion." And so Ireland-based Ryanair cuts costs, and it does so aggressively and continuously. A model of the "no frills" airline, it is able to offer spectacularly low fares to customers and still make money. It carries more international travelers than any other airline in the world. Ryanair flies to regional airports (lower fees), has no reclining seats (saves on maintenance), no on-board services (pay if you want a coffee), and even charges passengers to check in at the airport (human contact costs extra).

You should recall from earlier discussions in this book that an organization's value chain, as shown in Figure 19.1, is the specific sequence of activities that result in the creation of products or services with value for customers. The value chain includes all primary activities–from inbound logistics to operations to outbound logistics to marketing and sales to after-sales service, as well as support activities– such as procurement, human resource management, technology development and support, and financial and infrastructure maintenance.^[1078]

• The value chain is the specific sequence of activities that creates products and services with value for customers.

Figure 19.1. Elements in an organization's value chain.

Real Ethics

"Not in My Backyard" Dilemma Makes Things Personal

A major grocery store chain has decided to build a supercenter in your town. The store will be open 24/7, and the local economy is expected to benefit greatly. In fact, the company announced that it would hire 40 full-time and more than 100 part-time employees to staff the store. It also intends to use several local construction companies to build the center. City commissioners are excited about the additional tax revenue that will be generated because otherwise they were going to have to cut back on some services. This seems like very positive news.

But, the site selected for the new store is right at the edge of your neighborhood. Home prices are already falling because of the announcement. Neighbors are worried about the nuisances that will result from such a large store. Light pollution is a concern since the store will be open 24 hours a day and the parking lot lights are really bright. Noise will also be an issue because delivery trucks will be arriving at all hours of the day and night. Finally, traffic will certainly increase, and the streets will become more dangerous for the neighborhood children.

As the city manager, you will play a major role in determining whether the grocery store will be given final permission to build the new store. You clearly recognize how much the community can gain from this development. However, it seems that the benefits to the town as a whole will come at a cost to your particular neighborhood.

Your family, friends, and neighbors expect you to put a stop to this development plan. Simply suggesting that the grocery store build elsewhere is not a viable option. The grocery chain has targeted this particular site for years and is only willing to build in the community if it can do so at this location.

You Decide

What will you do? The new store would help the struggling local economy by providing jobs and increasing tax revenues, but why should your family and neighbors have to pay such a high price to support the rest of the community? You probably have the power to break off the negotiations and deny the grocery store permission to build. But is it the right thing to do? What are the ethical considerations that go into making decisions when professional obligations and personal obligations collide?

Analysis of any organization's value chain will show an intricate sequence of activities that step by step adds value to inputs, right up to the point at which finished goods or services are delivered to customers or clients. The essence of value chain management is to manage each of these steps for maximum efficiency and effectiveness.

Part of the logic of being able to identify and diagram a value chain is to focus management attention on three major questions. First: what value is being created for customers in each step? Second: how efficient is each step as a contributor to overall organizational productivity? Third: how can value creation be improved overall? As the customer of an online retailer such as Amazon.com, for example, you can think of this value in such terms as the price you pay, the quality you receive, and the timeliness of the delivery. From the standpoint of value chain management, Amazon's value creation process can be examined from the point where books are purchased to their transportation and warehousing, to electronic inventorying and order processing, and to packaging and distribution to the ultimate customer.

An essential element in any value chain is the relationship between the organization and the many people and businesses that supply it with needed resources and materials. All of these supplier relationships on the input side of the input-throughput-output action cycle must be well managed for productivity. Perhaps no company knows this lesson better right now than Boeing. Its new 787 Dreamliner was delayed over two years due to problems with a complex supply chain that required coordinated production from firms located in diverse locations such as Italy, Sweden, Korea, Japan, Australia, and the United States. Although cost saving was the goal of moving from in-house production to substantial outsourcing of components, the resulting coordination and delivery problems wreaked havoc with the Dreamliner's production schedules. This hurt both costs and customer goodwill. Boeing's CEO Jim McNerney says: "The initial plan outran our ability to execute it."^[1079]

The concept of supply chain management, or SCM, involves strategic management of all operations linking an organization and its suppliers, including such areas as purchasing, manufacturing, transportation, and distribution.^[1080] The goals of supply chain management are to achieve efficiency in all aspects of the supply chain while ensuring on-time availability of quality resources and products. Wal-Mart is still considered a master of supply chain management. For example, the firm uses an advanced information system that continually updates inventory records and sales forecasts based on point-of-sale computerized information. Suppliers access this information electronically, allowing them to adjust their operations and rapidly ship replacement products to meet the retailer's needs.

• Supply chain management strategically links all operations dealing with resource supplies.

Purchasing plays an important role in supply chain management. Just as any individual tries to control how much they spend, a thrifty organization must be concerned about how much it pays for what it buys. To leverage buying power, more organizations are centralizing purchasing to allow buying in volume. They are trimming supply chains and focusing on a small number of suppliers with whom they negotiate special contracts, gain quality assurances, and get preferred service. They are also finding ways to work together in supplier-purchaser partnerships. It is now more common, for example, that parts suppliers maintain warehouses in their customer's facilities. The customer provides the space; the supplier does the rest. The benefits to the customer are lower purchasing costs and preferred service; the supplier gains an exclusive customer contract and more sales volume.

Another important issue in the value chain is management of inventory, the amount of materials or products kept in storage. Organizations maintain a variety of inventories of raw material, work in process, and finished goods. Whenever anything is held in inventory, there is cost associated with it, and controlling these costs is an important productivity tool.

Inventory management is an area where developments in computer and information technologies play an increasingly important role. For example, it is increasingly common today to find radio-frequency identification (RFID) tags to electronically track the movement of goods, parts, and even people through various steps in the value chain. You see this in hospitals and amusement parks, which use wrist bands to track customer progress through the service-profit chain, and in various retail and service settings, ranging from retail and grocery stores to airline baggage handling, as RFID tags assist with supply chain and inventory management.

• Inventory is an amount of materials or products kept in storage.

• Inventory control by economic order quantity orders replacements whenever inventory level falls to a predetermined point.

Economic Order Quantity

The goal of inventory control is to make sure that an inventory is just the right size to meet performance needs, thus minimizing the cost. The economic order quantity (EOQ) method of inventory control involves ordering a fixed number of items every time an inventory level falls to a predetermined point. When this point is reached, as shown in Figure 19.2, a decision is automatically made (typically by computer) to place a standard order to replenish the stock. The order sizes are mathematically calculated to minimize costs of inventory. The best example is the local supermarket, where hundreds of daily orders are routinely made on this basis.

Figure 19.2. Inventory control by economic order quantity (EOQ).

Figure 19.3. Graphical approach to break-even analysis.

Another important value chain management issue relates to capacity planning for the production of products or services, and the pricing of them for sales. In basic business terms too much capacity raises costs, and too little capacity means unmet sales; too low a price fails to deliver revenues that cover costs, and too high a price drives away customers. Thus, when business executives are deliberating new products or projects, a frequent question is: "What is the 'break-even point'?"

The graph in Figure 19.3 shows that the break-even point is where revenues just equal costs. You can also think of it as the point where losses end and profit begins. The formula for calculating break-even points is:

Break-even point = Fixed costs/(Price — Variable Costs)

• The break-even point is where revenues = costs.

Managers use break-even analysis to improve control and perform "what if" calculations under different projected cost and revenue conditions. See if you can calculate some break-even points, doing the types of analyses that business executives perform every day. Suppose the proposed target price for a new product is $8 per unit, fixed costs are $10,000, and variable costs are $4 per unit. What sales volume is required to break even? (Answer: The break-even point is at 2,500 units.) What happens if you are good at cost control and can keep variable costs to $3 per unit? (Answer: The break-even point is at 2,000 units.) Now, suppose you can only produce 1,000 units in the beginning and at the original costs. At what price must you sell them to break even? (Answer: $14.)

• Break-even analysis calculates the point at which revenues cover costs under different "what if" conditions.

Without any doubt, customers put today's organizations to a very stiff test. Like you, most want three things: (1) high quality, (2) low price, and (3) on-time delivery of the goods and services they buy. They don't always get them, as these customer stories show.^[1085]

External and Internal Customers

Customer relationship management applies equally well to external and internal customers. Figure 19.4 expands the open-systems view of organizations to depict the complex internal operations of the organization, as well as its interdependence with the external environment. In this figure the organization's external customers purchase the goods produced or utilize the services provided. They may be industrial customers—other firms that buy a company's products for use in their own operations—or they may be retail customers or clients who purchase or use the goods and services directly. Internal customers, by contrast, are found within the organization. They are the individuals and groups who use or otherwise depend on one another's work in order to do their own jobs well.

Figure 19.4. The importance of external and internal customers.

When the quality theme was first introduced in Chapter 2 on the history of management thought, we discussed how "world-class organizations" embed quality in all aspects of their operations.^[1089] ISO certification by the International Standards Organization in Geneva, Switzerland, serves as a major indicator of quality accomplishments. Another benchmark is the Malcolm Baldrige award. It is given by the president of the United States to business, health care, education, and nonprofit organizations that meet quality criteria in the following areas: leadership, strategic planning, customer and market focus, measurement and knowledge management, human resource focus, process management, and results.^[1090]

• ISO certification indicates conformance with a rigorous set of international quality standards.

• The Malcolm Baldrige award is given to business, health care, education, and nonprofit organizations that meet quality criteria.

The work of W. Edwards Deming is a cornerstone of the quality movement. His approach to quality emphasizes constant innovation, use of statistical methods, and commitment to training in the fundamentals of quality assurance. One outgrowth of his work is total quality management, or TQM. This is a process that makes quality principles part of the organization's strategic objectives, applying them to all aspects of operations and striving to meet customers' needs by doing things right the first time.

• Total quality management is managing with an organization-wide commitment to continuous improvement, product quality, and customer needs.

Most TQM approaches insist that the total quality commitment applies to everyone in an organization and throughout the value chain—from resource acquisition and supply chain management, through production and into the distribution of finished goods and services, and ultimately to customer relationship management. Both TQM and the Deming approach are also closely tied to the emphasis on continuous improvement–always looking for new ways to improve on current performance. Again, this applies throughout the value chain.^[1091] The basic notion driving continuous improvement is that one can never be satisfied; something always can and should be improved on.

• Continuous improvement involves always searching for new ways to improve work quality and performance.

For Deming, quality principles are straightforward: tally defects, analyze and trace them to the sources, make corrections, and keep records of what happens afterwards.^[1092] He championed statistical quality control that takes samples of work, measures quality in the samples, and determines acceptability of results. Unacceptable results trigger investigation and corrective action.

• A Six Sigma program sets a quality standard of 3.4 defects or less per million products or service deliveries.

The task of tallying and analyzing defects can be done with a variety of sophisticated statistical techniques. One involves the Greek letter Σ (sigma), which in statistics is used to identify estimated standard deviation from a norm. In respect to statistical quality control, this would be a measure of defects in a work process, and the higher the Sigma the lower the number of defects. Many manufacturers now use a Six Sigma program, meaning that statistically the firm's quality performance standard is set at the Six Sigma level. That is, the quality goal is to have no more than 3.4 defects per million units of goods produced or services completed.^[1093] This translates to a perfection rate of 99.9997 percent.

Figure 19.5. Sample control chart showing upper and lower control limits.

Another way to tackle statistical quality control is shown in Figure 19.5. Such control charts are graphical ways of displaying trends so that exceptions to quality standards can be identified for special attention. In the figure, for example, an upper control limit and a lower control limit specify the allowable tolerances for measurements of a machine part. As long as the manufacturing process produces parts that fall within these limits, things are "in control." As soon as parts fall outside the limits, it is clear that something is going wrong that is affecting quality. The process can then be investigated—even shut down—to identify the source of the errors and correct them.

• Statistical quality control measures work samples for compliance with quality standards.

• Control charts graphically plot quality trends against control limits.

In his book, Beyond Reengineering, Michael Hammer defines a work process as "a related group of tasks that together create a result of value for the customer."^[1096] These tasks are what people do to turn resource inputs into goods or services for customers. Hammer highlights the following key words as essential elements of his definition: group–tasks are viewed as part of a group rather than in isolation; together–everyone must share a common goal; result–the focus is on what is accomplished, not on activities; customer–processes serve customers, and their perspectives are the ones that really count.

• A work process is a related group of tasks that together create a value for the customer.

• Workflow is the movement of work from one point to another in a system.

The concept of workflow, or the way work moves from one point to another in manufacturing or service delivery, is central to the understanding of processes.^[1097]

Research Brief

How Do You Improve the Productivity of a Sales Force?

That's the question asked by Dianne Ledingham, Mark Kovac, and Heidi Locke Simon. Writing in the Harvard Business Review, they use a series of case examples to illustrate how companies have used data and analytical methods to raise sales. They contrast the newer, data-driven approaches with what they call a "wing-and-a-prayer" style, in which salespersons are given goals and then simply told to go out and meet them.

One case involves U.S. Equipment Financing, a division of GE Commercial Finance headed by Michael Pilot. Pilot's approach was to focus on raising the performance of existing sales representatives by helping them sell more-the "productivity improvement approach"-in contrast to simply hiring more reps-the "capacity increase approach." Pilot attributes some $300 million in new business to his scientific approach to sales force productivity. He began with a new database that inventoried past transactions. He then asked sales reps to come up with criteria that would indicate the likelihood of a customer doing business with GE. He next ran regression analyses that tested these criteria against the past transactions. The result was a set of six criteria that correlated well with past successes.

When new prospects were scored using the criteria, Pilot found 50% more top-prospect sales candidates than had previously been identified. Using this set of top prospects, he redesigned the sales force to maximize attention to those prospects, and he provided reps with information and tools to better deal with their customers. The result was a 19% increase in the "conversion" rate, or sales closings.

Researchers consider Pilot's scientific method a "best-practice" approach to improving sales force productivity. They recommend the TOPSales approach, focusing on (1) targeted offerings by market segment, (2) optimized technology tools and procedures, (3) performance management metrics and systems, and (4) systematic sales force deployment.

You Be the Researcher

This article, by Ledingham et al., describes a vigorous productivity improvement approach to reaching a higher sales goal. Can you find examples in your experience or community where goals are reached, but the costs of doing so are very high? What would you propose so that the same goals could be reached with lower costs and higher productivity?

Reference: Dianne Ledingham, Mark Kovac, and Heidi Locke Simon, "The New Science of Sales Force Productivity," Harvard Business Review, vol. 84 (September 2006), pp. 124–33.

The various parts of a work process must all be completed to achieve the desired results, and they must typically be completed in a given order. An important starting point for a reengineering effort is to diagram or map these workflows as they actually take place. Then each step can be systematically analyzed to determine whether it is adding value, to consider ways of eliminating or combining steps, and to find ways to use technology to improve efficiency.

• Process value analysis identifies and evaluates core processes for their performance contributions.

Process reengineering can be used to regularly assess and fine-tune work processes to ensure that they directly add value to operations. Through a technique called process value analysis, core processes are identified and carefully evaluated for their performance contributions. Each step in a workflow is examined. Unless a step is found to be important, useful, and contributing to value-added results, it is eliminated. Process value analysis typically takes place as follows.^[1098]

Figure 19.6. How reengineering can streamline work processes.

Figure 19.6 shows an example of how reengineering and better use of computer technology can streamline a purchasing operation. Ideally, a purchase order should result in at least three value-added outcomes: order fulfillment, a paid bill, and a satisfied supplier. For this to happen, things like ordering, shipping, receiving, billing, and payment must all be well handled. A traditional business system might have purchasing, receiving, and accounts payable as separate functions, with each function communicating with each other and with the supplier. As the figure shows, there are lots of inefficiencies here. Alternatively, process value analysis might result in reengineering the workflow and redesigning it to include a new purchasing support team. Its members can handle the same work more efficiently with the support of the latest computer technology.^[1099]