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OM2 CHAPTER 1 GOODS, SERVICES, AND OPERATIONS MANAGEMENT DAVID A. COLLIER...

OM2 CHAPTER 1 GOODS, SERVICES, AND OPERATIONS MANAGEMENT DAVID A. COLLIER AND JAMES R. EVANS OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1  Chapter 1 Learning Outcomes learning outcomes LO1 Explain the concept of operations management. LO2 Describe what operations managers do. LO3 Explain the differences between goods and services. LO4 Describe a customer benefit package. LO5 Explain three general types of processes. LO6 Summarize the historical development of OM. LO7 Describe current challenges facing OM. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 2 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management W alt Disney clearly put us on the path toward things like quality, great guest service, creativity and innovation,” said Mr. Bruce Jones, programming director for the Disney Institute. Disney theme parks and resorts are designed to “create happiness by providing the finest in entertainment for people of all ages, everywhere.” How do they accomplish this? By meticulous attention to the management of operations! OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 3 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Disney theme parks and resorts, for example, focus on training employees (“cast members”) to provide exceptional guest service; on the use of technology both for entertainment and operational efficiency; on the physical setting (i.e., facility layout, lighting, signage, music, appealing to all five senses), separating “onstage” public areas from “backstage” work operations that include a complex underground system to move materials and people around the properties; on process design issues like efficient waiting lines--and on continuous improvement of everything they do.1 OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 4 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management What do you think? Describe one experience you had at a theme park that illustrates either good or bad customer service or operational design. What can we learn from your experience regarding how a theme park can create a positive customer experience or improve on a bad one through its design and operations? OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 5 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Operations management (OM) is the science and art of ensuring that goods and services are created and delivered successfully to customers. The principles of OM help one to view a business enterprise as a total system, in which all activities are coordinated, not only vertically throughout the organization, but also horizontally across multiple functions. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 6 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management United Performance Metals United Performance Metals (UPM), located in Hamilton, Ohio, is a supplier of stainless steel and high temperature alloys for the specialty metal market. UPM’s primary production operations include slitting coil stock and cutting sheet steel to customer specifications with rapid turnaround times from order to delivery. Bob Vogel is the Vice President of Operations at UPM. He is involved in a variety of daily activities that draw upon knowledge of not only OM and engineering, but also finance, accounting, organizational behavior, and other subjects. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 7 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management United Performance Metals OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 8 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management United Performance Metals While understanding specialty metals is certainly a vital part of Mr. Vogel’s job, the ability to understand customer needs, apply approaches to continuous improvement, understand and motivate people, work cross-functionally across the business, and integrate processes and technology within the value chain define Scott’s job as an operations manager. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 9 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management OM in the Workplace Brooke Wilson is a Process Manager for J.P. Morgan Chase in the Credit Card Division. Among his OM-related activities are: Planning and budgeting: Representing the plastic card production area in all meetings, developing annual budgets and staffing plans, and watching technology that might affect the production of plastic credit cards. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 10 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management OM in the Workplace Inventory management: Overseeing the management of inventory for items such as plastic blank cards, inserts such as advertisements, envelopes, postage, and credit card rules and disclosure inserts. Scheduling and capacity: Daily to annual scheduling of all resources (equipment, people, inventory) necessary to issue new credit cards and reissue cards that are up for renewal, replace old or damaged cards, and ones that are stolen. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 11 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management OM in the Workplace Brooke Wilson is a Process Manager for J.P. Morgan Chase in the Credit Card Division. Among his OM-related activities are: Quality: Embossing the card with accurate customer information and quickly getting the card in the hands of the customer. Brooke was an accounting major in college. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 12 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Understanding Goods and Services A good is a physical product that you can see, touch, or possibly consume. Examples of goods include: oranges, flowers, televisions, soap, airplanes, fish, furniture, coal, lumber, personal computers, paper, and industrial machines. A durable good is a product that typically lasts at least three years. Vehicles, dishwashers, and furniture are some examples of durable goods. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 13 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Understanding Goods and Services A non-durable good is perishable and generally lasts for less than three years. Examples are toothpaste, software, shoes, and fruit. A service is any primary or complementary activity that does not directly produce a physical product. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 14 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Similarities Between Goods and Services 1. Goods and services provide value and satisfaction to customers who purchase and use them. 2. They both can be standardized or customized to individual wants and needs. 3. A process creates and delivers each good or service, and therefore, OM is a critical skill. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 15 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Differences Between Goods and Services 1. Goods are tangible while services are intangible. 2. Customers participate in many service processes, activities, and transactions. 3. The demand for services is more difficult to predict than the demand for goods. 4. Services cannot be stored as physical inventory. 5. Service management skills are paramount to a successful service encounter. 6. Service facilities typically need to be in close proximity to the customer. 7. Patents do not protect services. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 16 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Understanding Goods and Services Service management integrates marketing, human resources, and operations functions to plan, create, and deliver goods and services, and their associated service encounters. A service encounter is an interaction between the customer and the service provider. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 17 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Understanding Goods and Services A broader definition is: Service encounters consist of one or more moments of truth – any episodes, transactions, or experiences in which a customer comes into contact with any aspect of the delivery system, however remote, and thereby has an opportunity to form an impression. Here, a service encounter includes the impression an empty parking lot has on whether the customer goes into a facility or the interaction with other customers such as while waiting in line. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 18 posted to a publicly accessible website, in whole of in part. Exhibit 1.1 How Goods and Services Affect Operations Management Activities OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 19 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Customer Benefit Packages A customer benefit package (CBP) is a clearly defined set of tangible (goods-content) and intangible (service-content) features that the customer recognizes, pays for, uses, or experiences. In simple terms, a CBP is some combination of goods and services configured in a certain way to provide value to customers. A CBP consists of a primary good or service, coupled with peripheral goods and/or services. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 20 posted to a publicly accessible website, in whole of in part. Exhibit 1.2 A CBP Example for Purchasing a Vehicle OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 21 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Customer Benefit Packages A primary good or service is the “core” offering that attracts customers and responds to their basic needs. For example, the primary service of a personal checking account is the capability to do convenient financial transactions. Examples of a primary good or service: an airline flight, a personal digital assistance (PDA) device, a checking account, a brief case, a football game, tax preparation advice, and so on. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 22 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Customer Benefit Packages Peripheral goods or services are those that are not essential to the primary good or service, but enhance it. Examples of peripheral goods or services for a personal checking account: on-line access and bill payment, debit card, designer checks, paper or electronic account statement, etc. Remember each primary or peripheral good or service requires a process to create and deliver it to customers. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 23 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Customer Benefit Packages A variant is a CBP attribute that departs from the standard CBP and is normally location- or firm-specific. A variant allows for adding unique goods or services such as a fishing pond or pool at an automobile dealership where kids can fish while the parents shop for vehicles. Once a variant is incorporated and standardized into all CBP delivery sites on a continuous basis, it becomes a permanent peripheral good or service. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 24 posted to a publicly accessible website, in whole of in part. Exhibit 1.2 A CBP Example for Purchasing a Vehicle OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 25 posted to a publicly accessible website, in whole of in part. Exhibit 1.3 Examples of Goods and Service Content OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 26 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Customer Benefit Packages It is very important that you understand the difference between customer wants and needs versus the CBP features selected by management to fulfill those needs. Processes create CBP features such as the (a) physical vehicle itself or (b) a leasing package that fits what the customer can afford. These CBP features fulfill certain customer’s wants and needs such as (a) physical transportation from point A to B, or (b) how can I pay for the vehicle? OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 27 posted to a publicly accessible website, in whole of in part. Exhibit Extra Another Example of Consumer Benefit Package OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 28 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Biztainment – (Huh?) Why would someone pay, for example, to crush grapes with their feet? Might it be that the process of doing this is as valuable to the customer as the outcome itself? Entertainment is the act of providing hospitality, escapism, fun, excitement, and/or relaxation to people as they go about their daily work and personal activities. The addition of entertainment to an organization’s customer benefit package provides unique opportunities for companies to increase customer satisfaction and grow revenue. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 29 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Biztainment – (Huh?) Biztainment is the practice of adding entertainment content to a bundle of goods and services in order to gain competitive advantage. The old business model of just selling and servicing a physical vehicle is gone. For example, a BMW automobile dealership in Fort Myers, Florida, recently opened a new 52,000- square-foot facility that offers a putting green, private work areas, a movie theater, wireless Internet access, massage chairs, a golf simulator, and a cafe´, so that customers have multiple entertainment options during their visits. Build-A-Bear Workshop boasts an average of $600 per square foot in annual revenue, double the U.S. mall average, and Holiday Inns found that hotels with holidomes have a 20% higher occupancy rate and room rates are on average $28 higher. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 30 posted to a publicly accessible website, in whole of in part. Exhibit 1.4 How Primary, Support, Supplier, and Management Processes Are Related OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 31 posted to a publicly accessible website, in whole of in part. Exhibit Extra Organization by Function versus Process OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 32 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Pal’s Sudden Service Pal’s Sudden Service is a small chain of mostly drive-through quick service restaurants located in Northeast Tennessee and Southwest Virginia. Pal’s competes against major national chains and outperforms all of them by focusing on important customer requirements such as speed, accuracy, friendly service, correct ingredients and amounts, proper food temperature, and safety. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 33 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Pal’s Sudden Service Pal’s uses extensive market research to fully understand customer requirements: convenience; ease of driving in and out; easy- to-read menu; simple, accurate order-system; fast service; wholesome food; and reasonable price. Every process is flowcharted and analyzed for opportunities for error, and then mistake- proofed if at all possible. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 34 posted to a publicly accessible website, in whole of in part.  Exhibit Extra Pal’s Sudden Service Value Chain OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 35 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Pal’s Sudden Service Entry-level employees – mostly high school students in their first job – receive 120 hours of training on precise work procedures and process standards in unique self-teaching, classroom, and on-the-job settings, reinforced by a “Caught Doing Good” program that provides recognition for meeting quality standards and high performance expectations. Pal’s collect performance measures such as complaints, profitability, employee turnover, safety, and productivity. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 36 posted to a publicly accessible website, in whole of in part. Exhibit 1.5 Five Eras of Operations Management OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 37 posted to a publicly accessible website, in whole of in part. Exhibit 1.6 U.S. Employment by Major Industry (slide 1) * Durable goods are items such as instruments, vehicles, aircraft, computer and office equipment, machinery, furniture, glass, metals, and appliances. ** Nondurable goods are items such as textiles, apparel, paper, food, coal, oil, leather, plastics, chemicals, and books. Source: United States Bureau of Labor Statistics OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 38 posted to a publicly accessible website, in whole of in part. Exhibit 1.6 U.S. 2001 Employment and Projected Change by Major Industry (slide 2) Source: United States Bureau of Labor Statistics OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 39 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Today’s Service Economy Goods-producing industries (manufacturing, construction, fishing, forestry, mining, and agriculture) account for about 20 percent of the jobs in the U.S. economy. Service-providing industries account for about 80 percent of the jobs in the U.S. economy. One-half of those jobs in goods-producing industries involve service processes such as human resource management, accounting, and financial. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 40 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Therefore, more than 90 percent of the jobs in the U.S. economy involve designing and managing service-, information- or entertainment- intensive processes. Most people in the United States are working in the service sector or service processes or in service-related aspects of manufacturing firms. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 41 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Current Challenges in OM Technology Globalization Changing cunsumer expectations A changing workforce Global manufacturing Sustainability OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 42 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Sustainability Sustainability refers to an organization’s ability to strategically address current business needs and successfully develop a long-term strategy that embraces opportunities and manages risk for all products, systems, supply chains, and processes to preserve resources for future generations. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 43 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Sustainability – Three Dimensions Environmental sustainability focuses on OM activities such as remanufacturing, waste management, green supply chains, and energy conservation. Social sustainability requires organizations to continually evaluate the impacts of their products and operations on society as a part of the organization’s overall corporate responsibilities, such as creating a zero carbon footprint product or supply chain. Economic sustainability revolves around making sound financial and operational decisions about workforce capability and capacity, resource acquisitions, technology, knowledge, core competencies, work systems, facilities, and equipment, as well as preparation for real-time or short-term emergencies. OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 44 posted to a publicly accessible website, in whole of in part.  Chapter 1 Goods, Services, and Operations Management Zappos Case Study 1. Draw and describe the customer benefit package that Zappos provides. Identify and describe one primary value creation, one support, and one general management process you might encounter at Zappos (see Exhibit 1.4). 2.Explain the role of service encounters and service management skills at Zappos. How does Zappos create superior customer experiences? 3.Describe how each OM activity in Exhibit 1.1 impacts the management of both the goods that Zappos sells and the services that it provides. (You might want to build a table like Exhibit 1.1 to organize your answers.) OM2, Ch. 1 Goods, Services, and Operations Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 45 posted to a publicly accessible website, in whole of in part.  OM2 CHAPTER 2 VALUE CHAINS DAVID A. COLLIER AND JAMES R. EVANS OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or 1 posted to a publicly accessible website, in whole or in part.  Chapter 2 Learning Outcomes learning outcomes LO1 Explain the concept of value and how it can be increased. LO2 Describe a value chain and the two major perspectives that characterize it. LO3 Describe a supply chain and how it differs from a value chain. LO4 Discuss key value chain decisions. LO5 Explain offshoring and the key issues associated with it. LO6 Identify important issues associated with value chains in a global business environment. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Chapter 2 Value Chains t a time when more than 98% of all shoes sold in the United States are made in other countries, Allen-Edmonds Shoe Corp. is a lonely holdout against offshoring. Moving to China could have saved as much as 60 percent. However, John Stollenwerk, Chief Executive, will not compromise on quality, and believes that Allen-Edmonds can make better shoes, and serve customers faster, in the United States. An experiment in producing one model in Portugal resulted in lining that wasn’t quite right and stitching that wasn’t as fine. Stollenwerk noted “We could take out a few stitches and you’d never notice it – and then we could take out a few more. Pretty soon you’ve cheapened the product, and you don’t stand for what you’re about.” Instead, Allen-Edmonds invested more than $1 million to completely overhaul its manufacturing process into a leaner and more efficient system that could reduce 5 percent off the cost of each pair of shoes. One year after implementing its new production processes, productivity was up 30 percent, damages were down 14 percent, and order fulfillment neared 100 percent, enabling the company to serve customers better than ever. What do you think? What is your opinion of companies that move operations to other countries with cheaper labor rates? Should governments influence or legislate such decisions? OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3  Chapter 2 Value Chains Value Chains The underlying purpose of every organization is to provide value to its customer and stakeholders. Value is the perception of the benefits associated with a good, service, or bundle of goods and services (i.e., the customer benefit package) in relation to what buyers are willing to pay for them. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  Chapter 2 Value Chains Value Chains The decision to purchase a good or service, or a customer benefit package, is based on an assessment by the customer of the perceived benefits in relation to its price. The customer's cumulative judgment of the perceived benefits leads to either satisfaction or dissatisfaction. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Chapter 2 Value Chains One of the simplest functional forms of value is: Value = Perceived benefits/Price (cost) to the customer If the value ratio is high, the good or service is perceived favorably by customers, and the organization providing it is more likely to be successful. To increase value, an organization must: (a) increase perceived benefits while holding price or cost constant, (b) increase perceived benefits while reducing price or cost, or (c) decrease price or cost while holding perceived benefits constant. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6  Chapter 2 Value Chains Value Chains A value chain is a network of facilities and processes that describes the flow of goods, services, information, and financial transactions from suppliers through the facilities and processes that create goods and services and deliver them to customer. A value chain is a “cradle-to-grave” model of the operations function (see Exhibit 2.1). OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  Chapter 2 Value Chains Value Chains The value chain begins with suppliers. Suppliers might be distributors, employment agencies, dealers, financing and leasing agents, information and Internet companies, field maintenance and repair services, architectural and engineering design firms, and contractors, as well as manufacturers of materials and components. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Exhibit 2.1 The Value Chain OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  Chapter 2 Value Chains Value Chains The inputs suppliers provide might be physical goods such as:  automobile engines or microprocessors provided to an assembly plant;  meat, fish, and vegetables provided to a restaurant;  trained employees provided to organizations by universities and technical schools; or  information such as computer specifications or a medical diagnosis. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  Chapter 2 Value Chains Value Chains Inputs are transformed into value-added goods and services through processes or networks of work activities, which are supported by such resources as land, labor, money, and information. The value chain outputs—goods and services— are delivered or provided to customers and targeted market segments. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  Examples of Goods-Producing and Service-Providing Value Chains Exhibit 2.2 (slide 1) OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  Examples of Goods-Producing and Service-Providing Value Chains Exhibit 2.2 (slide 2) OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Exhibit 2.3 Pre- and Postservice View of the Value Chain OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  Chapter 2 Value Chains A Service View of a Business Nestle once defined its business from a physical good viewpoint as "selling coffee machines." Using service management thinking, they redefined their business from a service perspective where the coffee machine is more of a peripheral good. They decided to lease coffee machines and provide daily replenishment of the coffee and maintenance of the machine for a contracted service fee. This "primary leasing service" was offered to organizations that sold more than 50 cups of coffee per day. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15  Chapter 2 Value Chains A Service View of a Business The results were greatly increased Nestle coffee sales, new revenue opportunities, and much stronger profits. Nestle's service vision of their business required a completely new service and logistical value chain capability. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  Chapter 2 Value Chains Buhrke Industries, Inc. Value Chain Buhrke Industries Inc., located in Arlington Heights, Illinois, provides stamped metal parts to many industries, including automotive, appliance, computer, electronics, hardware, housewares, power tools, medical, and telecommunications. Buhrke’s objective is to be a customer’s best total-value producer with on-time delivery, fewer rejects, and high-quality stampings. However, the company goes beyond manufacturing goods; it prides itself in providing the best service available as part of its customer value chain. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 Exhibit 2.4 The Value Chain at Buhrke Industries Source: Buhrke Industries company web site OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  Chapter 2 Value Chains Buhrke Industries, Inc. Value Chain Service is more than delivering a product on-time. It's also partnering with customers by providing personalized service for fast, accurate response; customized engineering designs to meet customer needs; preventive maintenance systems to ensure high machine uptime; experienced, highly trained, long-term employees; and troubleshooting by a knowledgeable sales staff. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  Chapter 2 Value Chains Value and Supply Chains A supply chain is the portion of the value chain that focuses primarily on the physical movement of goods and materials, and supporting flows of information and financial transactions through the supply, production, and distribution processes. Many organizations use the terms “value chain” and “supply chain” interchangeably; however, we differentiate these two terms in this book. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  Chapter 2 Value Chains Value and Supply Chains A value chain is broader in scope than a supply chain, and encompasses all pre- and post- production services (see Exhibit 2.3) to create and deliver the entire customer benefit package. A value chain views an organization from the customer's perspective—the integration of goods and services to create value—while a supply chain is more internally-focused on the creation of physical goods. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 Exhibit 2.3 Pre- and Postservice View of the Value Chain OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  Chapter 2 Value Chains Procter & Gamble’s Supply Chain Structure A model of a supply chain developed by Procter & Gamble—P&G’s “Ultimate Supply System”—is shown in Exhibit 2.5. The supply chain focus is on understanding the impact of tightly coupling supply chain partners to integrate information, physical material, product flow, and financial activities to increase sales, reduce costs, increase cash flow, and provide the right product at the right time at the right price to customers. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23  Procter & Gamble’s Conceptual Model of a Supply Chain Exhibit 2.5 for Paper Products Source: Wegryn, Glenn W., and Siprelle, Andrew J., “Combined Use of Optimization and Simulation Technologies to design an Optional Logistics Network,” http://www.simulationdynamics.com/PDFs/Papers/CLM%20P&G%Opt&Sim.pdf OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  Chapter 2 Value Chains Value Chain Design and Management Outsourcing is the opposite of vertical integration in the sense that the organization is shedding (not acquiring) a part of its organization. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25  Chapter 2 Value Chains Value Chain Design and Management Vertical integration refers to the process of acquiring and consolidating elements of a value chain to achieve more control. Outsourcing is the process of having suppliers provide goods and services that were previously provided internally. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  Chapter 2 Value Chains Value Chain Design and Management Backward integration refers to acquiring capabilities at the front-end of the supply chain (for instance, suppliers), while forward integration refers to acquiring capabilities toward the back-end of the supply chain (for instance, distribution or even customers). Companies must decide whether to integrate backward (acquiring suppliers) or forward (acquiring distributors), or both. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  Chapter 2 Value Chains Automobile Suppliers – Vanish or Rebound? Clips & Clamps Industries located in Plymouth, Michigan has been selling metal brackets for decades to the big three Detroit automobile manufacturers—General Motors, Ford, and Chrysler. But a few years ago, the firm decided it must become a tier-one supplier to Toyota, Honda, and Nissan if it was to survive the global economic downturn. Mr. Aznavirian, President and co- owner, said “You can’t sit around waiting for the Big Three to come back.” Mr. Aznavirian lead efforts to gain work from the Japanese firms by reducing equipment downtime, producing less scrap, and becoming a more efficient part of the global supply chain. --- Mr. Craig Fitzgerald, a consultant, noted that “more than half of North America’s 1,200 small auto suppliers will vanish into bankruptcies, mergers, and liquidations…. But some like Clips and Clamps will reinvent themselves and rebound.” OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28  Chapter 2 Value Chains The U.S. has experienced three waves of outsourcing: The first wave involved the exodus of goods- producing jobs from the U.S. in many industries several decades ago. Gibson Guitars, for example, produces its Epiphone line in Korea. The second wave involved simple service work, such as standard credit card processing, billing and other forms of transaction processing, keying information into computers, and writing simple software programs. Accenture, for example, does much of its bookkeeping operations in Costa Rica. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29  Chapter 2 Value Chains The U.S. has experienced three waves of outsourcing: The third, and current wave, involves skilled knowledge work, such as engineering design, graphic artists, architectural plans, call center customer service representatives, and computer chip design. For example, Massachusetts General Hospital uses radiologists located in Bangalore, India, to interpret CT scans. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30  Chapter 2 Value Chains Solved Problem Suppose that a manufacturer needs to produce a custom aluminum housing for a special customer order. Because it currently does not have the equipment necessary to make the housing, it would have to acquire machines and tooling at a fixed cost (net of salvage value after the project is completed) of $250,000. The variable cost of production is estimated to be $20 per unit. The company can outsource the housing to a metal fabricator at a cost of $35 per unit. The customer order is for 12,000 units. What should they do? OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31  Chapter 2 Value Chains Solution VC1 = Variable cost/unit if produced = $20 VC2 = Variable cost/unit if outsourced = $35 FC = fixed costs associated with producing the part = $250,000 Q = quantity produced Using Equation 2.1 we obtain: Q = 250,000/($35 - $20) = 16,667 In this case, because the customer order is for only 12,000 units, which is less than the break-even point, the least cost decision is to outsource the component. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32  Chapter 2 Value Chains Value chain integration is the process of managing information, physical goods, and services to ensure their availability at the right place, at the right time, at the right cost, at the right quantity, and with the highest attention to quality. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33  Chapter 2 Value Chains Value chain integration in services—where value is in the form of low prices, convenience, and access to special time-sensitive deals and travel packages—takes many forms. Examples include: Third-party integrators for the leisure and travel industry value chains include Orbitz, Expedia, Priceline, and Travelocity. Many financial services use information networks provided by third-party information technology integrators, such as AT&T, Sprint, IBM, and Verizon, to coordinate their value chains. Hospitals also use third-party integrators for both their information and physical goods, such as managing patient billing and hospital inventories. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34  Chapter 2 Value Chains Offshoring is the building, acquiring, or moving of process capabilities from a domestic location to another country location while maintaining ownership and control. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 Extra Exhibit Four Degrees of Offshoring Scenarios OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36  Chapter 2 Value Chains According to one framework, foreign factories can be classified into one of six categories: 1. Offshore factories established to gain access to low wages and other ways to reduce costs, such as avoiding trade tariffs. An offshore factory is the way most multinational firms begin their venture into global markets and value chains. 2. Outpost factories established primarily to gain access to local employee skills and knowledge. Such skills and knowledge might include software programming or call center service management. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37  Chapter 2 Value Chains 3. Server factories established to supply specific national or regional markets. 4. Source factories, like offshore factories, established to gain access to low cost production but also have the expertise to design and produce a component part for the company's global value chain. 5. Contributor factories established to serve a local market and conduct activities like product design and customization. Primary manufacturing, accounting, engineering design, and marketing and sales processes often reside at contributor factories. 6. Lead factories established to innovate and create new processes, products, and technologies. Lead factories must have the skills and knowledge to design and manufacturer "the next generation of products." OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 Exhibit 2.6 Example Issues to Consider When Making Offshore Decisions OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39  Chapter 2 Value Chains Rocky Brands Rocky Brands(www.rockyboots.com), headquartered in Nelsonville, Ohio, manufactures rugged leather shoes for hiking and camping. The company began making boots in 1932 as the William Brooks Shoe Company with an average wage rate of 28 cents per hour. In the 1960s, Rocky Shoes & Boots were 100% "Made in America." In 1960, more than 95 percent of all shoes sold in America were made in America. Timberland, Wolverine, and Rocky are popular brand names for this shoe market segment. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 Exhibit 2.7 Rocky Brands Value Chain OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41  Chapter 2 Value Chains Rocky Brands The principal characteristics of this global value chain are described as follows: 1. Leather is produced in Australia and then shipped to the Dominican Republic. 2. Outsoles are purchased in China and shipped to Puerto Rico. 3. Gor-Tex fabric waterproofing materials are made in the United States. 4. Shoe uppers are cut and stitched in the Dominican Republic, and then shipped to Puerto Rico. 5. Final shoe assembly is done at the Puerto Rico factory. 6. The finished boots are packed and shipped to the warehouse in Nelsonville, Ohio. 7. Customer orders are filled and shipped to individual stores and contract customers from Nelsonville. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42 Exhibit 2.7 Rocky Brands Value Chain OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43  Chapter 2 Value Chains Rocky Brands Global Challenges Rocky profit margins are only about 2 percent on sales of over $100 million, while Timberland sales top $1 billion and have a 9 percent profit margin. After seventy years in Nelsonville, the main factory closed in 2002. At that time, local labor costs were about $11 per hour without benefits, while in Puerto Rico the hourly rate was $6; in the Dominican Republic, $1.25; and in China, 40 cents. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44  Chapter 2 Value Chains Rocky Brands Global Challenges The price of boots continues to decline globally from roughly $95 a pair to $85, and is heading toward $75. The grandson of the founder of Rocky Brands said, "We've got to get there, or we're not going to be able to compete." OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45  Chapter 2 Value Chains Issues for Managing Global Value Chains  Global supply chains face higher levels of risk and uncertainty, requiring more inventory and day-to-day monitoring to prevent product shortages. Workforce disruptions, such as labor strikes and government turmoil in foreign countries, can create inventory shortages and disrupting surges in orders. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46  Chapter 2 Value Chains  Transportation is more complex in global value chains. For example, tracing global shipments normally involves more than one mode of transportation and foreign company.  The transportation infrastructure may vary considerably in foreign countries. The coast of China, for example, enjoys much better transportation, distribution, and retail infrastructures than the vast interior of the country. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47  Chapter 2 Value Chains  Global purchasing can be a difficult process to manage when sources of supply, regional economies, and even governments change. Daily changes in international currencies necessitate careful planning and in the case of commodities, consideration of futures contracts.  International purchasing can lead to disputes and legal challenges relating to such things as price fixing and quality defects.  Privatizing companies and property is another form of major changes in global trade and regulatory issues. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48  Chapter 2 Value Chains TuneMan Case Study 1. Draw the “bricks and mortar” process stages by which traditional CDs are created, distributed, and sold in retail stores. How does each player in the value chain make money? (You can use the exhibits in the chapter to help you identify major stages in the value chain.) 2. Draw the process stages for creating and downloading music today. How does each player in this electronic/digital value chain make money? 3. Compare and contrast the approaches in the previous two questions. What’s changed? What’s new? Are there any advantages/disadvantages of each approach? 4. Compare the role of operations in each of these value chain structures and approaches. OM2, Ch. 2 Value Chains ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49