Operations Management 6th Edition PDF

M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 1 Part One INTRODUCTION This part of the book introduces the idea of the operations function in different types of organization. It identifies the common set of objectives to whic...

M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 1 Part One INTRODUCTION This part of the book introduces the idea of the operations function in different types of organization. It identifies the common set of objectives to which operations managers aspire in order to serve their customers, and it explains how operations can have an important strategic role. M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 2 Chapter 1 Operations management Key questions Introduction ➤ What is operations management? Operations management is about how organizations produce ➤ Why is operations management goods and services. Everything you wear, eat, sit on, use, important in all types of read or knock about on the sports field comes to you courtesy organization? of the operations managers who organized its production. ➤ What is the input–transformation– Every book you borrow from the library, every treatment you output process? receive at the hospital, every service you expect in the shops ➤ What is the process hierarchy? and every lecture you attend at university – all have been ➤ How do operations processes have produced. While the people who supervised their ‘production’ different characteristics? may not always be called operations managers that is what they ➤ What are the activities of operations really are. And that is what this book is concerned with – the management? tasks, issues and decisions of those operations managers who have made the services and products on which we all depend. This is an introductory chapter, so we will examine what we mean by ‘operations management’, how operations processes can be found everywhere, how they are all similar yet different, and what it is that operations managers do. Check and improve your understanding of this chapter using self assessment questions and a personalised study plan, audio and video downloads, and an eBook – all at www.myomlab.com. M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 3 Chapter 1 Operations management 3 Operations in practice IKEA1 (All chapters start with an ‘Operations in practice’ example that illustrates some of the issues that will be covered in the chapter.) Love it or hate it, IKEA is the most successful furniture retailer ever. With 276 stores in 36 countries, it has managed to develop its own special way of selling furniture. The stores’ layout means customers often spend two hours in the store – far longer than in rival furniture retailers. IKEA’s philosophy goes back to the original business, started in the 1950s in Sweden by Ingvar Kamprad. He built a showroom on the outskirts of Stockholm where land was cheap and Source: Alamy Images simply displayed suppliers’ furniture as it would be in a domestic setting. Increasing sales soon allowed IKEA to start ordering its own self-designed products from local manufacturers. But it was innovation in its operations that dramatically reduced its selling costs. These included the idea of selling furniture as purchasing raw materials, right through to finished self-assembly flat packs (which reduced production products arriving in its customers’ homes, IKEA relies and transport costs) and its ‘showroom–warehouse’ on close partnerships with its suppliers to achieve concept which required customers to pick the furniture both ongoing supply efficiency and new product up themselves from the warehouse (which reduced development. However, IKEA closely controls all supply retailing costs). Both of these operating principles are and development activities from IKEA’s home town of still the basis of IKEA’s retail operations process today. Älmhult in Sweden. Stores are designed to facilitate the smooth flow But success brings its own problems and some of customers, from parking, moving through the store customers became increasingly frustrated with itself, to ordering and picking up goods. At the entrance overcrowding and long waiting times. In response IKEA to each store large notice-boards provide advice to in the UK launched a £150 m programme to ‘design out’ shoppers. For young children, there is a supervised the bottlenecks. The changes included: children’s play area, a small cinema, and a parent and Clearly marked in-store short cuts allowing customers baby room so parents can leave their children in the who just want to visit one area, to avoid having to go supervised play area for a time. Parents are recalled via through all the preceding areas. the loudspeaker system if the child has any problems. Express checkout tills for customers with a bag only IKEA ‘allow customers to make up their minds in rather than a trolley. their own time’ but ‘information points’ have staff who Extra ‘help staff’ at key points to help customers. can help. All furniture carries a ticket with a code Redesign of the car parks, making them easier to number which indicates its location in the warehouse. navigate. (For larger items customers go to the information desks Dropping the ban on taking trolleys out to the car for assistance.) There is also an area where smaller items parks for loading (originally implemented to stop are displayed, and can be picked directly. Customers vehicles being damaged). then pass through the warehouse where they pick up A new warehouse system to stop popular product the items viewed in the showroom. Finally, customers lines running out during the day. pay at the checkouts, where a ramped conveyor belt More children’s play areas. moves purchases up to the checkout staff. The exit area has service points and a loading area that allows IKEA spokeswoman Nicki Craddock said: ‘We know customers to bring their cars from the car park and people love our products but hate our shopping load their purchases. experience. We are being told that by customers Behind the public face of IKEA’s huge stores is a every day, so we can’t afford not to make changes. complex worldwide network of suppliers, 1,300 direct We realized a lot of people took offence at being herded suppliers, about 10,000 sub-suppliers, wholesale and like sheep on the long route around stores. Now if you transport operations include 26 Distribution Centres. know what you are looking for and just want to get in, This supply network is vitally important to IKEA. From grab it and get out, you can.’ ➔ M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 4 4 Part One Introduction Operations management is a vital part of IKEA’s Coping with fluctuations in demand (called capacity success management) IKEA shows how important operations management Maintaining cleanliness and safety of storage area is for its own success and the success of any type of (called failure prevention) organization. Of course, IKEA understands its market and Avoiding running out of products for sale (called its customers. But, just as important, it knows that the inventory management) way it manages the network of operations that design, Monitoring and enhancing quality of service to produce and deliver its products and services must be customers (called quality management) right for its market. No organization can survive in the Continually examining and improving operations long term if it cannot supply its customers effectively. practice (called operations improvement). And this is essentially what operations management is And these activities are only a small part of IKEA’s about – designing, producing and delivering products total operations management effort. But they do give and services that satisfy market requirements. For any an indication, first of how operations management business, it is a vitally important activity. Consider just should contribute to the businesses success, and some of the activities that IKEA’s operations managers second, what would happen if IKEA’s operations are involved in. managers failed to be effective in carrying out Arranging the store’s layout to gives smooth and any of its activities. Badly designed processes, effective flow of customers (called process design) inappropriate products, poor locations, disaffected Designing stylish products that can be flat-packed staff, empty shelves, or forgetting the importance efficiently (called product design) of continually improving quality, could all turn a Making sure that all staff can contribute to the previously successful organization into a failing one. company’s success (called job design) Yet, although the relative importance of these activities Locating stores of an appropriate size in the most will vary between different organizations, operations effective place (called supply network design) managers in all organizations will be making the same Arranging for the delivery of products to stores type of decision (even if what they actually decide (called supply chain management) is different). What is operations management? Operations management Operations management is the activity of managing the resources which produce and deliver Operations function products and services. The operations function is the part of the organization that is responsible for this activity. Every organization has an operations function because every organization produces some type of products and/or services. However, not all types of organization will necessarily call the operations function by this name. (Note that we also use the shorter terms Operations managers ‘the operation’ and ‘operations’ interchangeably with the ‘operations function’). Operations managers are the people who have particular responsibility for managing some, or all, of the resources which compose the operations function. Again, in some organizations the operations manager could be called by some other name. For example, he or she might be called the ‘fleet manager’ in a distribution company, the ‘administrative manager’ in a hospital, or the ‘store manager’ in a supermarket. Operations in the organization The operations function is central to the organization because it produces the goods and services which are its reason for existing, but it is not the only function. It is, however, one of Three core functions the three core functions of any organization. These are: the marketing (including sales) function – which is responsible for communicating the organization’s products and services to its markets in order to generate customer requests for service; M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 5 Chapter 1 Operations management 5 the product/service development function – which is responsible for creating new and modified products and services in order to generate future customer requests for service; the operations function – which is responsible for fulfilling customer requests for service through the production and delivery of products and services. Support functions In addition, there are the support functions which enable the core functions to operate effectively. These include, for example: the accounting and finance function – which provides the information to help economic decision-making and manages the financial resources of the organization; the human resources function – which recruits and develops the organization’s staff as well as looking after their welfare. Remember that different organizations will call their various functions by different names and will have a different set of support functions. Almost all organizations, however, will have the three core functions, because all organizations have a fundamental need to sell their services, satisfy their customers and create the means to satisfy customers in the future. Table 1.1 shows the activities of the three core functions for a sample of organizations. In practice, there is not always a clear division between the three core functions or between core and support functions. This leads to some confusion over where the boundaries of the Broad definition of operations function should be drawn. In this book we use a relatively broad definition of operations operations. We treat much of the product/service development, technical and information systems activities and some of the human resource, marketing, and accounting and finance activities as coming within the sphere of operations management. We view the operations func- tion as comprising all the activities necessary for the day-to-day fulfilment of customer requests. This includes sourcing products and services from suppliers and transporting products and services to customers. Working effectively with the other parts of the organization is one of the most important responsibilities of operations management. It is a fundamental of modern management that functional boundaries should not hinder efficient internal processes. Figure 1.1 illustrates some of the relationships between operations and some other functions in terms of the flow of information between them. Although it is not comprehensive, it gives an idea of the nature of each relationship. However, note that the support functions have a different relationship with operations than operations has with the other core functions. Operations management’s responsibility to support functions is primarily to make sure that they understand operations’ needs and help them to satisfy these needs. The relationship with the other two core functions is more equal – less of ‘this is what we want’ and more ‘this is what we can do currently – how do we reconcile this with broader business needs?’ Table 1.1 The activities of core functions in some organizations Core functional Internet service provider Fast food chain International aid charity Furniture manufacturer activities (ISP) Marketing and Promote services to users Advertise on TV Develop funding contracts Advertise in magazines sales and get registrations Devise promotional Mail out appeals for Determine pricing policy Sell advertising space materials donations Sell to stores Product/service Devise new services Design hamburgers, Develop new appeals Design new furniture development and commission new pizzas, etc. campaigns Coordinate with information content Design décor for Design new assistance fashionable colours restaurants programmes Operations Maintain hardware, Make burgers, Give service to the Make components software and content pizzas etc. beneficiaries of the charity Assemble furniture Implement new links and Serve customers services Clear away Maintain equipment M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 6 6 Part One Introduction Figure 1.1 The relationship between the operations function and other core and support functions of the organization Operations management is important in all types of organization In some types of organization it is relatively easy to visualize the operations function and what it does, even if we have never seen it. For example, most people have seen images of automobile assembly. But what about an advertising agency? We know vaguely what they do – they produce the advertisements that we see in magazines and on television – but what is their operations function? The clue lies in the word ‘produce’. Any business that pro- duces something, whether tangible or not, must use resources to do so, and so must have an operations activity. Also the automobile plant and the advertising agency do have one important element in common: both have a higher objective – to make a profit from pro- ducing their products or services. Yet not-for-profit organizations also use their resources to produce services, not to make a profit, but to serve society in some way. Look at the follow- ing examples of what operations management does in five very different organizations and some common themes emerge. M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 7 Chapter 1 Operations management 7 Automobile assembly factory – Operations management Source: Rex Features uses machines to efficiently assemble products that satisfy current customer demands Physician (general practitioner) – Operations management Source: Getty Images uses knowledge to effectively diagnose conditions in order to treat real and perceived patient concerns Management consultant – Operations management uses Source: Alamy Images people to effectively create the services that will address current and potential client needs Disaster relief charity – Operations management uses our and our partners’ resources to speedily provide the supplies Source: Corbis and services that relieve community suffering Advertising agency – Operations management uses our Source: Alamy Images staff ’s knowledge and experience to creatively present ideas that delight clients and address their real needs Start with the statement from the ‘easy to visualize’ automobile plant. Its summary of what operations management did was that... ‘Operations management uses machines to efficiently assemble products that satisfy current customer demands.’ The statements from the other organizations were similar, but used slightly different language. Operations management used, not just machines but also... ‘knowledge, people, “our and our partners’ resources” ’ and ‘our staff ’s experience and knowledge’, to efficiently (or effectively, or creatively) assemble (or produce, change, sell, move, cure, shape, etc.) products (or services or ideas) that satisfy (or match or exceed or delight) customers’ (or clients’ or citizens’ or society’s) demands (or needs or concerns or even dreams). So whatever terminology is used there is a common theme and a common purpose to how we can visualize the operations activity in any type of organization: small or large, manufacturing or service, public or private, profit or not-for-profit. Operations management uses resources to appropriately create outputs that fulfil defined market require- ments. See Figure 1.2. However, although the essential nature and purpose of operations management is the same in every type of organization, there are some special issues to consider, particularly in smaller organizations and those whose purpose is to maximize something other than profit. M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 8 8 Part One Introduction Figure 1.2 Operations management uses resources to appropriately create outputs that fulfil defined market requirements Operations management in the smaller organization Operations management is just as important in small organizations as it is in large ones. Irrespective of their size, all companies need to produce and deliver their products and services efficiently and effectively. However, in practice, managing operations in a small or medium-size organization has its own set of problems. Large companies may have the resources to dedicate individuals to specialized tasks but smaller companies often cannot, so people may have to do different jobs as the need arises. Such an informal structure can allow the company to respond quickly as opportunities or problems present themselves. But decision The role of operations making can also become confused as individuals’ roles overlap. Small companies may have management in smaller exactly the same operations management issues as large ones but they can be more difficult organizations often overlaps significantly to separate from the mass of other issues in the organization. However, small operations can with other functions also have significant advantages; the short case on Acme Whistles illustrates this. Short case Acme Whistles2 Acme Whistles can trace its history back to 1870 when Joseph Hudson decided he had the answer to the London Metropolitan Police’s request for something to replace the wooden rattles that were used to sound the alarm. So the world’s first police whistle was born. Soon Acme grew to be the premier supplier of whistles for police forces around the world. ‘In many ways’, says Simon Topman, owner and Managing Director of the Source: Simon Topman/Acme Whistles company, ‘the company is very much the same as it was in Joseph’s day. The machinery is more modern, of course, and we have a wider variety of products, but many of our products are similar to their predecessors. For example, football referees seem to prefer the traditional snail-shaped whistle. So, although we have dramatically improved the performance of the product, our customers want it to look the same. We have also M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 9 Chapter 1 Operations management 9 maintained the same manufacturing tradition from those specialist people in specialized roles. But this relative early days. The original owner insisted on personally informality has a lot of advantages. It means that we can blowing every single whistle before it left the factory. maintain our philosophy of quality amongst everybody in We still do the same, not by personally blowing them, the company, and it means that we can react very quickly but by using an air line, so the same tradition of quality when the market demands it.’ Nor is the company’s small has endured.’ size any barrier to its ability to innovate. ‘On the contrary’, The company’s range of whistles has expanded to says Simon, ‘there is something about the culture of include sports whistles (they provide the whistles for the the company that is extremely important in fostering soccer World Cup), distress whistles, (silent) dog whistles, innovation. Because we are small we all know each other novelty whistles, instrumental whistles (used by all of the and we all want to contribute something to the company. world’s top orchestras), and many more types. ‘We are It is not uncommon for employees to figure out new ideas always trying to improve our products’, says Simon, ‘it’s for different types of whistle. If an idea looks promising, a business of constant innovation. Sometimes I think that we will put a small and informal team together to look at it after 130 years surely there is nothing more to do, but we further. It is not unusual for people who have been with us always find some new feature to incorporate. Of course, only a few months to start wanting to make innovations. managing the operations in a small company is very It’s as though something happens to them when they different to working in a large one. Everyone has much walk through the door of the factory that encourages broader jobs; we cannot afford the overheads of having their natural inventiveness.’ Operations management in not-for-profit organizations Terms such as competitive advantage, markets and business, which are used in this book, are usually associated with companies in the for-profit sector. Yet operations management is also relevant to organizations whose purpose is not primarily to earn profits. Managing the operations in an animal welfare charity, hospital, research organization or government Operations decisions are department is essentially the same as in commercial organizations. Operations have to take the same in commercial the same decisions – how to produce products and services, invest in technology, contract and not-for-profit organizations out some of their activities, devise performance measures, and improve their operations performance and so on. However, the strategic objectives of not-for-profit organizations may be more complex and involve a mixture of political, economic, social and environ- mental objectives. Because of this there may be a greater chance of operations decisions being made under conditions of conflicting objectives. So, for example, it is the operations staff in a children’s welfare department who have to face the conflict between the cost of providing extra social workers and the risk of a child not receiving adequate protection. Nevertheless the vast majority of the topics covered in this book have relevance to all types of organization, including non-profit, even if the context is different and some terms may have to be adapted. Short case Oxfam International3 Oxfam International is a confederation of 13 like-minded organizations based around the world that, together with partners and allies, work directly with communities seeking to ensure that poor people can improve their lives and livelihoods and have a say in decisions that Source: Rex Features affect them. With an annual expenditure that exceeds US$700 million, Oxfam International focuses its efforts in several areas, including development work, long-term programmes to eradicate poverty and ➔ M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 10 10 Part One Introduction combat injustice, emergency relief delivering immediate disasters, giving more time to assess needs and life-saving assistance to people affected by natural coordinate a multi-agency response. The organization’s disasters or conflict, helping to build their resilience headquarters in Oxford in the UK provides advice, to future disasters, campaigning and raising public materials and staff, often deploying emergency support awareness of the causes of poverty, encouraging staff on short-term assignments. Shelters, blankets ordinary people to take action for a fairer world, and and clothing can be flown out at short notice from the advocacy and research that pressures decision-makers Emergencies Warehouse. Engineers and sanitation to change policies and practices that reinforce poverty equipment can also be provided, including water and injustice. tanks, latrines, hygiene kits and containers. When an All of Oxfam International’s activities depend on emergency is over, Oxfam continues to work with the effective and professional operations management. affected communities through their local offices to For example, Oxfam’s network of charity shops, run help people rebuild their lives and livelihoods. In an by volunteers, is a key source of income. The shops effort to improve the timeliness, effectiveness and sell donated items and handcrafts from around the appropriateness of its response to emergencies, world giving small-scale producers fair prices, training, Oxfam recently adopted a more systematic approach advice and funding. Supply chain management and to evaluating the successes and failures of its development is just as central to the running of these humanitarian work. Real-time evaluations, which seek to shops as it is to the biggest commercial chain of stores. assess and influence emergency response programmes The operations challenges involved in Oxfam’s ongoing in their early stages, were implemented during the ‘Clean Water’ exercise are different but certainly no less response to floods in Mozambique and South Asia, important. Around 80 per cent of diseases and over the earthquake in Peru, Hurricane Felix in Nicaragua one-third of deaths in the developing world are caused and the conflicts in Uganda. These exercises provided by contaminated water and Oxfam has a particular Oxfam’s humanitarian teams with the opportunity to expertise in providing clean water and sanitation gauge the effectiveness of their response, and make facilities. The better their coordinated efforts of identifying crucial adjustments at an early stage if necessary. The potential projects, working with local communities, evaluations highlighted several potential improvements. providing help and education, and helping to providing For example, it became evident that there was a need civil engineering expertise, the more effective Oxfam is to improve preparation ahead of emergencies, as well as at fulfilling its objectives. the need to develop more effective coordination planning More dramatically, Oxfam International’s response tools. It was also decided that adopting a common to emergency situations, providing humanitarian aid working approach with shared standards would improve where it is needed, must be fast, appropriate and the effectiveness of their response to emergencies. efficient. Whether the disasters are natural or political, Oxfam also emphasizes the importance of the role played they become emergencies when the people involved by local partners in emergencies. They are often closer can no longer cope. In such situations, Oxfam, through to, and more in tune with, affected communities, but its network of staff in local offices, is able to advise may require additional support and empowerment to on what and where help is needed. Indeed, local scale up their response and comply with the international teams are often able to provide warnings of impending humanitarian standards. The new operations agenda The business environment has a significant impact on what is expected from operations management. In recent years there have been new pressures for which the operations func- Modern business tion has needed to develop responses. Table 1.2 lists some of these business pressures and the pressures have changed operations responses to them. These operations responses form a major part of a new agenda the operations agenda for operations. Parts of this agenda are trends which have always existed but have accelerated, such as globalization and increased cost pressures. Part of the agenda involves seeking ways to exploit new technologies, most notably the Internet. Of course, the list in Table 1.2 is not comprehensive, nor is it universal. But very few businesses will be unaffected by at least some of these concerns. When businesses have to cope with a more challenging environment, they look to their operations function to help them respond. M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 11 Chapter 1 Operations management 11 Table 1.2 Changes in the business environment are shaping a new operations agenda The business environment is changing... Prompting operations responses... For example, For example, Increased cost-based competition Globalization of operations networking Higher quality expectations Information-based technologies Demands for better service Internet-based integration of operations More choice and variety activities Rapidly developing technologies Supply chain management Customer relationship management Frequent new product/service introduction ➡ Flexible working patterns Increased ethical sensitivity Mass customization Environmental impacts are more Fast time-to-market methods transparent Lean process design More legal regulation Environmentally sensitive design Greater security awareness Supplier ‘partnership’ and development Failure analysis Business recovery planning The input–transformation–output process All operations produce products and services by changing inputs into outputs using an Transformation process ‘input-transformation-output’ process. Figure 1.3 shows this general transformation process model model. Put simply, operations are processes that take in a set of input resources which are Input resources used to transform something, or are transformed themselves, into outputs of products and Outputs of goods and services. And although all operations conform to this general input–transformation–output services model, they differ in the nature of their specific inputs and outputs. For example, if you stand far enough away from a hospital or a car plant, they might look very similar, but move closer and clear differences do start to emerge. One is a manufacturing operation producing ‘products’, and the other is a service operation producing ‘services’ that change the physio- logical or psychological condition of patients. What is inside each operation will also be Figure 1.3 All operations are input–transformation–output processes M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 12 12 Part One Introduction different. The motor vehicle plant contains metal-forming machinery and assembly processes, whereas the hospital contains diagnostic, care and therapeutic processes. Perhaps the most important difference between the two operations, however, is the nature of their inputs. The vehicle plant transforms steel, plastic, cloth, tyres and other materials into vehicles. The hospital transforms the customers themselves. The patients form part of the input to, and the output from, the operation. This has important implications for how the operation needs to be managed. Inputs to the process Transformed resources One set of inputs to any operation’s processes are transformed resources. These are the resources that are treated, transformed or converted in the process. They are usually a mixture of the following: Materials – operations which process materials could do so to transform their physical properties (shape or composition, for example). Most manufacturing operations are like this. Other operations process materials to change their location (parcel delivery companies, for example). Some, like retail operations, do so to change the possession of the materials. Finally, some operations store materials, such as in warehouses. Information – operations which process information could do so to transform their informational properties (that is the purpose or form of the information); accountants do this. Some change the possession of the information, for example market research com- panies sell information. Some store the information, for example archives and libraries. Finally, some operations, such as telecommunication companies, change the location of the information. Customers – operations which process customers might change their physical properties in a similar way to materials processors: for example, hairdressers or cosmetic surgeons. Some store (or more politely accommodate) customers: hotels, for example. Airlines, mass rapid transport systems and bus companies transform the location of their customers, while hospitals transform their physiological state. Some are concerned with transforming their psychological state, for example most entertainment services such as music, theatre, television, radio and theme parks. Often one of these is dominant in an operation. For example, a bank devotes part of its energies to producing printed statements of accounts for its customers. In doing so, it Material inputs is processing inputs of material but no one would claim that a bank is a printer. The bank is Customer inputs also concerned with processing inputs of customers. It gives them advice regarding their financial affairs, cashes their cheques, deposits their cash, and has direct contact with them. Information inputs However, most of the bank’s activities are concerned with processing inputs of information about its customers’ financial affairs. As customers, we may be unhappy with badly printed statements and we may be unhappy if we are not treated appropriately in the bank. But if the bank makes errors in our financial transactions, we suffer in a far more fundamental way. Table 1.3 gives examples of operations with their dominant transformed resources. Table 1.3 Dominant transformed resource inputs of various operations Predominantly processing Predominantly processing Predominantly processing inputs of materials inputs of information inputs of customers All manufacturing operations Accountants Hairdressers Mining companies Bank headquarters Hotels Retail operations Market research company Hospitals Warehouses Financial analysts Mass rapid transport Postal services News service Theatres Container shipping line University research unit Theme parks Trucking companies Telecoms company Dentists M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 13 Chapter 1 Operations management 13 Transforming resources The other set of inputs to any operations process are transforming resources. These are the resources which act upon the transformed resources. There are two types which form the ‘building blocks’ of all operations: Facilities facilities – the buildings, equipment, plant and process technology of the operation; Staff staff – the people who operate, maintain, plan and manage the operation. (Note that we use the term ‘staff’ to describe all the people in the operation, at any level.) The exact nature of both facilities and staff will differ between operations. To a five-star hotel, its facilities consist mainly of ‘low-tech’ buildings, furniture and fittings. To a nuclear- powered aircraft carrier, its facilities are ‘high-tech’ nuclear generators and sophisticated electronic equipment. Staff will also differ between operations. Most staff employed in a factory assembling domestic refrigerators may not need a very high level of technical skill. In contrast, most staff employed by an accounting company are, hopefully, highly skilled in their own particular ‘technical’ skill (accounting). Yet although skills vary, all staff can make a contribution. An assembly worker who consistently misassembles refrigerators will dis- satisfy customers and increase costs just as surely as an accountant who cannot add up. The balance between facilities and staff also varies. A computer chip manufacturing company, such as Intel, will have significant investment in physical facilities. A single chip fabrication plant can cost in excess of $4 billion, so operations managers will spend a lot of their time managing their facilities. Conversely, a management consultancy firm depends largely on the quality of its staff. Here operations management is largely concerned with the development and deployment of consultant skills and knowledge. Outputs from the process Although products and services are different, the distinction can be subtle. Perhaps the Tangibility most obvious difference is in their respective tangibility. Products are usually tangible. You can physically touch a television set or a newspaper. Services are usually intangible. You can- not touch consultancy advice or a haircut (although you can often see or feel the results of these services). Also, services may have a shorter stored life. Products can usually be stored, at least for a time. The life of a service is often much shorter. For example, the service of ‘accommodation in a hotel room for tonight’ will perish if it is not sold before tonight – accommodation in the same room tomorrow is a different service. Most operations produce both products and services Some operations produce just products and others just services, but most operations produce a mixture of the two. Figure 1.4 shows a number of operations (including some described ‘Pure’ products as examples in this chapter) positioned in a spectrum from ‘pure’ product producers to ‘Pure’ service ‘pure’ service producers. Crude oil producers are concerned almost exclusively with the product which comes from their oil wells. So are aluminium smelters, but they might also produce some services such as technical advice. Services produced in these circumstances Facilitating services are called facilitating services. To an even greater extent, machine tool manufacturers pro- duce facilitating services such as technical advice and applications engineering. The services produced by a restaurant are an essential part of what the customer is paying for. It is both a manufacturing operation which produces meals and a provider of service in the advice, ambience and service of the food. An information systems provider may produce software Facilitating products ‘products’, but primarily it is providing a service to its customers, with facilitating products. Certainly, a management consultancy, although it produces reports and documents, would see itself primarily as a service provider. Finally, pure services produce no products, a psychotherapy clinic, for example. Of the short cases and examples in this chapter, Acme Whistles is primarily a product producer, although it can give advice or it can even design products for individual customers. Pret A Manger both manufactures and serves its sand- wiches to customers. IKEA subcontracts the manufacturing of its products before selling them, and also offers some design services. It therefore has an even higher service content. M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 14 14 Part One Introduction Figure 1.4 The output from most types of operation is a mixture of goods and services Formule 1 and the safari park (see later) are close to being pure services, although they both have some tangible elements such as food. Services and products are merging Increasingly the distinction between services and products is both difficult to define and not particularly useful. Information and communications technologies are even overcom- ing some of the consequences of the intangibility of services. Internet-based retailers, for example, are increasingly ‘transporting’ a larger proportion of their services into customers’ homes. Even the official statistics compiled by governments have difficulty in separating products and services. Software sold on a disc is classified as a product. The same software sold over the Internet is a service. Some authorities see the essential purpose of all businesses, and therefore operations processes, as being to ‘service customers’. Therefore, they argue, All operations are service all operations are service providers which may produce products as a part of serving their providers customers. Our approach in this book is close to this. We treat operations management as being important for all organizations. Whether they see themselves as manufacturers or service providers is very much a secondary issue. Short case Pret A Manger 4 Described by the press as having ‘revolutionized the concept of sandwich making and eating’, Pret A Manger opened their first shop in the mid-1980s, in London. Now they have over 130 shops in UK, New York, Source: Alamy Images Hong Kong and Tokyo. They say that their secret is to focus continually on quality – not just of their food, but in every aspect of their operations practice. They go to extraordinary lengths to avoid the chemicals and preservatives common in most ‘fast’ food, say the M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 15 Chapter 1 Operations management 15 company. ‘Many food retailers focus on extending the sandwich factory even though it could significantly shelf life of their food, but that’s of no interest to us. reduce costs. Pret also own and manage all their We maintain our edge by selling food that simply can’t shops directly so that they can ensure consistently be beaten for freshness. At the end of the day, we give high standards in all their shops. ‘We are determined whatever we haven’t sold to charity to help feed those never to forget that our hard-working people make all who would otherwise go hungry. When we were just the difference. They are our heart and soul. When they starting out, a big supplier tried to sell us coleslaw that care, our business is sound. If they cease to care, our lasted sixteen days. Can you imagine! Salad that lasts business goes down the drain. In a retail sector where sixteen days? There and then we decided Pret would high staff turnover is normal, we’re pleased to say stick to wholesome fresh food – natural stuff. We have our people are much more likely to stay around! We not changed that policy.’ work hard at building great teams. We take our reward The first Pret A Manger shop had its own kitchen schemes and career opportunities very seriously. where fresh ingredients were delivered first thing every We don’t work nights (generally), we wear jeans, morning, and food was prepared throughout the day. we party!’ Customer feedback is regarded as being Every Pret shop since has followed this model. The particularly important at Pret. Examining customers’ team members serving on the tills at lunchtime will have comments for improvement ideas is a key part of been making sandwiches in the kitchen that morning. weekly management meetings, and of the daily team The company rejected the idea of a huge centralized briefs in each shop. The processes hierarchy So far we have discussed operations management, and the input–transformation–output model, at the level of ‘the operation’. For example, we have described ‘the whistle factory’, ‘the sandwich shop’, ‘the disaster relief operation’, and so on. But look inside any of these operations. One will see that all operations consist of a collection of processes (though these processes may be called ‘units’ or ‘departments’) interconnecting with each other to form a network. Each process acts as a smaller version of the whole operation of which it forms a part, and transformed resources flow between them. In fact within any operation, the Processes mechanisms that actually transform inputs into outputs are these processes. A process is ‘an arrangement of resources that produce some mixture of products and services’. They are the ‘building blocks’ of all operations, and they form an ‘internal network’ within an operation. Internal supplier Each process is, at the same time, an internal supplier and an internal customer for other Internal customer processes. This ‘internal customer’ concept provides a model to analyse the internal activities of an operation. It is also a useful reminder that, by treating internal customers with the same degree of care as external customers, the effectiveness of the whole operation can be improved. Table 1.4 illustrates how a wide range of operations can be described in this way. Within each of these processes is another network of individual units of resource such as individual people and individual items of process technology (machines, computers, storage facilities, etc.). Again, transformed resources flow between each unit of transforming resource. So any business, or operation, is made up of a network of processes and any process is made up of a network of resources. But also any business or operation can itself be viewed as part of a greater network of businesses or operations. It will have operations that supply it with the products and services it needs and unless it deals directly with the end-consumer, it will supply customers who themselves may go on to supply their own customers. Moreover, any operation could have several suppliers and several customers and may be in competition with other operations producing similar services to those it produces itself. This network Supply network of operations is called the supply network. In this way the input–transformation–output model can be used at a number of different ‘levels of analysis’. Here we have used the idea Operations can be to analyse businesses at three levels, the process, the operation and the supply network. But analysed at three levels one could define many different ‘levels of analysis’, moving upwards from small to larger processes, right up to the huge supply network that describes a whole industry. M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 16 16 Part One Introduction Table 1.4 Some operations described in terms of their processes Operation Some of the Some of the Some of the operation’s inputs operation’s processes operation’s outputs Airline Aircraft Check passengers in Transported passengers Pilots and air crew Board passengers and freight Ground crew Fly passengers and Passengers and freight freight around the world Care for passengers Department store Goods for sale Source and store goods Customers and goods Sales staff Display goods ‘assembled’ together Information systems Give sales advice Customers Sell goods Police Police officers Crime prevention Lawful society, public Computer systems Crime detection with a feeling of security Information systems Information gathering Public (law-abiding Detaining suspects and criminals) Frozen food Fresh food Source raw materials Frozen food manufacturer Operators Prepare food Processing technology Freeze food Cold storage facilities Pack and freeze food Hierarchy of operations This idea is called the hierarchy of operations and is illustrated for a business that makes television programmes and videos in Figure 1.5. It will have inputs of production, technical and administrative staff, cameras, lighting, sound and recording equipment, and so on. It transforms these into finished programmes, music, videos, etc. At a more macro level, the business itself is part of a whole supply network, acquiring services from creative agencies, casting agencies and studios, liaising with promotion agencies, and serving its broadcast- ing company customers. At a more micro level within this overall operation there are many individual processes: workshops manufacturing the sets; marketing processes that liaise with potential customers; maintenance and repair processes that care for, modify and design technical equipment; production units that shoot the programmes and videos; and so on. Each of these individual processes can be represented as a network of yet smaller processes, or even individual units of resource. So, for example, the set manufacturing process could consist of four smaller processes: one that designs the sets, one that constructs them, one that acquires the props, and one that finishes (paints) the set. Critical commentary The idea of the internal network of processes is seen by some as being over-simplistic. In reality the relationship between groups and individuals is significantly more complex than that between commercial entities. One cannot treat internal customers and suppliers exactly as we do external customers and suppliers. External customers and suppliers usually operate in a free market. If an organization believes that in the long run it can get a better deal by purchasing goods and services from another supplier, it will do so. But internal customers and suppliers are not in a ‘free market’. They cannot usually look out- side either to purchase input resources or to sell their output goods and services (although some organizations are moving this way). Rather than take the ‘economic’ perspective of external commercial relationships, models from organizational behaviour, it is argued, are more appropriate. M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 17 Chapter 1 Operations management 17 Figure 1.5 Operations and process management requires analysis at three levels: the supply network, the operation, and the process Operations management is relevant to all parts of the business The example in Figure 1.5 demonstrates that it is not just the operations function that All functions manage manages processes; all functions manage processes. For example, the marketing function processes will have processes that produce demand forecasts, processes that produce advertising cam- paigns and processes that produce marketing plans. These processes in the other functions also need managing using similar principles to those within the operations function. Each function will have its ‘technical’ knowledge. In marketing, this is the expertise in designing and shaping marketing plans; in finance, it is the technical knowledge of financial reporting. Yet each will also have a ‘process management’ role of producing plans, policies, reports and services. The implications of this are very important. Because all managers have some responsibility for managing processes, they are, to some extent, operations managers. They all should want to give good service to their (often internal) customers, and they all will M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 18 18 Part One Introduction Table 1.5 Some examples of processes in non-operations functions Organizational Some of its Outputs from its Customer(s) for its function processes process outputs Marketing and Planning process Marketing plans Senior management sales Forecasting process Sales forecasts Sales staff, planners, operations Order taking process Confirmed orders Operations, finance Finance and Budgeting process Budgets Everyone accounting Capital approval Capital request Senior management, processes evaluations requesters Invoicing processes Invoices External customers Human resources Payroll processes Salary statements Employees management Recruitment processes New hires All other processes Training processes Trained employees All other processes Information Systems review process System evaluation All other processes technology Help desk process Advice All other processes System implementation Implemented working All other processes project processes systems and aftercare All managers, not just want to do this efficiently. So, operations management is relevant for all functions, and all operations managers, managers should have something to learn from the principles, concepts, approaches and manage processes techniques of operations management. It also means that we must distinguish between two meanings of ‘operations’: Operations as a function ‘Operations’ as a function, meaning the part of the organization which produces the products and services for the organization’s external customers; Operations as an activity ‘Operations’ as an activity, meaning the management of the processes within any of the organization’s functions. Table 1.5 illustrates just some of the processes that are contained within some of the more common non-operations functions, the outputs from these processes and their ‘customers’. Business processes Whenever a business attempts to satisfy its customers’ needs it will use many processes, in both its operations and its other functions. Each of these processes will contribute some part to fulfilling customer needs. For example, the television programme and video production company, described previously, produces two types of ‘product’. Both of these products involve a slightly different mix of processes within the company. The company decides to re-organize its operations so that each product is produced from start to finish by a dedicated process that contains all the elements necessary for its production, as in Figure 1.6. So customer needs ‘End-to-end’ business for each product are entirely fulfilled from within what is called an ‘end-to-end’ business processes process. These often cut across conventional organizational boundaries. Reorganizing (or ‘re-engineering’) process boundaries and organizational responsibilities around these business Business process processes is the philosophy behind business process re-engineering (BPR) which is discussed re-engineering further in Chapter 18. M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 19 Chapter 1 Operations management 19 Figure 1.6 The television and video company divided into two ‘end-to-end’ business processes, one dedicated to producing programmes and the other dedicated to producing music videos Operations processes have different characteristics Although all operations processes are similar in that they all transform inputs, they do differ in a number of ways, four of which, known as the four Vs, are particularly important: Volume The volume of their output; Variety The variety of their output; Variation The variation in the demand for their output; Visibility The degree of visibility which customers have of the production of their output. The volume dimension Let us take a familiar example. The epitome of high-volume hamburger production is McDonald’s, which serves millions of burgers around the world every day. Volume has important implications for the way McDonald’s operations are organized. The first thing Repeatability you notice is the repeatability of the tasks people are doing and the systematization of the Systematization work where standard procedures are set down specifying how each part of the job should be carried out. Also, because tasks are systematized and repeated, it is worthwhile developing specialized fryers and ovens. All this gives low unit costs. Now consider a small local cafeteria serving a few ‘short-order’ dishes. The range of items on the menu may be similar to the larger operation, but the volume will be far lower, so the repetition will also be far lower and the number of staff will be lower (possibly only one person) and therefore individual staff are likely to perform a wider range of tasks. This may be more rewarding for the staff, but less open to systematization. Also it is less feasible to invest in specialized equipment. So the cost per burger served is likely to be higher (even if the price is comparable). M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 20 20 Part One Introduction The variety dimension A taxi company offers a high-variety service. It is prepared to pick you up from almost anywhere and drop you off almost anywhere. To offer this variety it must be relatively flexible. Drivers must have a good knowledge of the area, and communication between the base and the taxis must be effective. However, the cost per kilometre travelled will be higher for a taxi than for a less customized form of transport such as a bus service. Although both provide the same basic service (transportation), the taxi service has a high variety of routes and times to offer its customers, while the bus service has a few well-defined routes, with a set schedule. If all goes to schedule, little, if any, flexibility is required from the operation. Standardized All is standardized and regular, which results in relatively low costs compared with using a taxi for the same journey. The variation dimension Consider the demand pattern for a successful summer holiday resort hotel. Not surprisingly, more customers want to stay in summer vacation times than in the middle of winter. At the height of ‘the season’ the hotel could be full to its capacity. Off-season demand, however, could be a small fraction of its capacity. Such a marked variation in demand means that the operation must change its capacity in some way, for example, by hiring extra staff for the summer. The hotel must try to predict the likely level of demand. If it gets this wrong, it could result in too much or too little capacity. Also, recruitment costs, overtime costs and under-utilization of its rooms all have the effect of increasing the hotel’s costs operation compared with a hotel of a similar standard with level demand. A hotel which has relatively level demand can plan its activities well in advance. Staff can be scheduled, food can be bought and rooms can be cleaned in a routine and predictable manner. This results in a high utilization of resources and unit costs which are likely to be lower than those in hotels with a highly variable demand pattern. The visibility dimension Visibility is a slightly more difficult dimension of operations to envisage. It refers to how much of the operation’s activities its customers experience, or how much the operation is Visibility means process exposed to its customers. Generally, customer-processing operations are more exposed to exposure their customers than material- or information-processing operations. But even customer- processing operations have some choice as to how visible they wish their operations to be. For example, a retailer could operate as a high-visibility ‘bricks and mortar’, or a lower-visibility web-based operation. In the ‘bricks and mortar’, high-visibility operation, customers will directly experience most of its ‘value-adding’ activities. Customers will have a relatively short waiting tolerance, and may walk out if not served in a reasonable time. Customers’ perceptions, rather than objective criteria, will also be important. If they per- ceive that a member of the operation’s staff is discourteous to them, they are likely to be dissatisfied (even if the staff member meant no discourtesy), so high-visibility operations require staff with good customer contact skills. Customers could also request goods which clearly would not be sold in such a shop, but because the customers are actually in the High received variety operation they can ask what they like! This is called high received variety. This makes it difficult for high-visibility operations to achieve high productivity of resources, so they tend to be relatively high-cost operations. Conversely, a web-based retailer, while not a pure low-contact operation, has far lower visibility. Behind its web site it can be more ‘factory-like’. The time lag between the order being placed and the items ordered by the customer being retrieved and dispatched does not have to be minutes as in the shop, but can be hours or even days. This allows the tasks of finding the items, packing and dispatching Customer contact skills them to be standardized by staff who need few customer contact skills. Also, there can be relatively high staff utilization. The web-based organization can also centralize its operation M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 21 Chapter 1 Operations management 21 Short case Two very different hotels Formule 1 Mwagusi Safari Lodge Hotels are high-contact operations – they are staff-intensive The Mwagusi Safari Lodge lies within Tanzania’s Ruaha and have to cope with a range of customers, each with a National Park, a huge undeveloped wilderness, whose variety of needs and expectations. So, how can a highly beautiful open landscape is especially good for seeing successful chain of affordable hotels avoid the crippling elephant, buffalo and lion. Nestled into a bank of the costs of high customer contact? Formule 1, a subsidiary Mwagusi Sand River, this small exclusive tented camp of the French Accor group, manages to offer outstanding overlooks a watering hole in the riverbed. Its ten tents are value by adopting two principles not always associated within thatched bandas (accommodation), each furnished with hotel operations – standardization and an innovative comfortably in the traditional style of the camp. Each use of technology. Formule 1 hotels are usually located banda has an en-suite bathroom with flush toilet and a close to the roads, junctions and cities which make them hot shower. Game viewing can be experienced even from visible and accessible to prospective customers. The hotels the seclusion of the veranda. The sight of thousands of themselves are made from state-of-the-art volumetric buffalo flooding the riverbed below the tents and dining prefabrications. The prefabricated units are arranged in room banda is not uncommon, and elephants, giraffes, various configurations to suit the characteristics of each and wild dogs are frequent uninvited guests to the site. individual site. All rooms are nine square metres in area, There are two staff for each customer, allowing individual and are designed to be attractive, functional, comfortable needs and preferences to be met quickly at all times. and soundproof. Most important, they are designed to be Guest numbers vary throughout the year, occupancy easy to clean and maintain. All have the same fittings, being low in the rainy season from January to April, and including a double bed, an additional bunk-type bed, a full in the best game viewing period from September to wash basin, a storage area, a working table with seat, a November. There are game drives and walks throughout wardrobe and a television set. The reception of a Formule the area, each selected for individual customers’ 1 hotel is staffed only from 6.30 am to 10.00 am and from individual preferences. Drives are taken in specially 5.00 pm to 10.00 pm. Outside these times an automatic adapted open-sided four-wheel-drive vehicles, equipped machine sells rooms to credit card users, provides access with reference books, photography equipment, medical to the hotel, dispenses a security code for the room and kits and all the necessities for a day in the bush. Walking even prints a receipt. Technology is also evident in the safaris, accompanied by an experienced guide can be washrooms. Showers and toilets are automatically cleaned customized for every visitor’s requirements and abilities. after each use by using nozzles and heating elements to Lunch can be taken communally, so that visitors can spray the room with a disinfectant solution and dry it before discuss their interests with other guides and managers. it is used again. To keep things even simpler, Formule 1 Dinner is often served under the stars in a secluded hotels do not include a restaurant as they are usually corner of the dry riverbed. located near existing restaurants. However, a continental breakfast is available, usually between 6.30 am and 10.00 am, and of course on a ‘self-service’ basis! M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 22 22 Part One Introduction on one (physical) site, whereas the ‘bricks and mortar’ shop needs many shops close to centres of demand. Therefore, the low-visibility web-based operation will have lower costs than the shop. Mixed high- and low-visibility processes Some operations have both high- and low-visibility processes within the same operation. In an airport, for example: some activities are totally ‘visible’ to its customers such as information desks answering people’s queries. These staff operate in what is termed a Front office front-office environment. Other parts of the airport have little, if any, customer ‘visibility’, such as the baggage handlers. These rarely-seen staff perform the vital but low-contact tasks, Back office in the back-office part of the operation. The implications of the four Vs of operations processes All four dimensions have implications for the cost of creating the products or services. Put simply, high volume, low variety, low variation and low customer contact all help to keep processing costs down. Conversely, low volume, high variety, high variation and high customer contact generally carry some kind of cost penalty for the operation. This is why the volume dimension is drawn with its ‘low’ end at the left, unlike the other dimensions, to keep all the ‘low cost’ implications on the right. To some extent the position of an operation ‘Four Vs’ analysis of in the four dimensions is determined by the demand of the market it is serving. However, processes most operations have some discretion in moving themselves on the dimensions. Figure 1.7 summarizes the implications of such positioning. Figure 1.7 A typology of operations M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 23 Chapter 1 Operations management 23 Worked example Figure 1.8 illustrates the different positions on the dimensions of the Formule 1 hotel chain and the Mwagusi Safari Lodge (see the short case on ‘Two very different hotels’). Both provide the same basic service as any other hotel. However, one is of a small, intimate nature with relatively few customers. Its variety of services is almost infinite in the sense that customers can make individual requests in terms of food and entertain- ment. Variation is high and customer contact, and therefore visibility, is also very high (in order to ascertain customers’ requirements and provide for them). All of this is very different from Formule 1, where volume is high (although not as high as in a large city- centre hotel), variety of service is strictly limited, and business and holiday customers use the hotel at different times, which limits variation. Most notably, though, customer contact is kept to a minimum. The Mwagusi Safari Lodge hotel has very high levels of service but provides them at a high cost (and therefore a high price). Conversely, Formule 1 has arranged its operation in such a way as to minimize its costs. Figure 1.8 Profiles of two operations The activities of operations management Operations managers have some responsibility for all the activities in the organization which contribute to the effective production of products and services. And while the exact nature of the operations function’s responsibilities will, to some extent, depend on the way the organization has chosen to define the boundaries of the function, there are some general classes of activities that apply to all types of operation. Understanding the operation’s strategic performance objectives. The first responsibility of any operations management team is to understand what it is trying to achieve. This means understanding how to judge the performance of the operation at different levels, from broad and strategic to more operational performance objectives. This is discussed in Chapter 2. Developing an operations strategy for the organization. Operations management involves hundreds of minute-by-minute decisions, so it is vital that there is a set of general prin- ciples which can guide decision-making towards the organization’s longer-term goals. This is an operations strategy and is discussed in Chapter 3. M01_SLAC0460_06_SE_C01.QXD 10/20/09 9:07 Page 24 24 Part One Introduction Designing the operation’s products, services and processes. Design is the activity of deter- mining the physical form, shape and composition of products, services and processes. It is a crucial part of operations managers’ activities and is discussed in Chapters 4 to 9. Planning and controlling the operation. Planning and control is the activity of deciding what the operations resources should be doing, then making sure that they really are doing it. Cha