Chapter 1: The Nature of Operations 1

Chapter 1

The Nature of Operations

Chapter 1: The Nature of Operations 2

Introduction

Chapter 1: The Nature of Operations 3

McDonald’s Corp

Facing increased competition Smarter and more demanding

customers Less brand loyal Switched to hamburger bun that does

not require toasting. Customers prefer taste of new bun Saves time and money

Chapter 1: The Nature of Operations 4

Olympic Flame

10,000 runners 15,000 miles through 42 states in 84

days Two years of planning Must plan for no-show runners and rush

hour traffic Cost of this operation in the

neighborhood of $20 million

Chapter 1: The Nature of Operations 5

Kmart Versus Wal-Mart

Both chains started in 1962 In 1987, Kmart had 2,223 stores to Wal-

Mart’s 1,198. Kmart’s sales were $25.63 billion to Wal-

Mart’s $15.96 billion By 1991, Wal-Mart’s sales exceeded

Kmarts Kmart still had more stores

Chapter 1: The Nature of Operations 6

Kmart Versus Wal-Mart continued

In year ending January 1996, Wal-Mart’s sales were $93.6 billion to Kmart’s $34.6 billion.

During this time Kmart emphasized marketing and merchandising (such as national TV ad campaigns).

Wal-Mart was investing millions in its operations to lower cost.

Chapter 1: The Nature of Operations 7

Kmart Versus Wal-Mart continued

Wal-Mart developed sophisticated distribution system that integrated its computer system with its distribution system.

Kmart’s employees lacked skills needed to plan and control inventory.

Period from 1987 to 1995 Kmart's market share declined from 34.5 percent to 22.7 percent.

Wal-Mart's increased from 20.1 percent to 41.6 percent

Chapter 1: The Nature of Operations 8

Kmart Versus Wal-Mart continued

Fast forward to 2004 Kmart appears to have adopted a new

strategy Merge with Sears, Roebuck & Co.

Potential synergies between Kmart’s convenient locations and Sears’ strong brands

Chapter 1: The Nature of Operations 9

Diversity and Importance of Operations

Improvements in operations can simultaneously lower costs and improve customer satisfaction.

Improving operations often dependent on advances in technology.

Can obtain competitive advantage by improving operations.

Diversity of operations

Chapter 1: The Nature of Operations 10

Operations

Heart of every organization Operations are the tasks that create

value

Chapter 1: The Nature of Operations 11

The Production System

Chapter 1: The Nature of Operations 12

Systems Perspective

Inputs Transformation System

Alter Transport Store Inspect

Outputs Environment

Chapter 1: The Nature of Operations 13

Inputs

Inputs include facilities, labor, capital, equipment, raw materials, and supplies.

A less obvious input is knowledge of how to transform the inputs into outputs.

Chapter 1: The Nature of Operations 14

Transformation System

The part of the system that adds value to the inputs.

Four major ways Alter – physical change Transport - relocate Store - protect Inspect – better understanding

Chapter 1: The Nature of Operations 15

Outputs

Two types of outputs commonly result from a production system Services (abstract or nonphysical) Products (physical goods)

Chapter 1: The Nature of Operations

16

Chapter 1: The Nature of Operations 17

Facilitating Good Concept

Often confusion in trying to classify organization as manufacturer or service

Facilitating good concept avoids this ambiguity

All organizations defined as service The tangible part of the service is

defined as facilitating good Pure services

Chapter 1: The Nature of Operations 18

The Range From Services to Products

Chapter 1: The Nature of Operations 19

Classification and Evolution of Economic Offerings

Chapter 1: The Nature of Operations 20

Comparison of Alternative Economic Offerings

Economic Offering Commodities Goods Services Experiences

Value added by

Extracting Producing Delivering Staging

Form of output Fungible Tangible Intangible Memorable

Key characteristics

Natural Standardized Customized Personalized

Buyer Market User Client Guest

Chapter 1: The Nature of Operations

21

Chapter 1: The Nature of Operations 22

Operations Activities

Strategy Output Planning Capacity Planning Facility Location Facility Layout Aggregate Planning

Inventory Management

Materials Requirements Planning

Scheduling Quality Control

Chapter 1: The Nature of Operations 23

Functional View of Organizations

Three Core Functions Operations Marketing Finance/Accounting

Other Important Functional Activities Human Resource Management Information Systems Engineering

Chapter 1: The Nature of Operations 24

Chapter in Perspective

Two alternative ways for organizing work activities Functional approach, companies

organize activities on the basis of the type of work performed

Organizing activities on the basis of specific value-creating processes.

Chapter 1: The Nature of Operations 25

Process View of Organizations

An Evolution

Chapter 1: The Nature of Operations 26

Traditional Functional Organization

Chapter 1: The Nature of Operations 27

Value Chain Approach