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1 CHAPTER Introduction to Operations Management LEARNING OBJECTIVES After completing this chapter you should b...

1 CHAPTER Introduction to Operations Management LEARNING OBJECTIVES After completing this chapter you should be able to: 1 Define operations management. 2 Explain the role of operations management in business. 3 Describe decisions that operations managers make. 4 Describe the differences between service and manufacturing operations. 5 Identify major historical developments in operations management. 6 Identify current trends in operations management. 7 Describe the flow of information between operations management and other business functions. CHAPTER OUTLINE What Is Operations Management? 2 Plan of This Book 10 Links to Practice: The E-tailers 4 Historical Development 11 Differences between Manufacturing and Service Today’s OM Environment 17 Organizations 5 Operations Management in Practice 18 Links to Practice: US Postal Service 6 OM Across the Organization 19 Operations Management Decisions 7 Inside OM 21 Links to Practice: Texas Instruments Case: Hightone Electronics, Inc. 22 Incorporated 9 Case: Creature Care Animal Clinic (A) 23 000 1 2 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT any of you reading this book may think that you don’t M know what operations management (OM) is or that it is not something you are interested in. However, after reading this chapter you will realize that you already know quite a bit about operations management. You may even be working in an operations management capacity and have used certain operations management techniques. You will also realize that operations management is probably the most critical business function today. If you want to be on the frontier of business competition, you want to be in operations management. Today companies are competing in a very different environment than they were only a few years ago. To survive they must focus on quality, time-based competition, effi- ciency, international perspectives, and customer relationships. Global competition, e- business, the Internet, and advances in technology require flexibility and responsiveness. This new focus has placed operations management in the limelight of business, because it is the function through which companies can achieve this type of competitiveness. Consider some of today’s most successful companies, such as Wal-Mart, Southwest Airlines, General Electric, Starbucks, Toyota, FedEx, and Procter & Gamble. These com- panies have achieved world-class status in large part due to a strong focus on operations management. In this book you will learn specific tools and techniques of operations management that have helped these, and other companies, achieve their success. The purpose of this book is to help prepare you to be successful in this new business environment. Operations management will give you an understanding of how to help your organization gain a competitive advantage in the marketplace. Regardless of whether your area of expertise is marketing, finance, MIS, or opera- tions, the techniques and concepts in this book will help you in your business career. The material in this book will teach you how your company can offer prod- ucts and services cheaper, better, and faster. You will also learn that operations management concepts are far reaching, affecting every aspect of the organization and even everyday life. WHAT IS OPERATIONS MANAGEMENT? Every business is managed through three major functions: finance, marketing, and operations management. Figure 1-1 illustrates this by showing that the vice presidents of each of these functions reports directly to the president or CEO of the company. Other business functions — such as accounting, purchasing, human resources, and engineering — support these three major functions. Finance is the function responsi- Finance, Marketing ble for managing cash flow, current assets, and capital investments. Marketing is re- sponsible for sales, generating customer demand, and understanding customer wants and needs. Most of us have some idea of what finance and marketing are about, but what does operations management do?  WHAT IS OPERATIONS MANAGEMENT? 3 FIGURE 1-1 President or CEO Organizational chart showing the three major business functions Marketing Operations Finance V.P. of Marketing V.P. of Operations V.P. of Finance Manages: customer Manages: people, Manages: cash flow, demands equipment, current assets Generates: sales for technology, and capital goods and materials, and investments services information To produce: goods and/or services Operations management (OM) is the business function that plans, organizes,  Operations management coordinates, and controls the resources needed to produce a company’s goods The business function and services. Operations management is a management function. It involves managing responsible for planning, coordinating, and controlling people, equipment, technology, information, and many other resources. Operations the resources needed to management is the central core function of every company. This is true whether the produce a company’s goods company is large or small, provides a physical good or a service, is for profit or and services. not for profit. Every company has an operations management function. Actually, all the other organizational functions are there primarily to support the operations function. Without operations, there would be no goods or services to sell. Consider a retailer such as Gap that sells casual apparel. The marketing function provides promotions for the merchandise, and the finance function provides the needed capital. It is the operations function, however, that plans and coordinates all the resources needed to design, produce, and deliver the merchandise to the various retail locations. Without operations, there would be no goods or services to sell to customers. The role of operations management is to transform a company’s inputs into the  Role of operations finished goods or services. Inputs include human resources (such as workers and man- management agers), facilities and processes (such as buildings and equipment), as well as materials, To transform organizational inputs into outputs. technology, and information. Outputs are the goods and services a company produces. Figure 1-2 shows this transformation process. At a factory the transformation is the FIGURE 1-2 Customer Feedback The transformation process Inputs Human Resources The Outputs Facilities Transformation Goods & Processes Process Services Technologies Materials Performance Information 4 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT physical change of raw materials into products, such as transforming leather and rubber into sneakers, denim into jeans, or plastic into toys. At an airline it is the effi- cient movement of passengers and their luggage from one location to another. At a hospital it is organizing resources such as doctors, medical procedures, and medica- tions to transform sick people into healthy ones. Operations management is responsible for orchestrating all the resources needed to produce the final product. This includes designing the product; deciding what resources are needed; arranging schedules, equipment, and facilities; manag- ing inventory; controlling quality; designing the jobs to make the product; and designing work methods. Basically, operations management is responsible for all aspects of the process of transforming inputs into outputs. Customer feedback and performance information are used to continually adjust the inputs, the trans- formation process, and characteristics of the outputs. As shown in Figure 1-2, this trans- formation process is dynamic in order to adapt to changes in the environment. Proper management of the operations function has led to success for many compa- nies. For example, in 1994 Dell Inc. was a second-tier computer maker that managed its operations similar to others in the industry. Then Dell implemented a new business model that completely changed the role of its operations function. Dell developed new and innovative ways of managing the operations function that have become one of to- day’s best practices. These changes enabled Dell to provide rapid product delivery of customized products to customers at a lower cost, and thus become an industry leader. Just as proper management of operations can lead to company success, improper man- agement of operations can lead to failure. This is illustrated by Kozmo.com, a Web-based home delivery company founded in 1997. Kozmo’s mission was to deliver products to customers — everything from the latest video to ice cream — in less than an hour. Kozmo was technology enabled and rapidly became a huge success. However, the initial success gave rise to overly fast expansion. The company found it difficult to manage the opera- tions needed in order to deliver the promises made on its Web site. The consequences were too much inventory, poor deliveries, and losses in profits. The company rapidly tried to change its operations, but it was too late. It had to cease operations in April 2001. LINKS TO PRACTICE The Web-based age has created a highly competitive world of on- The E-tailers line shopping that poses special www.Amazon.com challenges for operations man- www.Barnesandnoble. agement. The Web can be used com for on-line purchasing of every- thing from CDs, books, and gro- ceries to prescription medications and automobiles. Whereas the In- ternet has given consumers flexi- bility, it has also created one of the biggest challenges for companies: delivering exactly what the customer ordered at the time promised. As we saw with the example of Kozmo.com, making promises on a Web site is one thing; delivering on those promises is yet another. Ensuring that or- ders are delivered from “mouse to house” is the job of operations and is much more complicated than it might seem. In the 1990s many dot-com companies discovered just how difficult this is. They were not able to generate a profit and went out of busi- ness. To ensure meeting promises companies must forecast what customers want and maintain adequate inventories of goods, manage distribution centers and warehouses,  DIFFERENCES BETWEEN MANUFACTURING AND SERVICE ORGANIZATIONS 5 operate fleets of trucks, and schedule deliveries while keeping costs low and customers satisfied. Many companies like Amazon.com manage almost all aspects of their opera- tion. Other companies hire outside firms for certain functions, such as outsourcing the management of inventories and deliveries to UPS. Competition among e-tailers has become intense as customers demand increasingly shorter delivery times and highly customized products. Same-day service has become common in metropolitan areas. For example, Barnesandnoble.com provides same-day delivery in Manhattan, Los Angeles, and San Francisco. Understanding and managing the operations func- tion of an on-line business has become essential in order to remain competitive. For operations management to be successful, it must add value during the trans- formation process. We use the term value added to describe the net increase between  Value added the final value of a product and the value of all the inputs. The greater the value The net increase created added, the more productive a business is. An obvious way to add value is to reduce during the transformation of inputs into final outputs. the cost of activities in the transformation process. Activities that do not add value are considered a waste; these include certain jobs, equipment, and processes. In addition to value added, operations must be efficient. Efficiency means being able to perform  Efficiency activities well, and at the lowest possible cost. An important role of operations is to Performing activities at the analyze all activities, eliminate those that do not add value, and restructure processes lowest possible cost. and jobs to achieve greater efficiency. Today’s business environment is more competi- tive than ever, and the role of operations management has become the focal point of efforts to increase competitiveness by improving value added and efficiency. DIFFERENCES BETWEEN MANUFACTURING AND SERVICE ORGANIZATIONS Organizations can be divided into two broad categories: manufacturing organiza-  Manufacturing tions and service organizations, each posing unique challenges for the operations organizations function. There are two primary distinctions between these categories. First, manu- Organizations that primarily produce a tangible product facturing organizations produce physical, tangible goods that can be stored in and typically have low inventory before they are needed. By contrast, service organizations produce intangi- customer contact. ble products that cannot be produced ahead of time. Second, in manufacturing orga-  Service organizations nizations most customers have no direct contact with the operation. Customer Organizations that primarily contact is made through distributors and retailers. For example, a customer buying a produce an intangible car at a car dealership never comes into contact with the automobile factory. How- product, such as ideas, assistance, or information, ever, in service organizations the customers are typically present during the creation and typically have high of the service. Hospitals, colleges, theaters, and barber shops are examples of service customer contact. organizations in which the customer is present during the creation of the service. The differences between manufacturing and service organizations are not as clear- cut as they might appear, and there is much overlap between them. Most manufactur- ers provide services as part of their offering, and many service firms manufacture physical goods that they deliver to their customers or consume during service delivery. For example, a manufacturer of furniture may also provide shipment of goods and as- sembly of furniture. On the other hand, a barber shop may sell its own line of hair care products. You might not know that General Motors’ greatest return on capital does not come from selling cars but rather from postsales parts and service. The differences be- tween manufacturing and services are shown in Figure 1-3, which focuses on the dimensions of product tangibility and the degree of customer contact. Pure manufac- turing and pure service extremes are shown, as well as the overlap between them. 6 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT DEGREE OF CUSTOMER CONTACT FIGURE 1-3 Low High Characteristics of manufacturing and service Tangible Product organizations DEGREE OF TANGIBILITY OF PRODUCT OFFERING Manufacturing Organization Physical product Product can be inventoried Low customer contact Capital intensive Long response time Intangible product Product cannot be inventoried Intangible Product High customer contact Short response time Labor intensive Service Organization Even in pure service companies some segments of the operation may have low cus- tomer contact while others have high customer contact. The former can be thought of as “back room” or “behind the scenes” segments. Think of a fast-food operation such as Wendy’s, for which customer service and customer contact are important parts of the business. However, the kitchen segment of Wendy’s operation has no direct customer contact and can be managed like a manufacturing operation. Similarly, a hospital is a high-contact service operation, but the patient is not present in certain segments, such as the lab where specimen analysis is done. In addition to pure manufacturing and pure service, there are companies that have some characteristics of each type of organization. For these companies it is difficult to tell whether they are actually manufacturing or service organizations. Think of a post office, an automated warehouse, or a mail-order catalog business. These companies have low customer contact and are capital intensive, yet they provide a service. We call these companies quasi-manufacturing organizations. LINKS TO PRACTICE The U.S. Postal Service is an example of a quasi-manu- facturing type of company. It provides a service: U.S. Postal Service speedy, reliable delivery of letters, documents, and www.usps.com packages. Its output is intangible and cannot be stored in inventory. Yet most operations management decisions made at the Postal Service are similar to those that occur in manufacturing. Customer contact is low, and at any one time there is a large amount of inventory. The Postal Service is capital intensive, having its own facilities and fleet of trucks and relying on scanners to sort packages and track customer orders. Scheduling enough workers at peak processing times is a major concern, as is planning delivery schedules. Note that although the output of the U.S. Postal Service is a service, inputs include labor, technology, and equipment. The responsibility of OM is to manage the  OPERATIONS MANAGEMENT DECISIONS 7 100% FIGURE 1-4 90% U.S. employment by economic sector 80% Percentage of Workforce 70% 60% Service Producing 50% 40% 30% 20% Goods Producing (Manufacturing Construction) 10% 0% 1958 1973 1988 2003 Year Source: U.S. Department of Commerce conversion of these inputs into the desired outputs. Proper management of the OM function is critical to the success of the U.S. Postal Service. It is important to understand how to manage both service and manufacturing op- erations. However, managing service operations is of especially high importance. The reason is that the service sector constitutes a dominant segment of our economy. Since the 1950s the percentage of jobs in the service-producing industries of the U.S. economy has increased from 50 to 80 percent of total nonfarm jobs. The remaining 20 percent are in the manufacturing and goods-producing industries. Figure 1-4 illus- trates this large growth of the service sector. OPERATIONS MANAGEMENT DECISIONS In this section we look at some of the specific decisions that operations managers have to make. The best way to do this is to think about decisions we would need to make if we started our own company — say, a company called Gourmet Wafers that produces pra- line – pecan cookies from an old family recipe. Think about the decisions that would have to be made to go from the initial idea to actual production of the product: that is opera- tions management. Table 1-1 breaks these down into the generic decisions that would be appropriate for almost any good or service, the specific decisions required for our exam- ple, and the formal terms for these decisions that are used in operations management. Note in the Gourmet Wafers example that the first decisions made were very broad in scope (e.g., the unique features of our product). We needed to do this before we could focus on more specific decisions (e.g., worker schedules). Although our example is simple, this decision-making process is followed by every company, including IBM, General Motors, Land’s End, and your local floral shop. Also note in our example that before we can think about specific day-to-day decisions, we need to make decisions  TABLE 1-1 Operations Management Decisions for Gourmet Wafers General Decisions Decisions Specific Operations To Be Made for Cookie Production Management Term What are the unique features of the The business offers freshly baked cookies “homemade” Operations strategy business that will make it competitive? style, in a fast-food format. What are the unique features of the The unique feature of the cookies is that they are Product design product? loaded with extra-large and crunchy pecans, and are fresh and moist. What are the unique features of the A special convection oven is used to make the cookies Process selection process that give the product its in order to keep them fresh and moist. The dough is unique characteristics? allowed to rise longer than usual to make the cookies extra light. What sources of supply should we use The key ingredients, pecans and syrup, will be purchased Supply chain to ensure regular and timely receipt of from only one supplier located in South Carolina because managements the exact materials we need? How do it offers the best products. A relationship is worked out we manage these sources of supply? in which the supplier sends the ingredients on the exact schedule that they are needed. How will managers ensure the quality A quality check is made at each stage of cookie Quality management of the product, measure quality, and production. The dough is checked for texture; the identify quality problems? pecans are checked for size and freshness; the syrup is checked for consistency. What is the expected demand for the Expected sales for each day of the week have been Forecasting product? determined; for example, it is expected that more cookies will be sold during the weekday and most during the lunch hour. Expected cookie sales for each month and for the year have also been determined. Where will the facility be located? After looking at locations of customers and location Location analysis costs, it is decided that the facility will be located in a shopping mall. How large should the facility be? The business needs to be able to produce 200 cookies Capacity planning per hour, or up to 2000 cookies per day. How should the facility be laid out? Decisions are made about where the kitchen will be Facility layout Where should the kitchen and ovens be located and how the working area will be arranged for located? Should there be seating for maximum efficiency. The business is competing on the customers? basis of speed and quality; therefore, the facility should be arranged to promote these features. There will be a small seating area for customers and a large counter and display case for buying. What jobs will be needed in the Two people will be needed in the kitchen during busy Job design and work facility, who should do what task, and periods and one during slow periods. Their job duties measurement how will their performance be are determined. One person will be needed for measured? ordertaking at all times. How will the inventory of raw materials A different policy is developed for common ingredients, Inventory management be monitored? When will orders be such as flour and sugar. These ingredients will be placed and how much will be kept in ordered every two weeks for a two-week supply. A stock? special purchasing arrangement is worked out with the supplier of specialty ingredients. Who will work on what schedule? Two people will work the counter in split shifts. One Scheduling kitchen employee will work a full shift, with a second employee working part time.  OPERATIONS MANAGEMENT DECISIONS 9 FIGURE 1-5 STRATEGIC DECISIONS TACTICAL DECISIONS The relationship between Broad in scope Narrow in scope strategic and tactical decisions Long-term in nature Short term in nature All encompassing Concerning a small group of e.g. What are the unique features issues of our product that make us e.g. Who will work the 2nd shift competitive? tomorrow? for the whole company that are long term in nature. Long-term decisions that set the  Strategic decisions direction for the entire organization are called strategic decisions. They are broad in Decisions that set the scope and set the tone for other, more specific decisions. They address questions such direction for the entire company; they are broad in as: What are the unique features of our product? What market do we plan to compete scope and long term in in? What do we believe will be the demand for our product? nature. Short-term decisions that focus on specific departments and tasks are called tactical  Tactical decisions decisions. Tactical decisions focus on more specific day-to-day issues, such as the quan- Decisions that are specific tities and timing of specific resources. Strategic decisions are made first and determine and short term in nature and the direction of tactical decisions, which are made more frequently and routinely. There- are bound by strategic decisions. fore, we have to start with strategic decisions and then move on to tactical decisions. This relationship is shown in Figure 1-5. Tactical decisions must be aligned with strategic de- cisions, because they are the key to the company’s effectiveness in the long run. Tactical decisions provide feedback to strategic decisions, which can be modified accordingly. You can see in the example of Gourmet Wafers how important OM decisions are. OM decisions are critical to all types of companies, large and small. In large companies these decisions are more complex because of the size and scope of the or- ganization. Large companies typically produce a greater variety of products, have multiple location sites, and often use domestic and international suppliers. Managing OM decisions and coordinating efforts can be a complicated task, yet the OM func- tion is critical to the company’s success. We can illustrate this point by looking at opera- LINKS TO PRACTICE tions management decisions made by Texas In- struments (TI) in order to position itself for global Texas Instruments collaboration with customers, distributors, and Incorporated suppliers. TI realized its business was growing www.ti.com exponentially, with more than 120,000 monthly orders received and processed electronically. The coordination effort included 56 factories, includ- ing subcontractors, and the management of over 45,000 products. To succeed, the company needed to develop a system to generate better forecasts, co- ordinate manufacturing of products, manage orders, and track deliveries. Managing and coordi- nating global operations management functions was considered paramount to the company’s suc- cess. TI adopted a comprehensive software package called enterprise resource planning (ERP) that in- tegrates information throughout the organization, 10 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT manages forecasts, and coordinates factory operations. Designing and implementing the ERP system at TI required an understanding of all the strategic and tactical opera- tions decisions; otherwise it would not be effective. The system has proven to be a success and a major achievement, enabling TI to consistently manage factory opera- tions across the globe. PLAN OF THIS BOOK The purpose of this book is to provide concepts and techniques that give you the abil- ity to efficiently plan, order, and control the resources needed to produce a company’s goods and services. The topics progress from strategic to tactical, similar to the order of decisions used in the Gourmet Wafers example. The plan of this book is shown in Figure 1-6. We begin with broad, overarching issues such as product design and process selection. Also early in the book we cover operations topics that require a strategic perspective and a cultural change within the organization, such as supply chain management, total quality management, and just-in-time systems. We progress to more tactical issues, such as work measurement, inventory management, and sched- uling concerns. We have designed the chapters to provide relevant operations management con- cepts and techniques that are important to business professionals regardless of field of study. Throughout the chapters we show how the discussed tools and concepts relate to other functions in the organization. We show that operations management con- cepts are far reaching, affecting every aspect of the organization. Before You Go On You should understand that operations management (OM) is the business function responsible for planning, coordinating, and controlling the resources needed to produce a company’s goods and services. OM is directly responsible for managing the transformation of a company’s inputs (e.g., materials, technology, and informa- tion) into finished products and services. OM requires a wide range of strategic and tactical decisions. Strategic decisions are long range and very broad in scope (e.g., unique features of the company’s product and process). They determine the direction of tactical decisions, which are more short term and narrow in scope (e.g., policy for ordering raw materials). All organizations can be separated into manufacturing and service operations, which differ based on product tangibility and degree of customer contact. Service and manufacturing organiza- tions have very different operational requirements. FIGURE 1-6 Types of Decision Operations Management Topic Chapter Plan of the book Strategic Operations Strategy Ch. 2 Product Design and Process Selection Ch. 3 Supply Chain Management Ch. 4 Total Quality Management Ch. 5 and 6 Just-in-Time and Lean Systems Ch. 7 Forecasting Ch. 8 Capacity Planning and Location Analysis Ch. 9 Facility Layout Ch. 10 Work System Design Ch. 11 Inventory and Resource Planning Ch. 12, 13, 14, and 15 Tactical Scheduling Issues Ch. 16 and 17  HISTORICAL DEVELOPMENT 11 HISTORICAL DEVELOPMENT Why OM? The importance of operations management was not always recognized by business. In fact, following World War II American corporations were dominated by marketing and finance functions. The United States had just emerged from the war as the undis- puted global manufacturing leader due in large part to efficient operations. At the same time Japan and Europe were in ruins with their businesses and factories de- stroyed. U.S. companies were left to fill these markets: the post-World War II period of the 1950s and 1960s represented the golden era for U.S. business. The primary op- portunities were in the areas of marketing, to develop the large potential markets for new products, and in finance, to support the growth. Since there were no significant competitors, the operations function became of secondary importance, because com- panies could sell what they produced. Even the distinguished economist John Ken- neth Galbraith was noted as saying: “the production problem has been solved.” Then in the 1970s and 1980s things changed. American companies experienced large declines in productivity growth, and international competition began to be a challenge in many markets. In some markets such as the auto industry, American cor- porations were being pushed out. It appeared that U.S. firms had become lax with the lack of competition in the 1950s and 1960s. They had forgotten about improving their methods and processes, partly due to the lack of competitive challenge. In the meantime, foreign firms were rebuilding their facilities and designing new production methods. By the time foreign firms had recovered, many U.S. firms found themselves unable to compete. To regain their competitiveness companies turned to operations management, a function they had overlooked and almost forgotten about. The new focus on operations and competitiveness has been responsible for the re- covery of many corporations, and U.S. businesses experienced a resurgence in the 1980s and 1990s. Operations became the function at the core of organizational com- petitiveness. Although U.S. firms have rebounded, they are fully aware of continued global competition. Companies have learned that to achieve long-run success they must place much importance on their operations. Historical Milestones When we think of what operations management does — namely, managing the trans- formation of inputs into goods and services — we can see that as a function it is as old as time. Think of any great organizational effort, such as organizing the first Olympic games, building the Great Wall of China, or erecting the Egyptian pyramids, and you will see operations management at work. Operations management did not emerge as a formal field of study until the late 1950s and early 1960s, when scholars began to recognize that all production systems face a common set of problems and to stress the systems approach to viewing operations processes. Many events helped shape operations management. We will describe some of the most significant of these historical milestones and explain their influence on the development of operations management. Later we will look at some current trends in operations man- agement. These historical milestones and current trends are summarized in Table 1-2.  Industrial revolution The Industrial Revolution An industry movement that changed production by The Industrial Revolution had a significant impact on the way goods are produced substituting machine power today. Prior to this movement, products were made by hand by skilled craftspeople for labor power. 12 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT TABLE 1-2 Historical Development of Operations Management Concept Time Explanation Industrial Revolution Late 1700s Brought in innovations that changed production by using machine power instead of human power. Scientific management Early 1900s Brought the concepts of analysis and measurement of the technical aspects of work design, and development of moving assembly lines and mass production. Human relations movement 1930s to 1960s Focused on understanding human elements of job design, such as worker motivation and job satisfaction. Management science 1940s to 1960s Focused on the development of quantitative techniques to solve operations problems. Computer age 1960s Enabled processing of large amounts of data and allowed widespread use of quantitative procedures. Just-in-time systems (JIT) 1980s Designed to achieve high-volume production with minimal inventories. Total quality management (TQM) 1980s Sought to eliminate causes of production defects. Reengineering 1980s Required redesigning a company’s processes in order to provide greater efficiency and cost reduction. Environmental issues 1980s Considered waste reduction, the need for recycling, and product reuse. Flexibility 1990s Offered customization on a mass scale. Time-based competition 1990s Based on time, such as speed of delivery. Supply chain management 1990s Focused on reducing the overall cost of the system that manages the flow of materials and information from suppliers to final customers. Global competition 1990s Designed operations to compete in the global market. Electronic commerce Late 1990s; early Used the Internet for conducting business activity. twenty-first century in their shops or homes. Each product was unique, painstakingly made by one per- son. The Industrial Revolution changed all that. It started in the 1770s with the development of a number of inventions that relied on machine power instead of human power. The most important of these was the steam engine, which was in- vented by James Watt in 1764. The steam engine provided a new source of power that was used to replace human labor in textile mills, machine-making plants, and other facilities. The concept of the factory was emerging. In addition, the steam engine led to advances in transportation, such as railroads, that allowed for a wider distribution of goods. About the same time, the concept of division of labor was introduced. First de- scribed by Adam Smith in 1776 in The Wealth of Nations, this important concept would become one of the building blocks of the assembly line. Division of labor  HISTORICAL DEVELOPMENT 13 Today’s modern work environment Steamboat and railroad forging during the Industrial Revolution means that the production of a good is broken down into a series of small, elemental tasks, each of which is performed by a different worker. The repetition of the task al- lows the worker to become highly specialized in that task. Division of labor allowed higher volumes to be produced. This, coupled with advances in transportation, en- abled distant markets to be reached by steam-powered boats and railroads. A few years later, in 1790, Eli Whitney introduced the concept of interchangeable parts. Prior to that time, every part used in a production process was unique. With in- terchangeable parts, parts are standardized so that every item in a batch of items fits equally. This concept meant that we could move from one-at-a-time production to volume production, for example, in the manufacture of watches, clocks, and similar items. Scientific Management Scientific management was an approach to management promoted by Frederick W.  Scientific management Taylor at the turn of the twentieth century. Taylor was an engineer with an eye for ef- An approach to management ficiency. Through scientific management he sought to increase worker productivity that focused on improving output by redesigning jobs and organizational output. This concept has two key features. First, it is assumed that and determining acceptable workers are motivated only by money and are limited only by their physical ability. levels of worker output. Taylor believed that worker productivity is governed by scientific laws, and that it is up to management to discover these laws through measurement, analysis, and obser- vation. Workers are to be paid in direct proportion to how much they produce. The second feature of this approach is the separation of the planning and doing functions in a company, which means the separation of management and labor. Management is responsible for designing productive systems and determining acceptable worker out- put. Workers have no input into this process — they are permitted only to work. Many people did not like the scientific management approach. This was especially true of workers, who thought that management used these methods to unfairly in- crease output without paying them accordingly. Still, many companies adopted the scientific management approach. Today many see scientific management as a major milestone in the field of operations management, and it has had many influences on operations management. For example, piece rate incentives, in which workers are paid in direct proportion to their output, came out of this movement. Also, a widely used method of work measurement, stopwatch time studies, was introduced by Frederick Taylor. In stopwatch time studies, observations are made and recorded of a worker 14 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT performing a task over many cycles. This information is then used to set a time stan- dard for performing the particular task. This method is still used today to set a time standard for short, repetitive tasks. The scientific management approach was popularized by Henry Ford, who used the techniques in his factories. Combining technology with scientific management, Ford introduced the moving assembly line to produce Ford cars. Ford also combined scientific management concepts with division of labor and interchangeable parts to develop the concept of mass production. These concepts and innovations helped him increase production and efficiency at his factories. The Human Relations Movement The early twentieth century was dominated by the scientific management movement and its philosophy. However, this changed with the publication of the results of the  Hawthorne studies Hawthorne studies. The Hawthorne studies were conducted at a Western Electric The studies responsible for plant in Hawthorne, Illinois, in the 1930s. The purpose was to study the effects of envi- creating the human relations ronmental changes, such as changes in lighting and room temperature, on the produc- movement, which focused on giving more consideration to tivity of assembly-line workers. The findings from the study were unexpected; the pro- workers’ needs. ductivity of the workers continued to increase regardless of the environmental changes made. Elton Mayo, a sociologist from Harvard, analyzed the results and concluded that the workers were actually motivated by the attention they were given. The idea of workers responding to the attention they are given came to be known as the Hawthorne effect. Many sociologists and psychologists went to Hawthorne to study these findings,  Human relations which led to the human relations movement, an entirely new philosophy based on movement the recognition that factors other than money can contribute to worker productivity. A philosophy based on the The impact of these findings on the development of operations management has recognition that factors other than money can contribute to been tremendous. The influence of this new philosophy can be seen in the implemen- worker productivity. tation of a number of concepts that motivate workers by making their jobs more in- teresting and meaningful. For example, the Hawthorne studies showed that scientific management had made jobs too repetitive and boring. Job enlargement is an approach in which workers are given a larger portion of the total task to do. Another approach used to give more meaning to jobs is job enrichment, in which workers are given a greater role in planning. Recent studies have shown that environmental factors in the workplace, such as adequate lighting and ventilation, can have a major impact on productivity. However, this does not contradict the principle that attention from management is a positive factor in motivation. Management Science While one movement was focusing on the technical aspects of job design and another  Management science on the human aspects of operations management, a movement called management A field of study that focuses science was developing that would make its own unique contribution. Management on the development of science focused on developing quantitative techniques for solving operations prob- quantitative techniques to solve operations problems. lems. The first mathematical model for inventory management was developed by F. W. Harris in 1913. Shortly thereafter, procedures were developed for statistical sam- pling theory and quality control. World War II created an even greater need for the ability to quantitatively solve complex problems of logistics control, weapons system design, and deployment of missiles. Consequently, management science grew during the war and continued to  HISTORICAL DEVELOPMENT 15 grow after the war was over. Many quantitative tools were developed to solve prob- lems in forecasting, inventory control, project management, and other areas. Manage- ment science is a mathematically oriented field that provides operations management with tools that can be used to assist in decision making. A popular example of such a tool is linear programming. The Computer Age The 1970s witnessed the advent of the widespread use of computers in business. With computers, many of the quantitative models developed by management science could be used on a larger scale. Data processing was made easier, with important effects in areas such as forecasting, scheduling, and inventory management. A particularly im- portant computerized system, material requirements planning (MRP), was developed for inventory control and scheduling. Material requirements planning was able to process huge amounts of data to compute inventory requirements and develop sched- ules for the production of thousands of items. This type of processing was impossible before the age of computers. Today the exponential growth in computing capability continues to impact operations management. Just-in-Time Just-in-time (JIT) is a major operations management philosophy, developed in Japan  Just-in-time in the 1980s, that is designed to achieve high-volume production using minimal A philosophy designed to amounts of inventory. This is achieved through coordination of the flow of materials achieve high-volume production through so that the right parts arrive at the right place in the right quantity; hence the term, elimination of waste and just-in-time. However, JIT is much more than the coordinated movement of goods. It continuous improvement. is an all-inclusive organizational philosophy that employs teams of workers to achieve continuous improvement in processes and organizational efficiency by eliminating all organizational waste. Although JIT was first used in manufacturing, it has seen use in the service sector, for example, in the food service industry. JIT has had a profound impact on changing the way companies manage their operations. It is credited with helping turn many companies around and is used by companies including Honda, Toyota, and General Motors. JIT promises to continue to transform businesses in the future. Total Quality Management As customers demand ever higher quality in their products and services, companies have been forced to focus on improving quality in order to remain competitive. Total  Total quality management quality management (TQM) is a philosophy, promulgated by “quality gurus” such as A philosophy that seeks to W. Edwards Deming, that aggressively seeks to improve product quality by eliminat- improve quality by eliminating causes of product ing causes of product defects and making quality an all-encompassing organizational defects and by making quality philosophy. With TQM everyone in the company is responsible for quality. TQM was the responsibility of everyone practiced by some companies in the 1970s and became pervasive in the 1990s. This is in the organization. an area of operations management that no competitive company has been able to ig- nore. The importance of this movement is demonstrated by the number of compa- nies joining the ranks of those achieving ISO 9000 certification. ISO 9000 is a set of quality standards developed for global manufacturers by the International Organiza- tion for Standardization (ISO) to control trade into the then-emerging European Economic Community (EEC). Today many companies require their suppliers to meet these standards as a condition for obtaining contracts. 16 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT Business Process Reengineering  Reengineering Business process reengineering means redesigning a company’s processes to increase Redesigning a company’s efficiency, improve quality, and reduce costs. In many companies things are done in a processes to make them more certain way that has been passed down over the years. Often managers say, “Well, efficient. we’ve always done it this way.” Reengineering requires asking why things are done in a certain way, questioning assumptions, and then redesigning the processes. Operations management is a key player in a company’s reengineering efforts. Flexibility Traditionally companies competed by either mass-producing a standardized product or offering customized products in small volumes. One of the current competitive challenges for companies is the need to offer a greater variety of product choices to  Flexibility customers of a traditionally standardized product. This is the challenge of flexibility, An organizational strategy in which means being able to offer a wide variety of products to customers. For example, which the company attempts Procter and Gamble offers 13 different product designs in the Pampers line of dia- to offer a greater variety of product choices to its pers. Although diapers are a standardized product, the product designs are cus- customers. tomized to the different needs of customers, such as the age, sex, and development of the child using the diaper.  Mass customization One example of flexibility is mass customization, which is the ability of a firm to The ability of a firm to highly highly customize its goods and services to different customers. Mass customization customize its goods and requires designing flexible operations and using delayed product differentiation, also services to different customers. called postponement. This means keeping the product in generic form as long as pos- sible and postponing completion of the product until specific customer preferences are known. Time-Based Competition  Time-based competition One of the most important trends in companies today is competition based on time. An organizational strategy This includes developing new products and services faster than the competition, focusing on efforts to develop reaching the market first, and meeting customer orders most quickly. For example, new products and deliver them to customers faster than two companies may produce the same product, but if one is able to deliver it to the competitors. customer in two days whereas the other delivers it in five days, the first company will make the sale and win over the customers. Time-based competition requires specifi- cally designing the operations function for speed. Supply Chain Management  Supply chain Supply chain management (SCM) involves managing the flow of materials and infor- management mation from suppliers and buyers of raw materials all the way to the final customer. Management of the flow of The objective is to have everyone in the chain work together to reduce overall cost materials from suppliers to customers in order to reduce and improve quality and service delivery. Supply chain management requires a team overall cost and increase approach, with functions such as marketing, purchasing, operations, and engineering responsiveness to customers. all working together. This approach has been shown to result in more satisfied cus- tomers, meaning that everyone in the chain profits. SCM has become possible with the development of information technology (IT) tools that enable collaborative plan- ning and scheduling. The technologies allow synchronized supply chain execution and design collaboration, which enables companies to respond better and faster to changing market needs. Numerous companies, including Dell Computer, Wal-Mart, and Baxter Healthcare, have achieved world-class status by effectively managing their supply chains.  TODAY’S OM ENVIRONMENT 17 Global Marketplace Today businesses must think in terms of a global marketplace in order to compete ef-  Global marketplace fectively. This includes the way they view their customers, competitors, and suppliers. A trend in business focusing Key issues are meeting customer needs and getting the right product to markets as di- on customers, suppliers, and competitors from a global verse as the Far East, Europe, or Africa. Operations management is responsible for perspective. most of these decisions. OM decides whether to tailor products to different customer needs, where to locate facilities, how to manage suppliers, and how to meet local gov- ernment standards. Also, global competition has forced companies to reach higher levels of excellence in the products and services they offer. Regional trading agree- ments, such as the North American Free Trade Agreement (NAFTA), the European Union (EU), and the global General Agreement on Tariffs and Trade (GATT), guaran- tee continued competition on the international level. Environmental Issues There is increasing emphasis on the need to reduce waste, recycle, and reuse products and parts. Society has placed great pressure on business to focus on air and water quality, waste disposal, global warming, and other environmental issues. Operations  Environmental issues management plays a key role in redesigning processes and products in order to meet A trend in business to and exceed environmental quality standards. The importance of this issue is demon- consciously reduce waste, recycle, and reuse products strated by a set of standards termed ISO 14000. Developed by the International and parts. Organization for Standardization (ISO), these standards provide guidelines and a certification program documenting a company’s environmentally responsible actions. Electronic Commerce Electronic commerce (e-commerce) is the use of the Internet for conducting business activities, such as communication, business transactions, and data transfer. The Inter- net developed from a government network called ARPANET, which was created in 1969 by the U.S. Defense Department. Since the late 1990s the Internet has become an essential business medium, enabling efficient communication between manufactur-  Business to business (B2B) ers, suppliers, distributors, and customers. It has allowed companies to reach more Electronic commerce between customers at a speed infinitely faster than ever before. It also has significantly cut costs businesses. as it provides direct links between entities.  Business to customers Electronic commerce can occur between businesses, known as B2B (business to (B2C) business) commerce, and makes up the highest percentage of transactions. The most Electronic commerce between businesses and their common B2B exchanges occur between companies and their suppliers, such as customers. General Electric’s Trading Process Network. A more commonly known type of  Customer to customer e-commerce occurs between businesses and their customers, known as B2C exchange, (C2C) as seen with on-line retailers such as Amazon.com. E-commerce can also occur be- Electronic commerce between tween customers, known as C2C exchange, like consumer auction sites such as eBay. customers. E-commerce is creating virtual marketplaces that continue to change the way busi-  Virtual marketplace ness functions. (DEF to come) TODAY’S OM ENVIRONMENT Today’s OM environment is very different from what it was just a few years ago. Cus- tomers demand better quality, greater speed, and lower costs. In order to succeed, companies have to be masters of the basics of operations management. To achieve this 18 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT  Lean systems many companies are implementing a concept called lean systems. Lean systems take a A concept that takes a total total system approach to creating an efficient operation and pull together best system approach to creating practice concepts. This includes concepts such as just-in-time (JIT), total quality efficient operations. management (TQM), continuous improvement, resource planning, and supply chain management (SCM). The need for increasing efficiency has also led many companies  Enterprise resource to implement large information systems called enterprise resource planning (ERP). planning (ERP) ERP systems are large, sophisticated software programs used for identifying and plan- Large, sophisticated software ning the enterprise-wide resources needed to coordinate all activities involved in pro- systems used for identifying and planning the enterprise- ducing and delivering products to customers. wide resources needed to Applying best practices to operations management is not enough to give a coordinate all activities company a competitive advantage. The reason is that in today’s information age best involved in producing and practices are quickly passed to competitors. To gain an advantage over their competi- delivering products. tors companies are continually looking for ways to better respond to customers. This requires companies to have a deep knowledge of their customers and to be able to an-  Customer relationship ticipate their demands. The development of customer relationship management management (CRM) has made it possible for companies to have this detailed knowledge of their Software solutions that enable customers. CRM encompasses software solutions that enable the firm to collect the firm to collect customer- specific data. customer-specific data. This type of information can help the firm identify profiles of its most loyal customers and provide customer-specific solutions. Also, CRM software can be integrated with ERP software to connect customer requirements to the entire resource network of the company.  Cross-functional decision Another characteristic of today’s OM environment is the increased use of cross- making functional decision making, which requires coordinated interaction and decision The coordinated interaction making between the different business functions of the organization. Until recently and decision making that occurs between the different employees of a company made decisions in isolated departments, called “functional functions of the organization. silos.” Today many companies bring together experts from different departments into cross-functional teams to solve company problems. Employees from each function must interact and coordinate their decisions. This requires employees to understand the roles of other business functions and the goals of the business as a whole, in addi- tion to their own expertise. OPERATIONS MANAGEMENT IN PRACTICE Of all the business functions, operations is the most diverse in terms of the tasks per- formed. If you consider all the issues involved in managing a transformation process, you can see that operations managers are never bored. Who are operations managers and what do they do? The head of the operations function in a company usually holds the title of vice president of operations, vice president of manufacturing, V. P., or director of supply chain operations and generally reports directly to the president or chief operating of- ficer. Below the vice president level are midlevel managers: manufacturing manager, operations manager, quality control manager, plant manager, and others. Below these managers are a variety of positions such as quality specialist, production analyst, in- ventory analyst, and production supervisor. These people perform a variety of func- tions, such as analyzing production problems, developing forecasts, making plans for new products, measuring quality, monitoring inventory, and developing employee schedules. Thus, there are many job opportunities in operations management at all levels of the company. In addition, operations jobs tend to offer high salaries, interest- ing work, and excellent opportunities for advancement. Today many corporate CEOs  OPERATIONS MANAGEMENT IN PRACTICE 19 have come through the ranks of operations. For example, the current President and CEO of Wal-Mart, H. Lee Scott, comes from a background in operations and logistics. Also from the background of operations are the current CEO of Home Depot, Bob Nardelli, and the CEO of Lowe’s, Robert Tillman. As you can see, all business functions need information from operations manage- ment in order to perform their tasks. At the same time, operations managers are highly dependent on input from other areas. This process of information sharing is dynamic, requiring that managers work in teams and understand each other’s roles. OM ACROSS THE ORGANIZATION tomer needs if marketing managers do not understand what operations can produce, what due dates it can and Now that we know the role of the operations manage- cannot meet, and what types of customization opera- ment function and the decisions that operations man- tions can deliver. The marketing department can de- agers make, let’s look at the relationship between opera- velop an exciting marketing campaign, but if opera- tions and other business functions. As mentioned tions cannot produce the desired product, sales will not previously, most businesses are supported by three be made. In turn, operations managers need informa- main functions: operations, marketing, and finance. Al- tion about customer wants and expectations. It is up to though these functions involve different activities, them to design products with characteristics that cus- they must interact to achieve the goals of the orga- tomers find desirable, and they cannot do this nization. They must also follow the strategic without regular coordination with the marketing direction developed at the top level of the organiza- department. tion. Figure 1-7 shows the flow of information from Finance cannot realistically judge the need for the top to each business function, as well as the flow be- capital investments, make-or-buy decisions, plant ex- tween functions. pansions, or relocation if finance managers do not un- Many of the decisions made by operations managers derstand operations concepts and needs. On the other are dependent on information from the other func- hand, operations managers cannot make large financial tions. At the same time, other functions cannot be car- expenditures without understanding financial con- ried out properly without information from operations. straints and methods of evaluating financial invest- Figure 1-8 shows these relationships. ments. It is essential for these two functions to work to- Marketing is not fully capable of meeting cus- gether and understand each other’s constraints. FIGURE 1-7 President or CEO Organizational chart showing flow of information Strategic Direction of Company Sales and demand Financial requirements status Marketing Operations Finance V.P. of Marketing V.P. of Operations V.P. of Finance Organizational Operations needs ability to meet and financial sales and requirements demands 20 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT Marketing IS Finance Current Financial operating Capital investments planned measures Customer demands capabilities Information Customer feedback Inventory levels needs Capital requirements Budgets Need for new products Output rates Technological capabilities Stockholder Capacities requirements Operations Management Operations Labor skills Billing information capabilities available Product specs Labor Current requirements Labor Process Design performance Technological costs improvements requirements measures tradeoffs Human Accounting Engineering Resources FIGURE 1-8 Information flow between operations and other business functions Information systems (IS) is a function that en- Human resource managers must understand job ables information to flow throughout the organization requirements and worker skills if they are to hire the and allows OM to operate effectively. OM is highly de- right people for available jobs. To manage employees ef- pendent on information such as forecasts of demand, fectively, operations managers need to understand job quality levels being achieved, inventory levels, supplier market trends, hiring and layoff costs, and training deliveries, and worker schedules. IS must understand costs. the needs of OM in order to design an adequate infor- Accounting needs to consider inventory manage- mation system. Usually, IS and OM work together to ment, capacity information, and labor standards in design an information network. This close relationship order to develop accurate cost data. In turn, needs to be ongoing. IS must be capable of accommo- operations managers must communicate billing infor- dating the needs of OM as they change in response to mation and process improvements to accounting, and market demands. At the same time, it is up to IS to depend heavily on accounting data for cost manage- bring the latest capabilities in information technology ment decisions. to the organization to enhance the functioning of OM.  KEY TERMS 21 INSIDE OM Just as OM decisions are linked with those of other business functions, decisions within the OM function need to be linked together. We learned that OM is responsi- ble for a wide range of strategic and tactical decisions. These decisions directly impact each other and need to be carefully linked together, following the company’s strategic direction. In the Gourmet Wafers example we observed that decisions on product de- sign are directly tied to process selection. The reason is that the process of a company needs to be capable of producing the desired product. Similarly, the forecast of ex- pected demand directly impacts functions such as capacity planning, inventory man- agement, and scheduling. These are just a few examples of linkages within the OM function. Throughout this book we will study different OM functions and will learn how each impacts the other. You will realize that OM decisions are not made in isolation. Rather, each decision is intertwined with other business functions and other OM decisions. Chapter Highlights 1 Operations management is the business function 5 A number of historical milestones have shaped oper- that is responsible for managing and coordinating ations management into what it is today. Some of the resources needed to produce a company’s prod- the more significant of these are the Industrial Revo- ucts and services. Without operations management lution, scientific management, the human relations there would be no products or services to sell. movement, management science, and the computer 2 The role of operations management is to transform age. organizational inputs — human resources, facilities, 6 OM is a highly important function in today’s dy- materials, technology, and information — into a namic business environment. Among the trends that company’s finished goods or services. have had a significant impact on business are just-in- 3 Operations management is responsible for a wide time, total quality management, reengineering, flexi- range of decisions. They range from strategic deci- bility, time-based competition, supply chain man- sions, such as designing the unique features of a agement, a global marketplace, and environmental product and process, to tactical decisions, such as issues. planning worker schedules. 7 Operations managers need to work closely with all 4 Organizations can be divided into manufacturing other business functions in a team format. Marketing and service operations, which differ in the tangibility needs to provide information about customer expec- of the product and the degree of customer contact. tations. Finance needs to provide information about Manufacturing and service operations have very budget constraints. In turn, OM must communicate different operational requirements. its needs and capabilities to the other functions. Key Terms operations management (OM) 3 tactical decisions 9 just-in-time (JIT) 15 value added 5 industrial revolution 11 total quality management (TQM) 15 efficiency 5 scientific management 13 reengineering 16 manufacturing organizations 5 Hawthorne studies 14 flexibility 16 service organizations 5 human relations movement 14 mass customization 16 strategic decisions 9 management science 14 time-based competition 16 22 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT supply chain management (SCM) 16 business to customer (B2C) 17 enterprise resource management (ERP) 18 global marketplace 17 customer to customer (C2C) 17 customer relationship management environmental issues 17 virtual marketplace 17 (CRM) 18 business to business (B2B) 17 lean systems 18 cross-functional decision making 18 Discussion Questions 1. Define the term operations management. 9. What are the three historical milestones in operations man- 2. Explain the decisions operations managers make and give agement? How have they influenced management? three examples. 10. Identify three current trends in operations management 3. Describe the transformation process of a business. Give and describe them. How do you think they will change the future three examples. What constitutes the transformation process at of OM? an advertising agency, a bank, and a TV station? 11. Define the terms total quality management, just-in-time, 4. What are the three major business functions, and how are and reengineering. What do these terms have in common? they related to one another? Give specific examples. 12. Describe today’s OM environment. How different is it 5. What are the differences between strategic and tactical de- from that of a few years ago? Identify specific features you think cisions, and how are they related to each other? characterize today’s OM environment. 6. Find an article that relates to operations management in ei- 13. Describe the impact of e-commerce on operations man- ther the Wall Street Journal, Fortune or Business Week. Come to class agement. Identify the challenges posed by e-commerce on opera- prepared to share with others what you learned in the article. tions management. 7. Examine the list of Fortune magazine’s top 100 companies. 14. Find a company you are familiar with and explain how it Do most of these companies have anything in common? Are uses its operations management function. Identify what the there industries that are most represented? company is doing correctly. Do you have any suggestions for im- 8. Identify the two major differences between service and provement? manufacturing organizations. Find an example of a service and manufacturing company and compare them. CASE: Hightone Electronics, Inc. George Gonzales, Operations Director of Hightone Electronics, components to small repair shops. Products were offered for Inc., sat quietly at the conference table overlooking the lobby of sale through a catalogue that was mailed to prospective cus- the corporate headquarters office in Palo Alto, California. He tomers every four months. The company built its reputation on reflected on the board meeting that had just adjourned, and the high quality and service. As time passed, HEI began supplying challenge that lay ahead for him. The Board had just an- more than just radio parts, adding items such as fuses, trans- nounced their decision to start an Internet-based division of formers, computers, and electrical testing equipment. The ex- HEI. Web-based purchasing in the electronics industry had pansion of the product line had been coupled with an increase been growing rapidly. The Board felt that HEI needed to offer in the number and type of customers the company served. Al- on-line purchasing to their customers in order to maintain its though the traditional repair shops still remained a part of the competitive position. The Board looked to George to outline company’s market, technical schools, universities, and well- the key operations management decisions that needed to be ad- known corporations in the Silicon Valley were added to the list dressed in creating a successful Internet-based business. The of customers. next board meeting was just a week away. He had his work cut Today HEI operates the Palo Alto facility with the same out for him. dedication to supplying quality products through catalogue Hightone Electronics, Inc. was founded in Palo Alto, Califor- sales that it had when it was first founded. Customer service nia over fifty years ago. Originally, the company provided radio remains the top priority. HEI stocks and sells over 22,000 dif-  DISCUSSION QUESTIONS 23 ferent items. Most customers receive their orders within for the next board meeting was to identify the key operations 48 hours of placing on order, and all components are war- decision and persuade the Board that these issues needed seri- ranted for a full year. ous consideration. Expanding HEI to include Web-based purchasing seems to be a natural extension of catalogue sales that the company Case Questions already does successfully. George Gonzales agrees that the 1. Explain why operations management is critical to the suc- company has no choice but to move in this competitive cess of a business. Why would developing an Internet-based direction. However, George does not agree with the opinion business require different operations consideration for HEI? Is of the Board that this would be “business as usual.” He George Gonzales correct in his assessment that this would not believes that there are many operations decisions that need to be “business as usual”? be identified and addressed. As he stated in the meeting, 2. Recall that HEI wishes to continue its reputation of high “Having a slick Web site is one thing, but making sure the quality and service. Identify key operations management deci- right product is delivered to the right location is another. sions that need to be considered. How different will these deci- Operations is the key to making this happen.” His challenge sions be for the Internet business? CASE: Creature Care Animal Clinic (A) It has been three years since Dr. Julia Barr opened Creature Care certain items and in many cases there were multiple brands of Animal Clinic, a suburban veterinary clinic. Dr. Barr thought the same product. Sometimes medications passed their expira- that by now she would be enjoying having her own practice. She tion dates and had to be thrown away. At the same time, the had spent many years in college and worked to save money in clinic often unexpectedly ran out of stock of certain supplies order to start a business. Instead, she felt overwhelmed with and rush orders had to be placed. On one occasion they ran so business problems that were facing the clinic. She thought to low on bandages that the assistant had to be sent to the local herself: “I don’t produce anything. I just provide a service doing drug store. something I enjoy. How can this be so complicated?”